Today's important agreement secures the principle of exchange of information on tax matters - not a one-size-fits-all tax harmonisation Chancellor Gordon Brown

EU finance ministers have backed a plan to make it harder for their citizens to hide savings in other European countries.

The new system could bring in billions of extra pounds in tax.

After years of wrangling 12 EU members, including the UK, have agreed to take part in a new system of banking co-operation where they will exchange information in order to uncover hidden savings.

City of London wins

For the UK, the stumbling block had been the suggestion of a Europe-wide 'withholding tax' on savings.

This system ensures that EU citizens do pay their taxes on interest derived from savings held in other countries EU Commissioner Frits Bolkestein

There was fierce opposition to a tax being set in Europe, and the UK had instead argued for the sort of exchange of information that has now been agreed.

Chancellor Gordon Brown said in a statement: "Today's important agreement secures the principle of exchange of information on tax matters - not a one-size-fits-all tax harmonisation.

"After five years of detailed negotiation, today's deal finally ensures that there will be no withholding tax imposed on the City of London."

Switzerland's role

But for three EU member states the tax was the best option.

So, under the agreement, Austria, Belgium and Luxembourg will not pass on sensitive bank details but will instead levy a 35% tax on the interest on savings.

They were persuaded to do this after Switzerland, which is not an EU member, agreed to levy a 35% tax on foreign investments and pass it on to the relevant countries.

There were fears that Switzerland would have had an advantage if had remained outside the tax agreement.

Tax havens to take part

EU Commissioner Frits Bolkestein welcomed the deal, saying: "This system ensures that EU citizens do pay their taxes on interest derived from savings held in other countries."

Switzerland, which is not an EU member, has also agreed to levy a 35% tax on foreign investments.

The British tax havens of Jersey, Guernsey and the Isle of Man, along with the Caribbean overseas territories, will also take part.

Mr Bolkestein said there were still technical details to be settled with Switzerland, but the scheme could be launched at the beginning of next year.