Setback for Blair over EU tax row

A DRIVE by Tony Blair to defuse the controversy over calls for a common European tax policy suffered an immediate setback yesterday.

Downing Street issued a joint statement by the Prime Minister and Gerhard Schroder, the German Chancellor, saying that they opposed the harmonisation of income and company taxes throughout the European Union. But Mr Blair's hopes of a coup ahead of this weekend's summit of EU leaders in Vienna were scuppered when the German government said the declaration would not be published in Bonn.

Initially, a German Chancellery spokeswoman said the two leaders had spoken by telephone and "reached an understanding on European tax policy", but added: "It was not agreed that a joint written statement would be issued."

After several hours of confusion, the Germans finally acknowledged the statement. Downing Street blamed the mix-up on the fact that a press briefing in Bonn took place yesterday afternoon, while journalists in London had been told in the morning.

But Brussels officials suggested that the problem reflected differences between Mr Schroder and Oskar Lafontaine, his Finance Minister, who wants Britain to lose the competitive advantage of its low corporate tax rates. "This is symptomatic of the current disorganisation in Germany. It reflects worse on the Germans than the British," one EU diplomat said.

The Tories claimed it was significant that the statement made no reference to taxes on savings, capital and VAT. In the Commons, William Hague mocked the agreement, telling Mr Blair: "Every time you meet a German you go round saying, 'Don't mention the tax harmonisation'."

Mr Blair hit back by saying the Tories had now become an "anti-European party". Although the Government would not go back to the days of Tory rule "that left this country without influence" in Europe, he pledged: "We will oppose any measure at all that is against Britain's interest, whether on taxes or in any other field."

Mr Blair is likely to come under pressure at the Vienna summit to surrender part of the special rebate on Britain's contributions to the EU, which is worth pounds 2bn a year. Downing Street insisted yesterday that it would survive - even if Mr Blair had to use his veto to protect it.

In the Anglo-German statement, the only concession to greater co-ordination of taxes was on environmental and health grounds. "In approaching all of these issues, we will ensure that no proposal is accepted if it damages European competitiveness or destroys jobs."

Despite yesterday's confusion, British officials hope the Blair-Schroder statement will help to head off demands for greater integration on tax.

The Vienna summit has a crowded agenda dominated by the funding of the EU. There is likely to be a serious split between net contributor nations, including Germany, which want a freeze on EU spending, and nations such as Spain, which benefit from its structural and cohesion funds.

Retail organisations across Europe backed the scrapping by the European Union of duty-free sales last night, with the British Retail Consortium and the Belgian distributors' federation "abstaining" from the terms of a letter sent to EU leaders in Brussels.

Eurocommerce, the body that represents the EU interests of retail and wholesale traders, says duty-free sales must end as planned next June. "The tax exemption for duty-free shops leads to distortions of competition which fall back on regular commerce that has to pay taxes and... leads to considerable tax losses for the budgets of the member states," the letter says.

Blair's 'tax waffle', page 8