EU finance ministers do deal on savings tax

EU finance ministers have ended 14 years of wrangling to agree rules on the taxation of income earned on savings in cross-border accounts. The deal came after the ministers agreed to allow Italy to pay over 14 years at zero interest a €648 million fine for breaching milk production quotas.

Ireland voted in favour of the tax deal but abstained along with Denmark on the agreement with Italy.

The Commissioner responsible for tax issues, Mr Frits Bolkestein, said after the vote that Italy's success in delaying the tax deal highlighted the need for the abolition of national vetoes on some tax issues.

Under the new rules, most EU member-states will share information on citizens' bank accounts held abroad, a move governments believe will reduce tax evasion.

Millions of Europeans take advantage of the freedom of movement of capital within the EU to move savings to low-tax countries, causing large revenue losses for their governments.

In Germany alone, some €300 billion is estimated to have left the country for tax havens.

Luxembourg, Austria and Belgium will be allowed to retain their traditional banking secrecy in return for levying a "withholding tax" of up to 35 per cent on foreign citizens' income from savings accounts. The revenue would be shared with other member-states.

Three-quarters of the proceeds from the tax, set at 15 per cent in 2005 and rising to 35 per cent in 2010, will go to the EU country where the saver is resident, with the rest remaining with the three governments.

Switzerland is finalising a similar deal while Monaco, San Marino, Liechtenstein, Andorra and the UK Channel Islands will also have to either exchange information or impose a withholding tax. The US has pledged to exchange information when requested by EU countries.

The 10 countries due to join the EU next year are likely to be given until 2007 to begin exchanging information with their new partners.

Under the new rules, which will come into effect in January 2005, member-states will pass on details of interest earned by foreign nationals on savings accounts.

Germany, which shares borders with Austria, Switzerland, Belgium and Luxembourg, has been especially eager to agree a deal on the issue.

The new rules have been criticised by the Organisation for Economic Co-operation and Development (OECD), which believes they could hamper its efforts to get all the world's big economies to give up banking secrecy.

Before yesterday's meeting, a number of EU finance ministers encouraged the European Central Bank (ECB) to cut interest rates at tomorrow's meeting of its Governing Council in Frankfurt.

Germany's deputy finance minister, Mr Caio Koch-Weser, listed a number of reasons for the ECB to cut. "In view of the risks to growth, the expected decline in inflation and the rise of the euro, the ECB's room for manoeuvre in cutting rates has become greater," he said.