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Italian treasury sees

tax plan saving

4 trln lire

LONDON: The Italian treasury sees as much as four trillion lire in interest cost savings in the first year under a tax plan which abolishes withholding tax for foreign investors in Italian bonds, a treasury official said on Tuesday.

Lorenzo Pecchi, a member of the Council of Experts at the Italian Ministry of Treasury, told a seminar here that currently one percent in interest on Italy's outstanding debt equates to some eight trillion lire of costs to the treasury.

Based on that calculation, the treasury estimates savings of between 3.5 trillion and 4.0 trillion lire in the first year of the new tax regime, Pecchi said.

This figure, he later told Reuters, also takes into account an estimated loss of 0.7 trillion lire in tax revenues as a result of abolishing the withholding tax.

"The benefits are much higher than the costs", he said. The Italian cabinet on April 1 gave final approval to a law abolishing 12.5 percent withholding tax on Italian treasury bonds purchased by non-residents. The new tax regime is due to begin on January 1, 1997.

Pecchi told the seminar the regime also aimed to increase international participation in the Italian debt market which, he said, was relatively low.

He saw little risk through Italian long-term interest rates becoming increasingly vulnerable to international capital flows if these grew as a result of the new tax regime.

"First of all we start with a very small participation in our market", he said. The treasury estimates about eight percent of Italian domestic debt is held by foreign portfolios and 12 percent of overall lira-denominated debt, including Eurobond issues, he said.

Almost all European countries guarantee an exemption on the interest paid to non-residents, according to double taxation treaties. The exceptions to these, Pecchi told the seminar, were Luxembourg and Switzerland.

He said it was highly likely the new system would apply to Luxembourg as it was a member of the European Union. In the case of Switzerland, application of the new tax regime would depend on satisfactory communication between fiscal authorities in the two countries, he said.-Reuter