Brown is snubbed in EU tax row

TONY BLAIR'S European strategy was thrown into disarray last night as Germany and France called for abolition of the British veto over tax policy - a move which would open the door to a wide-ranging EU tax harmonisation.

The Franco-German push, at a meeting of European finance ministers, left British ministers and officials struggling to calm growing fears that London would be forced to accept a common tax policy.

In a further setback for Mr Blair, President Jacques Chirac of France and Chancellor Gerhard Schroder of Germany - meeting in Potsdam - issued a joint call for "speedy progress in harmonising taxes".

Oskar Lafontaine, Germany's controversial new finance minister, inflamed the debate in Britain over EU integration by arguing that the Government would eventually have to surrender its veto on tax policy. Currently, all 15 member states must agree any changes. But Mr Lafontaine told journalists in Brussels: "I believe the principle of unanimity can't be maintained in the long run."

He quickly won crucial backing from his French counterpart, Dominique Strauss-Kahn. Asked if he backed Mr Lafontaine's thinking, Mr Strauss- Kahn replied: "Absolutely." He added: "On certain tax subjects we must end unanimity."

For Britain, Gordon Brown, the Chancellor, dismissed Mr Lafontaine's statement as a "personal view", and insisted that any move to scrap the British veto would need to be agreed by all 15 EU countries.

"He won't be making a proposal," said Mr Brown, "because he knows it requires a treaty change which requires unanimity, and that simply is not going to happen."

Downing Street said there was "not a cat in hell's chance" of the Lafontaine plan being implemented. But there was little attempt to conceal anger over Mr Lafontaine's remarks, which threaten to scupper the Government attempts to reassure the public that it could not be railroaded into accepting EU control over income tax, VAT and company taxation.

"He is just fuelling the paranoia of the Eurosceptics," said one cabinet minister.

The Conservatives said Mr Lafontaine's remarks showed that Mr Brown's claim that nobody wanted tax harmonisation in Europe was "simply ludicrous".

By heightening the tempo, yesterday's Franco-German initiative threatens to undermine the Government's unofficial strategy of nudging Britain close to membership of the euro, which is being launched by 11 EU countries in January.

Although not officially on the finance ministers' agenda yesterday, the pressure was mounting for more harmonisation of company taxation. Mr Lafontaine called for sweeping moves, not just to harmonise the rates of business tax, but tax bases and thresholds.

Mr Strauss-Kahn echoed the German demand for a minimum corporate rate of tax, arguing: "That's the whole idea behind this exercise." He added: "We can live with different VAT rates or excise tax rates on gas, because they don't lead to tax competition. We would like to see tax harmonisation in two areas: corporate tax and savings taxation."

First steps towards coordination - being made through a code of conduct designed to stamp out "harmful" tax competition, were speeded up yesterday - despite British opposition. Germany, France and Italy led a successful move to bring forward by six months a report originally scheduled for November 1999.

In what was being seen as an attempt to deflect domestic attention from the tax row. Mr Brown used yesterday's meeting to line up behind Germany and France in calling for a five-year reprieve for duty-free shopping which is scheduled to be abolished next June.

The Chancellor had not previously demonstrated any enthusiasm for retaining duty free, but yesterday he blamed the previous Tory government for helping to bury the tax perk, and said he now backed a delay. Campaigners now believe there are hopes it can be salvaged.