Britain is generally depicted as 'Mr (or Madam) No' in Europe because, on a wide range of issues, the...
So it is with the withholding tax directive, which is now entering its fourth year of wrangling without any sign of a solution in sight. Here is a critical dispute that pitches the markets and investors in the region against many of its politicians. Despite endless talk around the current unpopular tax proposal, not a single word of the directive by which the measure would be introduced has been changed.
Withholding tax would affect the eurobond market most of all, but with a ripple effect throughout other sectors. Banks and securities houses argue that it would carve away their already thin margins with extra administrative burdens. They would be forced either to deduct tax from investors at source and hand it to their tax authority or provide information to authorities on how much interest an investor has received.
It would be up to member states to choose which method companies within their jurisdiction would operate, so the directive would lead to a patchwork of reporting regimes across the EU, ironically going against the very spirit and concept of the single market.
Yet the politicians backing the proposal show no sign of budging from their position, mainly because they suspect a tax evasion agenda is at the root of the objections by market participants. They have refused to accept warnings that implementation of the directive as it stands would probably provoke eurobond issuers to appoint paying agents and investors to use custodians in 'directive-free' locations such as Switzerland or New York.
The UK, with its own huge slice of the eurobond market at stake, has been the focus of the market's lobbying of politicians, so there are continual efforts by the directive's champions to bring Britain into the main political pack, initially under the Finnish presidency of the EU up until December, and now under the auspices of a proposal by Portugal.
But investment houses, and even officials in localities like Switzerland (who freely admit they would stand to gain from the introduction of EU-wide withholding tax), are urging EU authorities not to force through a compromise which would quickly fall apart and in the end create more problems.
Fiscal harmonisation across the 15-nation EU is the first step. But already there are proposals that the same measures apply throughout the 29-nation OECD. Consolidation in the investment and banking industry - Switzerland itself has seen a third of its banks disappear over the last five years - is dissolving national business boundaries.
Businesses and investors have demonstrated that they can operate globally in a highly efficient way. Regulators and policy-makers, for the most part, are still clinging to the pre- economy. How the issue of EU withholding tax is handled will be watched carefully by financial centres everywhere. It could be the template on how to manage the new economy, or stand as an example of how it was outpaced and out-manoeuvred by it.
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