UK may block EU direct tax plans

GORDON BROWN, theChancellor, last night threatened to veto the first move by Brussels to legislate on direct tax - the most potent symbol of national sovereignty.

He said he was not prepared to see the City of London - and Britain's economy - suffer losses from attempts by the EU Commission to tighten tax rules on savings.

The Chancellor was chairing talks in Luxembourg on proposals designed to ensure that tax is paid on all income from bank accounts and securities held by EU residents.

The Government has welcomed moves to combat tax evasion, but fears EU legislation setting a fixed rate of tax on interest from savings would merely drive investors out of the EU and particularly out of the City of London.

The Chancellor told a news conference that the plan was unacceptable: "We are going to stand up for the national interest in this matter."

The proposal aims to set an EU-wide minimum tax rate on interest paid to EU savers who invest in an EU member state other than their own. Financial institutions would either withhold 20 per cent from the interest due, or ensure that details of a customer's interest payments were passed back to the home tax authority.

UK investment bankers have been lobbying the Treasury hard to fight the plan, fearing it could seriously damage European capital markets and particularly the Eurobond market. The City of London is by far the largest centre for Eurobond trading.

Mr Brown signalled backing for the idea of exchanging information between tax authorities to crack down on tax evasion on savings. But his strident tone dismayed EU taxation Commissioner Mario Monti, the plan's author. He sat stoney-faced alongside Mr Brown, and then insisted that Brussels had already considered the impact of the measure on EU financial institutions.

He pointed out that his plan only applied to EU individuals investing in other EU countries, not to third-country nationals investing in London or elsewhere in the EU. Furthermore, he said, the tax would only apply to interest on savings, not income from shares or capital gains.

"It is a form of tax co-operation. It is not to be regarded as a new tax but a way of getting European governments to co-operate on cutting cross-border tax evasion."