The end of this month represents the deadline self-imposed by the European Union for agreement on its Savings Tax Directive, which aims at introducing common rules for the taxation of savings across the EU and calls for the exchange of information between member states. The main purpose of the Directive is to counter the perceived evasion of tax by EU resident individuals, who deposit their savings on a cross-border basis and fail to declare the income to their own tax authorities.

Late last month Swiss and EU officials confirmed there had been some progress in the ongoing debate over the Directive. The EU’s Internal Market and Tax Commissioner Frits Bolkestein, the Danish Minister of Finance, Thor Pedersen, and the President of the Swiss Confederation, Kaspar Villiger, unanimously said that progress had been achieved for both sides, over the weeks leading to the November meeting.

Discussions between the EU and Switzerland reportedly are now focusing on finding an appropriate level of taxation of interest payments to EU citizens that is equivalent to the planned savings tax directive. Switzerland has said it is prepared to adopt a tax rate of up to 35%.

The collaborative tone of the meetings notwithstanding, the solution must meet both EC demands and the demands of the Swiss legal system. Mr. Villiger again reiterated that *”relinquishing banking secrecy in Switzerland does not stand a chance.”* He has said that privacy is guaranteed by Swiss law but that it is waived when terrorism or crime are involved. He also maintains that a withholding tax is a more effective means of countering tax evasion than exchange of information because it occurs automatically.

The Member States of the EU feel that the draft Tax Package, although related to the EU Single Market, must include dependent territories and certain key third countries, to avoid a “flight of capital across borders”. They have called for the adoption of equivalent measures in Andorra, Liechtenstein, Monaco, San Marino, the United States, and Switzerland.

In the United States, the Washington, D.C.-based Coalition for Tax Competition describes the Savings Tax Directive as a significant threat to market-based policy and fiscal competition – and to American interests. A statement from the Coalition said *”America is the best tax haven in the world. Low taxes and a strong commitment to financial privacy combine to attract more that $9 trillion in foreign capital to the U.S. economy. This inflow of money is a key determinant of American prosperity because this money is put to work for the nation and produces more jobs, higher standards of living, and general prosperity.”*

The Coalition also has reported that the Bush Administration does not support the Directive, and has quoted the Director of the National Economic Council as saying so.

The group has commended the Administration’s economic team for standing up for American taxpayers, and has called for a clear message to be sent to the U.S. Treasury *”to stop negotiating with the Europeans and start putting the interests of the American people before the interests of European tax collectors.”*

As the deadline approaches, it is expected that the Commission will present a report on the negotiations with non-EC countries to the Council of Economics and Finance Ministers that coordinates economic policy in the EU, i.e. ECOFIN.