Outlook for '99: Brussels - Tax fight in Euroland

The view from the world's economic hotspots

MONEY will seldom be far from the debate in Brussels this year. Not only does 1999 bring the start of the euro, it sees the culmination of the EU's struggle to reform its finances. That will climax in March at a special summit in Brussels when Germany will demand, and surely get, a cut in its pounds 8bn annual net contribution to Brussels. An assault on Britain's budget rebate remains likely.

For the Government that is hardly the only tricky economic issue. At December's Vienna summit, the 15 EU leaders agreed there was no desire for "general tax harmonisation", but the advent of the single currency can only increase pressure for co-ordination of economic policy, including tax. Indeed the Austrian prime minister, Viktor Klima, who chaired the meeting, summed up by saying that "economic policy co-ordination is our over-reaching aim".

Two measures on the table present direct, practical problems. Although signed up to the battle against "harmful" tax competition, Britain is opposed to the so-called withholding tax. This measure, designed to prevent citizens of one EU country avoiding tax by investing in another, would deduct 20 per cent tax from the interest of all savings. The Chancellor, Gordon Brown, has threatened a veto on the grounds that it would devastate the Eurobond market based in the City.

With Brussels refusing to offer an exemption to eurobonds, the issue will reach a crescendo in the run-up to the heads of government meeting in June. Anything short of a full-blooded veto will provoke an outcry from the Eurosceptic press.

Meanwhile a European code of conduct committee, chaired by the Treasury's Dawn Prim-arolo, may rule some British tax breaks - including one to help the film industry - out of order. The momentum towards long-term tax co-ordination will be kept alive by a study of company taxation throughout the EU. And, during the second half of the year, there may be an attempt to scrap the veto on tax policy altogether at the EU's Inter-governmental Conference.

Finally there is the issue which Jacques Santer, European Commission president, likened to the Loch Ness Monster for its ability to keep resurfacing: duty-free. Despite a unanimous decision seven years ago to scrap duty- free in the summer of 1999, lobbying has kept the issue alive. Ministers will examine it one more time, though the Danish finance minister is threatening to resign (and bring down her government) rather than save duty-free. Drink cheaply while you can because any reprieve is likely to be brief.

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