Brown: I'll veto Europe's tax plan

GORDON BROWN will seek today to head off German-led demands for a common European tax policy, amid growing cabinet anxiety that the moves have played into the hands of Eurosceptics in Britain.

The Chancellor, who is attends a meeting of EU finance ministers in Brussels, faces a rift with other left-of-centre governments over calls for a minimum rate of company taxation; a tax on foreign investments and an environmental tax on domestic fuel and electricity.

Britain could also be hit by EU plans to stamp out "unfair" state subsidies, which may include the Government's support to the film industry.

But Mr Brown will support Germany and France in a move to grant a surprise last-minute reprieve for duty-free shopping, which is due to be abolished throughout Europe next June. The three countries will call for a five- year delay while the issue is reviewed.

The German Chancellor, Gerhard Schroder, has asked his Finance Minister, Oskar Lafontaine, to use Germany's spell in the EU's rotating presidency, which starts next month, to campaign for a re-think on duty free sales. But such a decision would require unanimous agreement among all 15 member states, which may be difficult to achieve.

However, the agreement between Germany and Britain on duty-free goods will not mask a growing rift over Mr Lafontaine's pressure for tax harmonisation to follow next month's launch of the euro.

Mr Brown will make clear today that he is ready to veto the three tax moves under discussion. "We are going to play hardball," said one British official. "We think we are in a majority and we will win this debate. We will see how much progress Germany makes during its presidency."

But British ministers are worried that the demands of the new German government, elected in October, have fuelled reports in Eurosceptic newspapers that a wide range of taxes, including income tax and VAT, could be decided by Brussels.

Downing Street pledged yesterday that children's clothes, food and public transport would continue to be exempt from VAT, and insisted that ending their zero-rating was not even under discussion in the EU.

Privately, ministers are worried that Tony Blair's "softly, softly" approach to Europe has been blown off course by the recent wave of speculation about a common tax policy.

His allies are worried that this will make it harder to win over British public opinion to support membership of the single currency. At the same time, they acknowledge that repeated threats to wield the veto would diminish Britain's influence in Europe, as 11 other EU states prepare for the euro's launch in less than five weeks.

The most immediate threat for Mr Brown today is Germany's demand for a minimum rate of corporation tax throughout the EU. This is seen by Britain as a back door move to stop UK firms enjoying a competitive advantage over their European rivals.

The Chancellor will also threaten to block a planned 20 per cent minimum tax on the interest from savings and investments overseas. This would hit the British Eurobond market, threatening pounds 5bn in earnings and up to 11,000 jobs in the City.

Mr Brown will tell his EU counterparts that the legislation, the EU's first on a direct taxation measure, would not collect more revenue, would bring the EU into disrepute internationally and would entrench banking secrecy.

The Chancellor's threat of a British veto will also extend to proposals for an environmental tax, which some member states and the European Commission believe should be levied on domestic users of polluting fuels.

Britain is not opposed in principle to an energy tax - one of the measures in a package that Germany wants to see agreed during its presidency - but the Government is determined to stamp out any suggestion that domestic tax rates are being dictated by Brussels.

Last night Mr Blair sought to combat the German demands on tax by agreeing a plan with Spain for action to boost employment and growth at next week's summit of EU leaders in Vienna.

Brown fights for duty free

page 2

Letters, Review, page 2