No hiding place for fraudsters as Europe moves to end tax havens and 'piracy'

Plan could recoup billions of unpaid duty, writes Sarah Helm in Brussels; 'Theo Waigel called for a culture of fair tax competition'

Ideas for European fiscal citizenship which could lead to the eventual setting up of a European tax authority are to be canvassed next week at a high level meeting on tax reform in Brussels.

The idea envisages the gradual abolition of "resident" and "non resident" tax status for European citizens, in order to create a single "European resident" status for tax-payers.

The plan, which exists in outline only, is initially intended as a way of stopping cross-border tax fraud. Citizens living in one member state would no longer be able to avoid tax by investing or placing savings as a "non-resident" in another member state. Instead, they would be taxed on all earnings as a European resident.

The idea, proposed by Belgium, and supported in principle by several member states, could recoup billions in unpaid tax, and could ease the operation of the single market. However, the implications of creating "European fiscal citizenship" are highly controversial.

European legislation would be necessary to set up the scheme, which would have to be administered by some form of tax authority. The idea could fuel fears that Europe is moving towards setting up a single European tax system.

A meeting of national tax advisers, under the chairmanship of Mario Monti, the single market commissioner, will discuss the plans on Tuesday, as part of a long term drive aimed at speeding the process of harmonising direct and indirect taxes across Europe.

Ideas are also being discussed for a code of conduct, setting minimum rates for corporation tax in order to stop member states indulging in unfair "tax competition" or "tax piracy" to seduce foreign investors. As a first stage a moratorium on setting up so-called tax havens is being proposed.

Britain is opposed to any plans for tax harmonisation, arguing that such proposals would set Europe on a federal path. However, France and Germany, as well as other member states, recognise that national tax systems are becoming more and more incompatible with the single European market, and could be incompatible with a single currency.

Furthermore, competing tax systems create unfair competition between member states, and allow for mass cross-border fraud which is deemed to be holding up growth and job creation in the run up to the single currency.

Billions of pounds in tax revenue is being lost because national tax regimes are competing unfairly and because national authorities cannot cope with mass movement of people across European borders.

Theo Waigel, the German finance minister, this week stepped up pressure for tax harmonisation, calling for a culture of fair tax competition to be established among countries in Europe.

Meanwhile, voices on the left are increasingly concerned that uncontrolled competition between tax systems benefits wealthy Europeans and large companies, who are able to move capital and savings as they "shop around" for good deals. Ordinary Europeans, meanwhile, bear the brunt of welfare and benefit cuts, which compensate for loss of revenue.

The initial round of proposals to be discussed by the Monti group highlights the need for harmonisation of corporation tax, tax on savings and VAT.

Meanwhile, Yves Thibault de Silguy, the economic commissioner, is arguing that a "flexibility" clause, to be incorporated in the forthcoming Amsterdam treaty, should be broad enough to apply to monetary union. Mr de Silguy wants to ensure that countries which join the single currency should have the "flexibility" to opt for far wider tax and social security harmonisation in the future. Both France and Germany want such a flexibility clause in order to maintain the option for states inside the euro zone to forge deeper integration of economic policies.

All member states are increasingly accusing each other of "tax piracy" and turning a blind eye to tax fraud. As more Europeans move across borders, and more and more multi-nationals invest in member states, tax has become harder to police.

Germany is particularly worried about the vast sums invested by Germans in Luxembourg banks, which do not have a withholding tax, or a tax on interest on savings. Germany loses about $12bn (pounds 7.5bn) a year in this way.

Corporation tax competition is also likely to be tackled in the first round of harmonisation measures. Ireland and the Netherlands are deemed to be the prime offenders in this area, offering advantageous tax rates to lure foreign investors. Germany is monitoring unfair corporation tax offers in Belgium and Corsica.

Some in European finance ministries believe the entire task of tax harmonisation is too ambitious for the European Union to tackle alone. If loopholes are closed in Europe, tax dodgers will move their money outside the EU altogether - to Switzerland, for example.

Officials working on the plans say the answer to this problem is to involve the Organisation for Economic Co-operation and Development in parallel harmonisation projects and to work on bilateral arrangements between the EU and non-member states.