Brown stalls on EU tax proposals

News Analysis: The Chancellor's failure to produce a document on `withholding tax' is antagonising the EC
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The Independent Online
THE Chancellor, Gordon Brown, was last night under mounting pressure to table a key document on Britain's approach to the controversial "withholding" tax, amid criticism from Europe over the Treasury's delaying tactics.

Despite a promise to complete the paper in June, Mr Brown's office was still refusing yesterday to say whether it will be on the table when ministers discuss taxation in the Finnish town of Turku on Saturday. As finance ministers prepared for the two-day gathering there was a rebuke from the Finnish presidency of the European Union, and wider irritation at tactics that are seen as an attempt to win time for the UK.

The document is designed to clarify the British position on taxing the interest of savings - a measure the Government has resisted because of fears it could devastate London's lucrative eurobond market. The initiative is part of a package designed to combat unfair or "harmful" tax competition, due to be agreed at the Helsinki summit in December.

The proposed legislation is designed to prevent EU citizens investing in neighbouring countries to escape paying tax on interest in their own. It would force countries either to levy a 20 per cent tax on interest paid to EU citizens who are non-resident, or to inform tax authorities in their native country about their earnings.

The City has claimed that up to 110,000 jobs are at stake. It is mindful of the experience of New York, which dominated eurobond trading before the imposition of a tax resulted in large-scale relocation to London.

Although the momentum behind wider moves to harmonise taxes in the EU has evaporated, most governments, as well as the incoming European Commission, remain committed to the initiative.

In a letter to colleagues the chair of this weekend's meeting, the Finnish finance minister, Sauli Niinisto, argued that "achieving an agreement on the tax package is really a matter of the union's credibility". He added: "In the case that you cannot approve the proposals, I ask you to clarify in detail your difficulties."

Within the EC the irritation with Mr Brown is acute because, without a clear signal from the Chancellor, there is little hope of squaring Luxembourg, the other EU country that has held out over the issue.

An EC official said: "The tax package should be finished by the end of the year. It is important to give a signal that everything is going, and that there is political impetus. If the British document is not presented it will be difficult to give that decision."

The delay may have strained Mr Brown's relations with his European partners but it has probably already achieved its objective. Diplomats and officials say that the refusal of the Treasury to circulate the paper in advance has effectively sabotaged prospects of a genuine discussion on the issue this weekend.

If, as seems likely, Mr Brown produces a paper on Saturday there will not be time for translation or for technical aspects to be checked with national capitals. Reactions will be off-the-cuff rather than considered.

One theory is that, by delaying discussion, the UK can use agreement as a bargaining chip in wider negotiations over the tax package, including the proposed code to outlaw unfair tax competition.

Mr Brown promised to produce the paper in April after winning a concession under which big institutional investors would not be brought into the scope of the measure. Drafts are circulating in Whitehall and Treasury officials are said to be waiting only on Mr Brown's approval.

The most recent work has centred around efforts to define a "threshold" that big institutions would have to pass to win their exemption from the tax measures, differentiating the "wholesale" and "retail" elements of the market. One worry is that smaller investors might combine their holdings to reach the ceiling.

Despite discussions between the Treasury and the Finns yesterday, Mr Brown's office would say only that the Chancellor will "set out clearly" his view on the Eurobond issue, with or without a paper.

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