Bermuda is keeping a watchful eye on negotiations over a proposed European Union tax directive on the taxation of savings.

But a Finance Ministry official said Bermuda would be less affected than other British overseas territories because it is less dependent on offshore banking.

British Caribbean leaders met last weekend to finalise their response to the draft directive which has not yet been approved and is due to be debated by the EU council in December prior to becoming law in 2004.

The draft directive is deeply unpopular with some Caribbean countries.

The Cayman government says that it is "lobbying incessantly to ensure that the draft directive does not become law in the Cayman and other Caribbean overseas territories". There were no Bermuda government representatives at last week's meeting which was attended by government ministers from Cayman Islands, BVI, Anguilla, Montserrat and Turks and Caicos.

According to Financial Secretary, Donald Scott: "The situation for those overseas territories is different to Bermuda because the structure of some of their economies relies more on offshore banking than is the case in Bermuda."

Mr. Scott explained that the EU has realised that unless the exchange of information principles are adopted worldwide, the problem of "harmful tax competition" would be impossible to overcome.

For that reason, the EU is holding ongoing negotiations with non-EU member states, so-called "third parties".

This category includes not only non-EU member states such as Switzerland and the United States, but also overseas territories of EU members.

The United Kingdom is being "leaned on" to ensure that its overseas territories, including Bermuda, toe the line.

But in many respects the UK, with its lack of withholding tax obligations on the interest income of non-residents, is considered by many to be a financial tax haven itself.

How the UK will go about exerting pressure on the Island to comply with the directive remains to be seen.

Initiatives to counter harmful tax competition were also discussed recently at an OECD level.

The Bermuda government sent Finance secretary, Donald Scott and Registrar of Companies, Stephen Lowe to a closed OECD meeting in the Cayman Islands during the week of October 28 - November 1, 2002.

Finance Minister, Eugene Cox said that the meeting agenda focused on the information requirements that were necessary to give effect to exchange of information agreements between OECD countries and non-OECD countries.

Asked about the similarities between the OECD Exchange of Information agreement and the EU draft directive, Donald Scott said "The OECD objects to mobile capital moving from one jurisdiction to another, the EU has a slightly different driver."

The EU focuses more on "harmful tax competition," that is where a foreign undertaking decides to locate in a certain jurisdiction driven exclusively or predominantly by tax considerations as opposed to multiple investment factors such as political and economic stability, infrastructure, size and potential growth of market sector, cost of labour, skilled workforce and international, outlook, banking system and the like.

Even though Bermuda is not being accused of harmful tax competition, and in fact was singled out by an OECD spokesperson last April as being a helpful jurisdiction, there will still be pressure on Bermuda to comply with an exchange of information framework to mirror the one envisaged by the EU.

This is best explained with an theoretical example: If EU member states approve the directive, but a non-EU state like Bermuda does not institute similar transparency requirements, there would be a flight of capital and investment institutions to Bermuda.

Therefore EU members will refuse to approve the directive unless they know that every jurisdiction is on board; it's a case of "all or nothing" and only time will tell if financial jurisdictions can co-operate enough to see these initiatives through.