UK seeks allies on eurobond tax

CHANCELLOR Gordon Brown will continue to try and kill a proposed EU withholding tax on eurobonds despite a 386-106 vote in favour of the new levy by the European Parliament in Strasbourg on Wednesday.

"The Chancellor has said he is not going to agree to anything that damages jobs in the City," a Treasury spokesman said after the vote.

Before using its right to veto the new tax, however, the Government will attempt to build a consensus against the proposal as it heads for consideration by the European Council of Finance Ministers, or Ecofin, this spring. "It's clear that it's not just Britain and Luxembourg that have problems with the directive, but that a large number of European states are uncomfortable with various aspects," said Simon Murphy, the Labour MEP who headed opposition to the tax in Strasbourg.

The German, French, and Italian governments are in favour of including eurobonds in the plan of Tax Commissioner Mario Monti to harmonise EU withholding tax policy. Deutsche Bank, Germany's largest bank, has gone on record in support of the tax - although it favours a 15 per cent tax rather than the 20 per cent proposed by by Mr Monti.

The Germans, French, and Italians say a uniform withholding tax without exemptions is necessary to combat income tax evasion in the EU. They say that only 10 per cent of the eurobonds are floated and traded in London are held by individuals while the rest are held by institutions and would not be affected by the new tax.

But City bankers claim that as many as 100,000 jobs would be put at risk, if the eurobond market decamped from London to Zurich or New York. They suggest that continental support for the plan stems partly from a wish to clip London's wings as Europe's pre-eminent financial centre.

Last week's vote in the European Parliament was not binding. The proposal for withholding tax harmonisation - including the eurobond ex- emption - will be decided by EU finance ministers.

Peter Holmgren, Sweden's co-ordinator for financial questions in Ecofin, said: "The Parliament has a right to express its will. But tax matters are in the hands of governments." He added: "There is a long way to go before any agreement on this issue can be reached."

Four other EU governments have also expressed reservations about the withholding tax proposal, according to Mr Murphy: the Netherlands, Austria, Denmark, and Spain.

But Katrina Scak Nielsen, the Danish official responsible for co-ordinating policy between Brussels and Copenhagen, backed off from supporting Britain's position. "What Danish politicians say individually may differ from the Danish government's official position," she noted.

Nikolaus Berg, an official at the Austrian trade commission in London, took a similar line. "The banking sector in Austria wouldn't be happy with the plan," he said. "But at the federal level it's still under consideration."

But as the backroom jockeying began for a decision which the EC wants by the end of the year, the Treasury struck a defiant note, threatening to use Britain's veto to block the directive if an exemption for eurobonds is not included.