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EU to clamp down on tax evasion via withholding taxes

EU finance ministers, seeking to combat tax evasion, agreed to crack down on investors who try to escape taxes by stashing money in banks abroad.

Twelve EU countries will report foreign savers' interest income to their home tax authorities, while three -- Luxembourg, Austria and Belgium -- plus non-EU member Switzerland will impose withholding taxes that start at 15 percent next year and rise to 35 percent in 2010.

Tuesday's agreement, affecting accounts at lenders from Deutsche Bank AG to Credit Suisse Group, ends a stalemate that dates back to the 1980s. The accord will lead to higher taxes in Europe at a time when the slowest growth in a decade is squeezing government revenue. Tax lawyers said investors may find loopholes.

"It's very inappropriate for economies in Europe," said Edward Troup, head of tax at London-based law firm Simmons & Simmons. "It's not a sensible system for an efficient global tax structure because the fact the rate is so high will encourage evasion."

The final agreement is contingent on settling what EU Financial Services Commissioner Frits Bolkestein called "loose ends" with Switzerland.

Europe's taxes are already among the world's steepest, leading investors to move money across borders to defy the taxman.

The average European works until July 24 to pay his or her annual tax bill, compared with May 16 in the US, according to the European employers federation.

British Chancellor of the Exchequer Gordon Brown abandoned his quest for a global bank-interest reporting policy that would have required financial centers to disclose foreign depositors' identities and interest earnings to their home governments.

"Those tax rates are right," Brown said.
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