The Treasury gave a cautious welcome to a compromise plan by the European Commission and Finland, which holds the EU's rotating presidency, aimed at resolving a two-year battle between Britain and its partners.
The surprise move is likely to defuse a row which threatened to overshadow a summit of European leaders in Finland starting tomorrow. But after studying the plan, Treasury officials warned that many "big questions" had not yet been answered. A final agreement could still be months away.
When he meets fellow EU finance ministers in Helsinki tonight, the Chancellor will say that the revised proposal provides a basis for further discussion. But he will warn that the Government will not sign a directive which damages London's lucrative Eurobond market and will need to consult the City closely over the new plan.
To stamp out tax evasion, the original directive would have forced EU countries to levy a 20 per cent tax on savings held by citizens of other member states, or to force banks to disclose the income to those countries so they can recoup the tax. The Government fears this would mean a flight of capital to the US, Switzerland and other countries with less rigorous rules.
In yesterday's concession, Brussels proposed "special arrangements for international bonds which would require the UK neither to impose a withholding tax on interest payments nor to introduce an additional layer of regulation".
Although Treasury officials described the words as encouraging, they warned that the devil would be in the detail - whether existing Eurobonds would be protected and whether the City needs to provide more information.
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