EU Ministers Clinch Tax Deal

BRUSSELS, Belgium -- European Union finance ministers Tuesday backed a long-awaited plan to tax income from cross-border savings that will help cash-strapped member states boost revenues and stem tax evasion.

The deal ends a decade-long stalemate over the outline of the so-called savings tax proposal and is set to be finalized before EU leaders meet in March.

Under the terms of the deal, and in return for keeping their cherished banking secrecy, Luxembourg, Austria and Belgium would have to tax up to 35 percent the income from savings non-residents hide in these countries.

The other 12 member states would share data on billions of euros EU citizens hide abroad so that the income from these savings can be taxed in savers' home country.

"You see a very happy finance minister in front of you. This allows Europe to banish a fundamental injustice," said German Finance Minister Hans Eichel, whose country earned a formal EU rebuke at the same meeting over its swelling budget deficit.

"This does not mean that Austria, Luxembourg and Belgium are not great banking centers. They are, but they should not be known as great banking centers because they are places where one can profit from tax evasion in other countries," he said.

Official data from June 2000 shows citizens and firms from Europe's biggest economy held 960 billion euros ($1.03 trillion) abroad excluding direct investments and trade credits. Unofficial data suggest individuals held between 300 billion and 750 billion euros abroad.

The deal envisages Luxembourg, Austria and Belgium would have to introduce a withholding tax of 15 percent in 2004, raise it to 20 percent in 2007 and to 35 percent in 2009. They would have to share these tax revenues with EU member states.

"Who would have thought three or four years ago that we would accept a withholding tax of 35 percent. I consider this a tremendous achievement," European Internal Market Commissioner Frits Bolkestein told reporters.

British Chancellor of the Exchequer Gordon Brown confirmed that ministers had struck a deal and hailed the accord.

"Today's important agreement secures the principle of exchange of information on tax matters -- not one size fits all tax harmonization," Brown said in a statement, stressing that no withholding tax would be imposed on London.

Luxembourg and Austria had consistently vetoed a deal in the past, fearing the plan would give a competitive advantage to rival financial centers such as non-EU Switzerland and calling the suggested withholding tax rates too high.

Both countries also feared they may be undercut by a German plan to introduce a 25 percent withholding tax on income from savings.

This could mean, for instance, that German residents holding savings in Luxembourg or Austria could get a 10 percent reduction if they contact their tax authorities back home.

Switzerland, whose banks manage $3 trillion for clients, is resisting easing banking secrecy, and its banks are threatening to force a national referendum if client privacy is in jeopardy.