Bermuda's low tax regime not only faces scrutiny from the Organisation for Economic Cooperation and Development (OECD) but also from the European Union (EU).

EU tax commissioner Mario Monti has issued a draft directive proposing the EU's offshore centres impose a minimum 20 percent tax on investors or provide information to other member states on interest income from savings.

Member countries of both organisations are attempting to prevent the flight of money from their jurisdictions to places that impose less tax or no tax, especially on capital gains from investments.

"The proposed measures would apply only in the EU, but member states with dependent or associated territories or which have special responsibilities or taxation prerogatives in respect of other territories should ensure, within the framework of their constitutional arrangements, that equivalent provisions are introduced in those territories,'' the EU directive stated, according to an article in Portfolio International magazine.

Because of Bermuda's status as an overseas territory of the UK, the directive's proposals, if acted on, would directly attack the Island's booming investment and financial services sector. The proposal would also affect international business -- especially the core insurance and reinsurance companies that make a good part of their revenues from investments.

Finance Minister Grant Gibbons said the EU's proposal is part of the attack by high taxation countries like Germany and France against what they label as "harmful tax competition''.

"We are certain that the UK is looking out for their overseas territories' interests,'' he said yesterday.

The tax issue will be part of the discussions when Premier Pamela Gordon and Dr. Gibbons, among others, attend a major meeting of the Overseas Territories with Foreign Office junior Minister Baroness Symons and her team next month.

The EU is mainly seeking to end cross-border tax differences between member countries to wipe out what is considered unfair competition for business between them. Luxembourg's favourable tax regime is one such example.

Ireland came under pressure for its differential tax rate in which it had about a 32 percent tax generally, and a favourable ten percent tax in Dublin and Shannon. The tax was considered unfair to neighbouring countries and attracted business away from other EU members. In May, Ireland did away with the differential tax and now imposes a single 12.5 percent tax.

"We are in a period where the momentum has been building among OECD, G7 (Group of Seven) and EU members targeting harmful tax competition,'' Dr.

Gibbons said. "We are watching very carefully. Bermuda does not have differential tax rates. Local companies essentially pay the same taxes as international companies.'' That argument about differential tax rates will be part of the core of Bermuda's presentation to the OECD.

The OECD attack stemmed from a report which came out in May recommending information gathering on all jurisdictions to compile a list of those considered to be in tax competition with its members.

The hit list of tax havens is due to be published next year.

Bermuda, as an associate member of the OECD, will submit the information required to the organisation next month, he said. Presumably Bermuda will make its representation to the EU through the UK.

A working group formed from international business representatives has been created to tackle the issues as they evolve.

"It's certainly a threat and we are treating it as such,'' Dr. Gibbons said.

"The area is quite complicated. We are at a period where we are actively addressing it.'' Bermuda International Business Association chairman Glenn Titterton said the organisation was not aware of any developments that would give rise to any immediate concern.

In regards to the OECD, he said the information gathering does not of itself pose a threat to Bermuda or international business.

BUSINESS BUC