Eurobond tax threat recedes

City cheered as Brussels relaxes stance on withholding levy

BRITAIN is gaining ground in the battle to get eurobonds exempted from a European Union plan to tax interest income paid to individuals across EU borders.

The news will cheer the City, which is the capital of the eurobond market, where the plan is jeopardising thousands of jobs.

The exemption "has not been accepted, but it hasn't been rejected", said a source close to negotiations. "It's on the table."

Finance ministers will discuss it at an informal Ecofin meeting on 17 April. No final resolution is expected until later in the year. But the source said: "There is a growing recognition that the wrong move could drive the eurobond market to Zurich or to New York. Britain has been invited to offer a solution. The Government has accepted this invitation."

The Savings Directive, as the tax plan is known, stems from a December 1997 request to Brussels by EU finance ministers to come up with a scheme to stop EU residents from evading tax by investing savings outside their home countries.

In the early days of the eurobond market, rich continental Europeans lumped together under the description of "Belgian dentists" would sometimes buy eurobonds to achieve this end. Eurobonds bore the cloak of anonymity because interest was paid on them via Swiss or Luxembourg numbered accounts.

But in the 1980s, pension funds, insurance companies, and other institutional investors became big buyers, and the eurobond market formed the foundation of the international bond market. Today less than 10 per cent of the outstanding pounds 2,000bn in eurobond issues is held by individuals.

Bank lobby groups last week welcomed signs that Brussels was relaxing its line. The City has lived in fear that imposition of a Brussels withholding tax on eurobonds would prompt holders to invoke their legal right to cash in eurobonds before maturity, thereby creating havoc in financial markets.

"Exempting outstanding eurobonds would go some way towards laying these fears to rest," said Tim Dickenson, director of the International Securities Market Association.

But Mr Dickenson and others worry that the compromise on the table in Brussels will do little to prevent the future trade in eurobonds from decamping from EU financial capitals to Zurich or New York.

"The eurobond market is a tight margin business," said Sally Easton, vice-chairman of the International Paying Agents Association. "If withholding tax is imposed on future eurobonds, that will lead to an increase in administrative and legal costs. Already law firms working on new eurobonds are including clauses allowing them to flip the custodianship of eurobonds to Zurich if a withholding tax is imposed."

Seeking to get future as well as existing eurobonds exempted from the Brussels tax scheme, government officials are working on a further redefinition of the market.

"The idea," said a source close to government thinking, "would be to create a professional eurobond market for institutional investors from which individuals would be excluded."

This, said the official, would allow Brussels to monitor offshore investments by individuals for income tax evasion. At the same time it would spare the professional market - located in Frankfurt, Brussels, and other EU capitals as well as London - costs which could make it uncompetitive.