Banks will have to provide information on savings held by residents of other EU states if European leaders accept a tax Directive proposed yesterday by the European Commission.

The proposal follows an agreement by EU Finance Ministers last year that every member-state should be obliged to provide information to other member-states on interest paid to individual savers resident elsewhere in the EU.

The Commission's new plan replaces an earlier proposal that would have allowed states to choose between providing information or levying a withholding tax on non-resident savers. Under the new Directive, Austria, Belgium and Luxembourg would be permitted to apply a withholding tax for up to seven years before being obliged to exchange information with other member-states.

The EU Taxation Commissioner, Mr Frits Bolkenstein, said the proposed Directive was part of a package of measures agreed by EU Finance Ministers four years ago to combat harmful tax competition.

"In making this proposal the Commission has given effect to the consensus reached by member-states that all citizens resident in the EU should pay the tax due on their savings income and that the best way of achieving this is to establish a comprehensive system of information exchange between member-states.

"The onus is now on the member-states to work intensively to meet the December 2002 deadline for agreement on this proposal and on the other elements of the package to combat harmful tax competition," he said.

The Directive requires the unanimous approval of the EU's 15 member-states following consultations with the European Parliament and the Economic and Social Committee. Finance Ministers have made clear that they will not adopt any proposal on the issue before they reach agreement on information exchange with non-EU countries such as the US, Switzerland, Liechtenstein, Monaco, Andorra and San Marino.