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Conclusion
The way forward: Proposal for actions inside the Union and within the OECD
Removing harmful tax distortions and 'fighting tax evasion' are worthwhile, important objectives but they can take a highly technical form and are mostly of a negative or defensive nature. Already, thinking in terms of 'fair competition' is more in line with the post euro agenda. Europe is not built on distrust of the other but, on the contrary, on mutual recognition and in-depth dialogue.
As the euro comes to life, political leaders have the responsibility to present the European citizens with a new set of widely shared, positive objectives for the next stages of European integration. Steps toward harmonisation of taxes clearly belong in this agenda, yet they should aim not just at addressing the concerns of tax collectors but, as explicitly as possible, at meeting the needs of the corporations, financial institutions, investors and workers who are intended to be the true beneficiaries of the proposed Directive. It is unfortunate therefore that, until now at least, the proposed Directive has probably over-emphasised the concerns of the tax-collector community - which are inward-looking by their very nature - at the expense of the concerns of market participants and intermediaries - which are outward looking, also by nature.
Setting up a high level group...
In this spirit, this report recommends setting up a high level group within Europe to reflect upon and make proposals on tax convergence and capital market implications after the euro.
...to serve as catalyst for a dialogue on post euro integration
One of the objectives of this group would be to engage market participants, notably professional associations such as IPMA, ISMA and EBA in a dialogue on the changing relationship between wholesale and retail markets and on the search for the appropriate ways to draw the line between them. Such a distinction could serve the function of the definition now obsolete given of 'euro-securities' in the Prospectus Directive. More technical issues (gross-up and redemption) could also be covered, although it is likely that this is already being done. As we have seen, bearer bonds are a more important issue in need of some clarification and shared thinking.
This dialogue would lay the ground for a Directive that would meet its social and tax objectives in ways not detrimental to the European capital market industry. Without prejudging what this high level group might conclude, the present report leads to some suggestions that might be considered.
Suggestions for a simpler and more 'European' Directive
The emphasis should be on the following features that can already be considered as needed for the directive to be a the same time less costly to administer and more in line with a European integration dynamics:
- First, the withholding tax should be final so as to make it simple and also to make it European in inspiration rather than merely defensive.
- Second, it should be set at a level low enough to compensate for the bias in today's national tax systems toward keeping savings at home.
- Third, a perspective should be open for an evolution toward a VAT type of structure, with agreed levels of withholding taxes for agreed types of investment. Differentiated tax levels would facilitate the funding of pensions in ways comparable to what Member States do at home, with the possibility of zero level withholding tax for the type of pension-related investment that are (or that will become in some years) tax exempt in the Member States.
- Fourth, it should include a 'post-euro' set of guidelines to separate retail from wholesale activities, exempting the latter entirely. This in turn calls for in-depth work and, maybe, some reorganisation of placement activities by financial firms themselves so as to adapt their internal procedures, control and reporting to the blurring of the lines between domestic and global.
Agenda for the indispensable international dialogue
Aimed at the removal of tax distortion and at the fight against tax evasion, the proposed Directive can be the catalyst of the much needed international dialogue on financial stability.
In their efforts to achieve the objective set forth in the proposed Directive, the leaders of the Union should also look at the latter as one building block toward a more resilient international architecture for the forthcoming two-currency world.
The OECD is mentioned by almost all market participants - and notably by all our interviewees - as the logical forum for any meaningful debate and decision on a withholding tax that could stand a chance of not transforming rapidly into a major source of lost investment and lost financial market activity for the EU. Actually, the OECD has already a long experience with the issue which it first approached in the form of a proposal to reform international withholding tax regime as far back as 1976.
There is something a little surprising in the Commission's view that going alone is a good way for Europe to show the way and be followed quickly thereafter by an OECD-wide consensus: the European tradition would seem to be that consensus is built rather than announced or presupposed. More importantly, capital markets are the kingdom of "ratchet effects": once liquidity is lost, it does not come back easily as it is in the nature of liquidity to feed on liquidity.
By letting the prized eurobond market cross the Atlantic and the Alps, the Commission's proposal would bet that discussions among OECD experts could undo what market forces would have done and repatriate the lost business, the lost liquidity and the lost leading-edge skills to the Union. This is a brave view indeed of the power of OECD working parties! An ex ante approach would clearly be more in the EU interest than an ex post one.
Steps in this direction could include:
- Engaging its OECD partners and notably Switzerland in a co-ordinated effort to establish an OECD-wide withholding tax, possibly with some regional rate differences, that could fit into the global financial infrastructure needed for the smooth functioning of global financial markets.
- Providing enough incentives, of the positive and negative type, to prevent some smaller countries to leave the 'OECD Club' as some have recently been reported to be considering.
- Requiring OECD countries to achieve the necessary transparency with respect to the links established through their banks with related parties in non-OECD financial centres in the form for instance of 'double-bottomed' bank accounts.
- Encouraging and rewarding the evolution of the off-shore world toward a common ethics in such fora as IOSCO and BIS.
This international dialogue would be the counterpart to the intra European.
Taking 'the global euro' into consideration in the timing of tax initiatives
It is likely that these internal and external dialogues will require a couple of years of in-depth work and dialogue before providing the platform on which a revised proposal for a Directive can be based. This would come as a disappointment to advocate swift initiatives against 'harmful tax competition' in the field of interest payments. This disappointment, in the view of this report, should be assuaged however by two considerations:
The first consideration is that the standstill agreement on 'harmful tax competition' can very much be enforced, as it has actually begun to be, while this common approach is developed. Judging by the debate of the fall of 1998, it seems that the most immediate concern of Member States concern corporate taxes. Measures such as those envisioned in Denmark to attract holding companies (by replicating a Dutch-style tax environment!) are a clear illustration of what is at stake. In no way therefore would EU governments be simply turning a blind eye to what they perceive as harmful tax competition if they focused on the enforcement of this agreed standstill while progress is being made along the lines advocated in this report.
The second consideration is that there is something much worse than delayed action: outright failure. The technical complexity of the procedures to be put in place has been clearly underestimated, with the risk of ending up the way the TAURUS project ended when it had to be abandoned as too costly and too complex. Such a failure to implement the announced proposal would deal a serious blow to European momentum and would do so at the very moment when the creation of the euro is making success a strategic imperative for the Union. As we have seen, in addition, this risk of failure has been accepted at the cost of not exploring pro-integration approaches such as making the withholding tax final. Such alternatives are readily available to make the proposal workable while also taking a quantum leap toward 'Citizens' Europe.'
Altogether, the Commission should be complimented for having acted swiftly within the relatively narrow mandate set by the ECOFIN on 1 December 1997. Yet, it should also be alerted to the fact that, in this specific context, this is either too much or too little boldness. Too much in light of the major risks lightly accepted for the sake of relatively limited benefits. Too little in light of the agenda already taking shape to move Europe beyond the single currency toward elements of a genuinely common tax policy. The latter would look at the people of Europe not as potential tax evaders but as those citizens who have really made possible the Union of today by the far reaching changes they have accepted and encouraged for their collective good.
