Opinion of the Economic and Social Committee on the 'Proposal for a Council Directive to ensure a minimum of effective taxation of savings income in the form of interest payments within the Community'
Date: 1999-02-24
Institutions: European Economic and Social Committee
Subjects: EU Member State, interest, residence, savings, tax harmonisation, tax system

C 116/18

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Official Journal of the European Communities

28.4.1999

Opinion of the Economic and Social Committee on the ‘Proposal for a Council Directive to
ensure a minimum of effective taxation of savings income in the form of interest payments
within the Community’(1)

(1999/C 116/05)

On 3 July 1998 the Council decided to consult the Economic and Social Committee, under Article 100
of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 8 February 1999.
The rapporteur was Mr Geuenich.

At its 361st plenary session on 24 and 25 February (meeting of 24 February 1999), the Economic and
Social Committee adopted the following opinion by 93 votes to 22, with 15 abstentions.

1.

Introduction

1.1. Commission objectives

The proposal for a directive is intended to ensure a minimum
of effective taxation of savings income in the form of interest
paid to natural persons who are resident for tax purposes in
another EU Member State. The Commission is aiming to
achieve a pragmatic, minimalist solution in order to avoid
complications as far as possible. Issues relating to taxation of
pensions and insurance payments will be considered separately
with a view to drawing up specific proposals for legislation.

Taxation of investment income earned by corporations like-
wise falls into a different legal category than that covered by
the present proposal for a directive.

1.2. Content of the Commission proposal

1.2.1.
To ensure minimum taxation of interest payments
to natural persons resident in the Community, the Member
States can introduce either a withholding tax on interest
payments to beneficiaries resident in another Member State
(‘withholding-tax system’) or a system whereby information is
communicated to the home Member State of the interest
beneficiary (‘information system’). This possibility of choosing
between two different systems is referred to as the ‘coexistence
model’. The model applies to interest payments made through
a paying agent in the EU (the ‘paying agent principle’). The
place of establishment of the debtor is irrelevant.

1.2.2.
The minimum rate of withholding tax is set at 20 %,
though this does not preclude Member States from having a
higher rate if they so wish. The sole function of the tax is to
tax is collected once (minimum taxation of
ensure that
interest).
It should therefore not be levied if the interest
beneficiary presents to the paying agent a certificate from the
tax authority of the Member State of residence confirming that
this tax authority has been informed of the amount of interest

to be paid. If the amount of interest paid exceeds the amount
recorded on the certificate, withholding tax is charged on the
difference.

1.2.3.
The certificate must identify the interest beneficiary
and the paying agent, and specify the amount of interest due
and the payment date. The certificate is issued to the interest
beneficiary within two months of application. According to
the Commission,
further details concerning the certificate
remain to be discussed.

Revenues from withholding tax remain in the coun-
1.2.4.
try where the tax is collected. In cases where a certificate is
received from the tax authority of the Member State of
residence, as described in the previous point, that country
obviously receives the revenues from the taxation of interest
payments.

In its proposal for a Directive of 10 February 1989(2)
1.2.5.
the Commission considered excluding eurobonds from the
scope of the directive. This is not the case in the present
proposal for a Directive, under which interest on eurobonds
would be subject to the same taxation procedure as other
forms of interest.

1.2.6.
The Community undertakes to enter into nego-
tiations with its main trading partners with the aim of also
ensuring effective taxation of interest paid by paying agents in
third countries to beneficiaries resident in the Community.

1.2.7.
The Commission recommends that the representa-
tives of the Member State governments meeting within the
Council adopt the following decision: ‘Member States which
have dependent or associated territories or which have special
responsibilities or taxation prerogatives in respect of other
territories are committed to taking appropriate measures,
where appropriate within the framework of their constitutional
arrangements, to ensure that provisions concerning interest
payments to Community residents, equivalent to those con-
tained in the Directive once adopted, may be applied in those
territories.’

(1) OJ C 212, 8.7.1998, p. 13.

(2) COM(89) 60 final, OJ C 141, 7.6.1989, p. 5.

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1.2.8.
The Member States are due to adopt and publish the
necessary legal and administrative provisions by 31 December
1999 at the latest, so that the directive can be applied from 1
January 2001.

The Commission will report to the Council on the functioning
of the directive by 1 January 2004. On the basis of this report,
the Commission will
if necessary propose to the Council
amendments to the directive designed to improve the system
of taxing interest payments and to eliminate any undesirable
distortion of competition.

2. Risk of tax avoidance

2.1.
Introducing withholding tax or an obligation to report
cross-border interest payments in the European Union could
encourage tax avoidance by moving funds to low-tax countries
outside the EU. The ESC would make the following points on
major instances of this practice.

Switzerland would not profit from any additional large
2.2.
influx of tax avoidance funds from the EU countries, as this
would put further upward pressure on the exchange rate of
the overvalued Swiss franc. The current overvaluation is
already having a considerable effect on Switzerland’s inter-
national competitiveness. Switzerland might be obliged in its
own interests to take measures to prevent a further big influx
of tax avoidance funds.

With the above in mind,
it must also be considered that
Switzerland relies on a system of bilateral agreements with the
EU to avoid any disadvantages that might arise from not being
an EU member. In this context there is every reason to hope
that Switzerland and the EU will be able to reach a mutually
satisfactory agreement in relation to the objectives of the
proposal for a directive to guarantee a minimum of effective
taxation of savings income in the form of interest payments
within the Community.

2.3.
In addition to all the big names in world finance, the
Cayman Islands are host to some 28 000 off-shore holding
companies (27 640 as at 6 November 1998) and as many
trusts, which are attracted by zero taxation and increasing
confidence in the islands’ domestic stability.

It is an open secret that large-scale money-laundering takes
place in the Cayman Islands, for instance. If there is any
surveillance of this money-laundering, it is conducted only by
the authorities of the Cayman Islands themselves, without the
involvement of any foreign authority. If a foreign authority
wishes to obtain the cooperation of the local authorities, this
has to be approved first by a local court. No cases of this
happening are known to date.

The right forum for dealing with the problem of a potential
increase in tax avoidance using tax havens would presumably

be the International Monetary Fund (IMF).
If appropriate,
negotiations between the EU and the OECD, involving the
United States, could play a complementary or supportive role.
Specifically, the IMF could block access to the international
system of interbank transfers for all those banks that did not
exercise a minimum degree of discipline.

However, it is hardly acceptable that the tax environment in
the Cayman Islands, which are a British protectorate, should
in the long run obstruct the objective of achieving a minimum
of effective taxation of savings income in the form of interest
payments within the Community.

2.4.
The Cayman Islands have also been referred to as the
‘Liechtenstein of the Caribbean’, which says something about
the position of that other tax haven. However, the Liechtenstein
issue is quite different from that of the Cayman Islands, if only
because Liechtenstein is,
the
European Economic Area (EEA).

like Norway, a member of

2.5.
The Committee notes that the process of solving the
problem of tax avoidance is well under way. It refers to Article
11 of the proposal for a directive, in which the Community is
to be required to initiate either bilateral or multilateral
negotiations with its main third-country trading partners in
order to ensure that effective taxation of interest payments is
possible.

The Committee is pleased to note that the European Council
has stated its firm intention to meet this requirement. The
conclusions of the European Council of 11 and 12 December
1998 in Vienna say the following about tax policy:

‘The European Council welcomes the report of the Council on
reinforced tax policy cooperation and emphasizes the need to
combat harmful tax competition. Cooperation in the tax policy
area is not aiming at uniform tax rates and is not inconsistent
with fair tax competition but is called for to reduce the
continuing distortions in the single market, to prevent excess-
ive losses of tax revenue or to get tax structures to develop in
a more employment-friendly way.

Specifically, the European Council:

— invites the Council [of Ministers] to pursue work on the
proposals for a directive on taxation of savings and for a
directive on interest and royalties with a view to reaching
agreement before the Helsinki European Council;

— welcomes the intention of the Commission and the Council
to begin talks with third countries on problems concerning
the taxation of interest income.’

2.6.
A political process to resolve the problem of tax
avoidance is also under way for Member States with dependent
or associated territories or with special responsibilities or tax
rights in such territories. An example is the joint statement of

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Tony Blair and Chancellor Gerhard Schröder of 10 December
1998, which was forwarded to the Austrian Chancellor, Viktor
Klima, and all the other EU heads of state and government and
the European Commission President, Jacques Santer, in which
they say:

3.3.
As the Commission proposes a system which includes
a choice between a withholding-tax system and an information
system instead of only one common system, the following
problem will arise.

— ‘We fully support the need for enhanced cooperation in

the fight against tax abuse and evasion’.(1)

2.7.
It should be borne in mind that the more ‘exotic’ the
country, the riskier a capital investment motivated by the
desire to avoid tax is likely to be. Internal economic stability
and an economy sound enough to make foreign capital secure
are particularly relevant considerations here. There is also a
limit to the extent to which above-average risk on capital
investment can be covered by higher risk premiums, since any
interest, including the risk premium, must ultimately be earned
on the market. Thus the capital market automatically sets
limits on tax avoidance in high-risk countries.

The countries that choose the withholding-tax system will
keep the taxes from interest incomes while those with an
information system inform other countries of their respective
nationals’ interest incomes and thereby export this tax base.
To prevent such a redistribution the Commission proposal
needs to be amplified with a rule which eliminates the impact
on the tax base created by the ‘co-existence’ model.

3.4.
The Committee notes that ensuring minimum taxation
of cross-border interest payments does not prevent individual
Member States from helping small savers by providing tax
exemptions, for example. The Committee also endorses this
approach.

2.8.
Finally, the Committee points out that the possibility
of tax avoidance has not prevented any EU Member State from
taxing interest earned by residents. This thorough taxation
must now be supplemented by minimum taxation of interest
paid to savers in another EU Member State.

3.5.
Since collection of withholding tax does not discharge
the beneficiary’s tax liability, but could do so de facto if the
beneficiary did not declare the interest received in the country
of residence, the Committee points out that the ‘information
system’ is a particularly effective way of ensuring that interest
is taxed at the beneficiary’s personal tax rate.

3. ESC recommendations

3.1.
The Committee has already stated its views on the
question of taxing cross-border interest payments in the EU in
taxation’(2) and
its opinions entitled ‘Direct and indirect
‘Taxation in the European Union — Report on the develop-
ment of tax systems’(3), and refers back to these documents.

3.2.
The Committee welcomes the proposal for a directive
because, once fully implemented by the Member States, it
should curtail improper tax competition, and help to provide
resources for job creation and (through the requirement to
conduct productive negotiations with major trading partners)
to prevent the European Union being put at a disadvantage on
international capital markets.

The OECD has traditionally advocated the exchange of infor-
mation on taxation between its members. It can be assumed
that the OECD has been waiting for action to establish a
minimum level of effective taxation of interest payments
within the Community, now taken by the European Com-
mission with this proposal for a directive, before introducing
complementary measures.

(1) From Agence Europe No 7361 (General News),11.12.1998, p. 7.
(2) OJ C 82, 19.3.1996.
(3) OJ C 296, 29.9.1997.

However, the Committee is also aware that fair account must
be taken of the legal situation in each EU Member State. In
Luxembourg, for instance, an ‘information system’ would be
constitutionally impossible.

3.6.
The Committee assumes that there can be no problem
with administering the ‘information system’ in this age of
advanced electronic communications technology.

The introduction of other systems in addition to the ‘coexist-
ence model’,
‘information’ and
‘withholding tax’ systems would make the situation progress-
ively more unmanageable.

i.e. alongside the parallel

The Committee welcomes the Commission proposal
3.7.
that the Council should adopt a decision on negotiations to
bring the position of EU exclaves and ‘off-shore’ centres into
line.

3.8.
The Committee recommends that the minimum tax-
ation of interest should be extended to financial products,
which can be considered virtually equivalent to fixed-interest
investments. The inclusion or non-inclusion of eurobonds in
the scope of the directive is a major problem. The eurobond
market is very significant in volume terms and has particular
features that call for special evaluation of its tax treatment. It
should be noted that many investors in this market are not
resident in the European Union. The eurobond market is
highly concentrated, and the vast majority of issues take place
in London.

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The Committee is aware how important this matter is, and for
the following reasons is inclined to agree with the Com-
mission’s view, as expressed in the proposal.

Excluding eurobonds would substantially restrict the scope of
the proposed directive.
It would also give this type of
investment a further advantage over other types of capital
investment.

It should also be pointed out that eurobonds represent a
significant percentage of the issues market in the United
Kingdom. Not applying the taxation system set out in the
Commission’s proposal to eurobonds would virtually amount
to excluding the United Kingdom from the scope of the
directive. This is therefore an extremely delicate political
problem for which a solution needs to be proposed that is
likely to be supported by the required majority in the Council.

Brussels, 24 February 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

APPENDIX

to the opinion of the Economic and Social Committee

(Rule 47(3) of the Rules of Procedure)

The following amendments, which were supported by over a quarter of votes cast, were defeated during the course
of the debate:

Amendment tabled by Mr Levitt and Mr Walker

Replace the entire text by the following:

‘1.1. While accepting in principle the idea of a unified withholding tax in the EU, the ESC considers that the
Commission’s present proposals are ill-timed and ill-conceived.

1.2.
In the absence of any agreement with countries outside the EU, there is the near certainty that such a measure,
applied unilaterally within the EU, would result in massive outflows of capital to countries with more favourable tax
regimes,
including lower compliance costs. This has happened in the past when an individual Member State
attempted to introduce similar legislation and it will happen again on a much larger scale if this proposal becomes
law at this time. There is evidence that banks are already making contingency plans to switch funds to Switzerland,
Liechtenstein and other European tax havens and these countries will welcome such inflows enthusiastically.

1.2.1.
The ESC therefore believes that negotiations with external nations should precede the introduction of such
legislation, if only because the prior enactment of this legislation would leave the negotiating teams with no lever
with which to negotiate.

1.3.
The extension of such legislation to include existing Eurobonds would have disastrous consequences for the
Eurobond market. In many cases, bond holders are guaranteed a specified return after tax and the effect would be to
force the bond issuers to increase the gross rate of interest paid in order to leave them with the same net return. This
would increase the cost of capital, which would, in turn, reduce the prospects for employment. Where the terms of
the issue permitted the bond issuers to redeem the bonds at an earlier date, they would do so and replace them by
new issues at lower rates of interest. This would induce a massive capital transfer to issuers from bondholders
including pension funds.

1.3.1.
in other countries, which would create additional unemployment.

The net effect of this would be to place EU-based capital markets at a disadvantage with their competitors

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1.4.
In any case, the legislation is unlikely to do much to achieve its declared aim of reducing tax evasion. Where
a Member State imposed a withholding tax, it would receive this tax into its exchequer; on the other hand, if it opted
to inform the Member State where the taxpayer was domiciled, the tax would be collected by that Member State. In
these circumstances, all Member States will naturally elect to impose a withholding tax and none will choose the
option to inform. The “co-existence” is, therefore, a myth.

1.4.1.
The result of this is that the minimum tax of 20 % will also be the maximum tax, since Member States in
which the taxpayers are resident will continue to be ignorant of the existence of the transactions, which will
consequently escape the higher rates of tax which would, in most cases, have been levied if the information method
had been used.’

Reason

Self-explanatory

Result of the vote

Against: 72; for: 40; abstentions: 7.

Opinion of the Economic and Social Committee on:

— the ‘Proposal for a Council Regulation (EC) amending Regulation No 19/65/EEC on the
application of Article 85(3) of the Treaty to certain categories of agreements and concerted
practices’, and

— the ‘Proposal for a Council Regulation (EC) amending Regulation No 17: First Regulation

implementing Articles 85 and 86 of the Treaty’

(1999/C 116/06)

On 4 November 1998 the Council decided to consult the Economic and Social Committee, under Article
198 of the Treaty establishing the European Community, on the above-mentioned proposals.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 11 February 1999. The rapporteur was Mr
Regaldo.

At its 361st plenary session (meeting of 24 February 1999), the Economic and Social Committee adopted
the following opinion by 118 votes for with two abstentions.

1.

Introduction

The Commission has issued its Communication(1) on
1.1.
the application of the Community competition rules to vertical
restraints in response to the 227 written submissions received
during the consultation exercise on the Green Paper(2). Its
primary objective is to shape a new Community vertical
restraints policy in order to remedy the shortcomings of the
current one.

1.2.
For its part, the Committee takes the view that firstly,
an effective policy is needed as vertical restraints are a key

(1) OJ C 365, 26.11.1998, p. 3.
(2) OJ C 296, 29.9.1997.

component of EU competition policy and play a significant role
in promoting business competitiveness, market integration,
economic and social cohesion and consumer welfare.

1.3.
Vertical agreements such as agreements and concerted
practices entered into by firms, each operating at a different
stage of the economic process, in respect of the supply and/or
purchase of goods or the marketing of services (otherwise
known as vertical restraints) have in time shown a pro-
competitive tendency. However, the current rules on vertical
restraint need to be updated in line with the ongoing change
in production processes and the evolution and multiplication
of different types of distribution point.