Labour government.

Last autumn, the European Union issued a draft directive proposing to charge withholding tax on all interest payments to non-EU residents.

Almost immediately after the directive was issued, British Prime Minister Tony Blair said he would veto any moves to make the proposal law throughout Europe, after fears were expressed that the tax might drive significant amounts of European capital offshore. But late in December, Mr. Blair reversed his position and said he would only campaign against the withholding tax proposals for small changes necessary to protect London's eurobond market. Otherwise, he indicated, Britain would not oppose the introduction of a pan-European withholding tax.

Voicing worries which are widely held in Europe, Paul Dobbyn, an partner in A&L Goodbody, a finance house in Dublin, said last week: "My concern is that (the imposition of a withholding tax) may cause even greater capital outflows from the EU to the offshore centres.'' Luxembourg, Mr. Dobbyn pointed out, has insisted that any new withholding taxes be levelled equally throughout Europe and that the "offshore centres be brought into line -- otherwise the money will go to Bermuda and other places.'' Whether Bermuda will be in a position to accept "greater capital inflows'' will depend on the conclusions of the British White Paper, due later this year, and the findings of the Organisation for Economic Co-operation & Development on whether or not Bermuda operates a "tax harmful tax regime''.

BUSINESS BUC