The European Commission proposal to introduce a blanket 20% withholding tax for all member states of the EU is still being heavily opposed in certain quarters, particularly in the UK and Luxembourg.
Their argument is that it would drive the Euro bond market to New York or Zurich, and away from London, at a cost of some 100,000 jobs. But it is more complex than these headline figures suggest and in particular, European bond issuers are concerned that their own tax liabilities may increase as a result of any change to the status quo. And for the pensions industry, there is the real risk that any perceived lack of tax efficiency will discourage workers from building up their pensions.
The issue was hotly debated last weekend at a meeting of European Finance Ministers chaired by Hans Eichel, the successor to Oskar Lafontaine as Germany’s finance minister. Under pressure from certain EU members, particularly the aforementioned states most likely to be affected, the EC is considering whether the wholesale market for international bonds might be exempted from the EU-wide withholding tax of 20% on savings of non-residents.
The concession is a classic EU compromise that will please opponents of the tax initiative while allowing the proponents of fiscal reform to carry through a raft of other measures.
Germany has recommended that Eurobond holdings above E40,000 be exempted. The detail of the compromise measures has yet to be agreed and there remains some scepticism as to whether it is possible to separate the different parts of the bond market, the institutional from the retail. Some observers argue that unless all existing international bonds are exempted, the withholding tax will create chaos by triggering early redemption clauses.
A feasibility study is expected to be produced by the end of May. One of the main issues it is addressing is the impact of the ‘gross up’ clauses on some bond issues, which would affect their taxable status and would in some cases, increase the tax liability of the issuer. Issuers would be forced to appoint paying agents.
Major bond issuers including the UK’s Abbey National, are now holding fire on their concerns about this aspect of the change, until they have a better idea of the outcome of the study and of the on-going negotiations in Brussels. Betty Olivi, spokesperson for Commissioner Mario Monti, comments, "We need to know more about the euro bonds issue and we have instigated a number of studies." She adds that member states will continue their negotiations on the withholding tax issue and formal discussions will recommence among ministers at the ECOFIN meeting on May 25.
UK Chancellor Gordon Brown is reserving judgement on the German compromise proposal. Meanwhile, Fleming Fund Management’s Henry Kelly suggests that Luxembourg is preparing itself for the inevitability of the withholding tax. The Luxembourg government’s official position remains that it is happy to accept the new tax as long as it applies to all countries. Richard Newell