Personal Finance: EU puts the bite on tax havens

BRITISH residents with money in UK-based investments have nothing to fear from the proposed European directive on the taxation of investment income. Their tax treatment would not change, and those who are eligible to receive interest and dividends untaxed because their total income is less than the tax threshold, for example, could continue to do so.

But the directive which Germany will push for while it holds the EU presidency from January to June next year seeks to commit member states to tightening up tax rules that disadvantage EU economies - the UK has already accepted that principle.

One problem, as Germany sees it, is that EU residents can put money in countries such as Luxembourg which pay interest gross and do not report that interest to tax authorities abroad. UK residents may do the same in the Channel Isles and the Isle of Man, where similar conditions apply.

One solution would be a requirement on banks and nominee companies to report all untaxed payments to the tax authorities in the recipient's country of residence.

However, that would require changes in the constitutions of countries like Luxembourg and Austria, which have strict secrecy laws; but it could not cover non-EU countries like Switzerland, the Channel Isles and the Isle of Man, which are proud of their autonomy and the financial services they provide.

The other alternative is to require institutions and banks to impose a withholding tax, at a suggested rate of 20 per cent, on non-resident accounts so that the temptation to evade tax is reduced. Again, it would not cover territories outside EU boundaries.

Whether the UK could impose such rules on its associated territories, and if so how, is something that no one either in those territories or in the Home Office is keen to talk about.

The UK itself is now a relatively low-tax area, which has helped it in building up a lucrative business offering private banking services to wealthy foreigners. This could be at risk if the withholding tax is implemented.

The UK is also committed to ensuring that the Eurobond market, which deals in securities issued by international banks and businesses, is not driven away from London where it settled in the 1960s to escape taxation in the US, and has grown exponentially. Euro-bonds pay interest gross and the securities themselves are bearer bonds, which can be held anonymously.

Isabel Berwick is away.