(BRUSSELS) - EU finance ministers discussed on Tuesday tightening rules on tax dodgers who stash their cash in murky offshore tax havens as Germany seeks broad support for a tough clampdown.

With Berlin and Liechtenstein mired in a standoff over tax fraud, the issue of how to crack down on tax havens on the European Union's doorstep has climbed high up the agenda at meeting of EU finance ministers in Brussels.

Germany's no-nonsense finance minister, Peer Steinbrueck, is eager to win backing from Berlin's EU partners to extend a 2005 savings tax directive, which aims to discourage taxpayers from hiding cash in offshore accounts.

"The European Commission should bring out a proposal to extend the savings directive sooner than expected," he told reporters as he arrived for the meeting with his EU counterparts.

The EU's executive arm is supposed to produce a review of the directive's working in October or November but it has indicated that it could do so sooner if ministers wanted.

In its present form, the savings tax directive requires EU members to share tax information with each other about interest income kept by account holders from other EU countries.

However, it was only agreed after special arrangements were made for Austria, Belgium and Liechtenstein, which were eager to protect banking secrecy in their countries.

Under the directive, they do not have to exchange tax information with fellow EU countries but instead have to charge foreign account holders a witholding tax on interest income.

The EU has similar bilateral agreements requiring a witholding tax with a clutch of countries and territories known for their banking secrecy laws, including Switzerland and Liechtenstein.

However, the savings directive allows considerable scope for people to set up foundations in order to get around the rules, which also do not cover such revenues as dividend income or capital gains.

"What we have seen from the ongoing review is that there are loopholes," said European Commission spokeswoman for tax issues, Maria Assimakopoulou.

"There are loopholes also because the directive doesn't apply to other structures and only to individuals," she added.

Belgian Finance Minister Didier Reynders said that any beefing up of the current rules would have to include extending them to cover other sources of income than interest earned.

"We've got a directive that is limited to certain products," he said. "I've said from the start, for example, that insurance products are not covered. We've got to cover all savings."

Any tightening of the rules is likely to take a long time as the current directive took long years to negotiate, with especially Luxembourg worried about losing the benefits its banking secrecy offers.

Luxembourg Prime Minister Jean-Claude Juncker insisted, however, that "the function of European financial centres cannot be to get rich at the expense of their neighbours.

"A stock taking needs to be done (of the current directive) to see if it works correctly or if it is defective," he said.

"After the stock taking, it has to be seen whether the directive needs to be completed or not," added Juncker, who is also Luxembourg's finance minister.

Even if the EU is able to eventually agree on tightening the rules, critics warn that tax dodgers will only go further afield to hide their savings in fast growing Asian tax havens with which the EU is struggling to get bilateral agreements.

"The European Commission has to be supported in its negotiations with tax havens like Singapore, Macao and Hong Kong," Steinbrueck said.

Economic and Financial Affairs Council (ECOFIN)

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