The Hungarian EU Presidency has sent the Italian authorities a letter urging them to waive their veto to adoption of a partial compromise on taxation of savings income that targets Switzerland. The 27 ambassadors will discuss the subject on 11 May, six days ahead of an Ecofin Council.

Hungary is adamant about securing a partial agreement on taxation of savings income before the end of its EU Presidency, on 30 June (see Europolitics 4190 and 4192). It proposes to the 27 to give the European Commission the green light to draw up negotiation mandates with Switzerland, Liechtenstein, Andorra, San Marino and Monaco with a view to ensuring that these countries continue to apply measures "equivalent" to the Union's. The 27 are considering extending the scope of their directive on savings taxation, limited for now to earnings collected as interest, to new products like life insurance and to certain legal persons (trusts, foundations, etc).

Luxembourg has a "general political reservation" on the conclusions drafted by Hungary for submission to the EU's finance ministers, which nevertheless do not touch on the extremely sensitive issue of the abolition of banking secrecy in the Union, although general application of the automatic exchange of information between member states' tax administrations nevertheless remains the Union's "ultimate objective," writes Budapest.

Semeta in Luxembourg

Hungary nonetheless seems to believe that Luxembourg could make concessions if Italy did the same. Taxation Commissioner Algirdas Semeta will discuss this matter, on 11 May, with Luxembourg's Finance Minister Luc Frieden.

Rome refuses to make the slightest concession until the findings of a European Commission report, to be presented in June, are unveiled and have been analysed. The report concerns the functioning of existing rules, which Rome claims leave room for improvement, arguing that banks can circumvent their obligations quite easily.

The CHF123 million (nearly €100 million) paid to Italy in 2009 by Switzerland, which applies withholding at the source on savings interest paid to non-residents, is said to be ridiculously low compared with the amount of funds Italians have stashed away in Switzerland. Rome says the tax amnesty it decreed in 2009 revealed that funds concealed in Switzerland are in fact 30 times as high as the figures found in Berne's accounts.

Delay is detrimental

The Hungarian Presidency's letter asks Italy to give up its demands. Maintaining its veto "will not serve the common economic interest of Italy and the EU in fighting fraud and tax evasion more effectively," states Budapest.

If the EU were to agree, as Italy demands, to the possibility of a total overhaul of the EU rules rather than a mere extension of their scope, Switzerland would doubtless refuse to enter into negotiations with the European Commission. Since Luxembourg is demanding to be placed on an equal footing with Berne, the conclusion of a political agreement on this issue would be "seriously delayed, by months or even years". Meanwhile, "banks would continue to exploit the loopholes" of existing legislation massively, which "would further reduce states' already very narrow budgetary margin to offer tax incentives to support the fragile economic recovery".

The Hungarian letter also denounces a second perverse effect of Italy's red light: it risks weakening the Union's position in its "dialogue" with the United States on the Foreign Account Tax Compliance Act (FATCA). The Europeans are trying to convince Washington to copy their model of tax transparency rather than imposing a new system on their financial institutions.