The passage into law of a proposed 20 percent withholding tax on interest income across the European Union (EU), which would include Bermuda, continues to create controversy.

Representatives of Austria, Luxembourg and Switzerland have all raised concerns about the tax, with some calling for exemptions and others for an even broader application of the tax.

Luxembourg's Finance Minister Luc Frieden has insisted that the catchment area for the tax be extended to include Switzerland, the Channel Islands and the United Kingdom's Overseas Territories, including Bermuda -- even though it is understood that the tax will be applied throughout the EU, including the Territories. The British Government's White Paper made reference to the introduction of the tax in the Overseas Territories.

Under the proposal, which is to be implemented Europe-wide by December 31 this year, member States and Overseas Territories of the EU must choose between implementing a 20 percent tax on investment income paid to non-resident savers or informing the saver's home state of the amount of interest paid.

Switzerland, which is not a member of the EU, is expected to be the recipient of "a major capital outflow'' as investors move their capital beyond Europe's grasp.

Yet Swiss bankers have broken a long tradition of maintaining a diplomatic silence on such matters, claiming that the tax is based on a failed German tax collection model and that less well-regulated jurisdictions than Switzerland will be the real beneficiaries of the capital outflows.

"The proposed directive could have the effect of driving very significant amounts of capital away from London,'' said Pierre Mirabaud, former chairman of the Swiss Private Bankers Association. "But, contrary to the opinion of some commentators, this capital is unlikely to come to Switzerland.'' The president of the Swiss Bankers Association Georg Krayer, added: "The withholding tax proposal is based on the German model of paying agent's tax.

As we all know, Germany's experience of such a system has hardly been a success. German banks have seen enormous sums being credited through their international branches and subsidiaries, rather than through their domestic offices.'' Mr. Frieden has also argued that the present directive is "too complicated'' and advocates, instead, a simpler tax with no exceptions. He has offered a compromise which would satisfy no one, by which certain Luxembourgeois exemptions would be introduced, to match the exemption Great Britain is currently seeking for the London eurobond market.

Meanwhile, Austria's deputy Finance Minister Dr. Wolfgang Ruttenstorfer has called for a minimum tax on all interest payments throughout Europe and criticised the exemptions currently being negotiated.

"This tax cannot be introduced by just one country,'' Dr. Ruttenstorfer said.

"Therefore a minimum threshold is needed all over Europe.'' If Luxembourg is unable to have its way, Mr. Frieden said, he would push for a lower rate of tax than 20 percent to be introduced.

The position of Tony Blair, the British Prime Minister, has vacillated over the years. His New Labour Party stated its blanket opposition to the introduction of the tax in its election manifesto. Indeed, both Mr. Blair and his deputy, John Prescott, are on record as stating that no such tax would be introduced.

Mr. Blair, recently changed his mind, however, and now seeks to exempt the Eurobond market in London from the tax on transactions under 45,000 euros.

With that exemption in place, Mr. Blair has said, he would not veto the introduction of the tax.

BUSINESS BUC