Brown backs down in row over Europe tax on savings

Prospects of a Europe-wide tax on savings being introduced in a year's time moved a step closer yesterday when Britain dropped a demand that had been blocking talks.

After 12 years of discussion on a plan to stop investors evading taxes on the interest on savings, a meeting of EU finance ministers in Brussels moved towards a deal that could be struck next week.

The scheme, due to start on 1 January 2004, is designed to crack down on thousands of EU citizens who hold savings in accounts in another member state, avoiding tax on the interest their cash earns. Germany is a particular loser from the present position, with many residents crossing borders to open bank accounts.

After yesterday's talks, three smaller countries – Luxembourg, Austria and Belgium – were still holding out.

At the heart of the deadlock is a dispute over how to combat tax evasion. One option is for countries to impose their own withholding tax on interest earned by foreigners and to share revenue with the saver's home country.

The other is for them to exchange information automatically with tax authorities in depositors' home countries.

Britain won backing for the automatic exchange option but Austria, Luxembourg and Belgium said they would only follow suit if nations including Switzerland, not an EU member, agreed to do the same. Until yesterday Gordon Brown, the Chancellor of the Exchequer, rejected a compromise under which the Swiss could protect their banking secrecy and impose a withholding tax.

Mr Brown has now backed down and endorsed a plan that would see withholding tax on accounts in Switzerland fixed at 35 per cent. Information would only be exchanged on a request based on suspicion of fraud or money-laundering.

A British official said: "Clearly we would like the Swiss to go further but the price the Swiss are having to pay is a high withholding tax of 35 per cent."

The Treasury saysits strategy has been based around the desire to prevent a withholding tax being forced on London, with damaging implications for the eurobond market. The original proposal from the European Commission allowed nations the option of choosing between a withholding tax or an exchange of information.

One EU diplomat said the British change of heart reflected "a bit of realism creeping in". But the agreement could still fall at the final hurdle. Luxembourg and Austria say they will not exchange information unless the Swiss do so. In the meantime they want to levy a withholding tax at the lower rate of 15 to 20 per cent. "We can't accept that money will flee outside the EU's frontiers," said Jean-Claude Juncker, the Prime Minister of Luxembourg.

There are also doubts the UK's dependent territories, such as Jersey, will fall into line.