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Taxation: All in the name of harmony

Why should a UK bank become a tax collector for the Germans? That is the not-so-hidden agenda that international bondholders see behind a proposed EU directive on taxation of savings.

They fear that such a directive, if implemented, could cause a tax event that triggers wholesale calling of up to 8% of the $3 trillion Eurobonds outstanding, resulting in a chaos of refinancings in a market already heavily stressed by Emu and the year 2000 problem.

The proposal is the "ill-conceived brain-child of German chancellor Helmut Kohl in an attempt to win votes for his re-election in September", Eurobond specialists opine. If so, it may die a well-deserved death as early as October, they hope and pray.

The proposal, rushed out in May, only five months after the first discussions by European economic and finance ministers (Ecofin) in December, is aimed at "removing distortions in the single market", according to the Brussels preamble. The directive will be aimed at eliminating "non-taxation of income" (ie tax evasion), the document says, although it will also seek to correct distortions caused by double taxation. It is likely to affect all interest payments to individuals, not corporate entities, including interest on bonds, deposits, even venture capital investments, with a levy of 20%.

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