Last September the European Commission proposed a directive aimed at introducing a financial transaction tax in the EU. Unanimity is required at the Council, and David Cameron has vowed to veto such damaging proposal. In fact, David Cameron and George Osborne are leading opposition to the Commission’s proposal.
David Cameron has said to the House of Commons “On the financial transactions tax, I have been clear all along that we are not opposed in principle to such a tax if one could be agreed at the global level, but we will not unilaterally introduce a new financial transactions tax in the UK. Neither will we support its introduction in the European Union unless it is part of a global move.” Moreover, he has recently said to the BBC, "The idea of a transactions tax put in place only in Europe that doesn't include other jurisdictions, what that would do is it would cost jobs, it would cost us tax revenue, it would be bad for the whole of Europe".
The EU Member States are divided on this issue, whereas the UK and Sweden and are against the introduction of the FTT in the EU, France and Germany are very much in favour. Belgium, Greece, Hungary, Portugal and Spain also support the idea. In fact, French President Nicolas Sarkozy is pushing for a financial transaction tax. Angela Merkel’s coalition government is divided over the issue therefore she said that the FTT should be adopted by all 27 EU members. Italy is now backing Germany on this, Mario Monti said "The government headed by (my predecessor Silvio) Berlusconi had voiced its opposition at the EU level, I however have expressed the Italian government's openness on that issue". Moreover, he said "It is necessary that the different countries do not go it alone in the application of this tax. I believe in a European perspective”. It is important to note that some eurozone member states, particularly Ireland and the Netherlands, have shown concerns about the proposal. Denmark, which currently holds the Presidency of the Council of the European Union, has also spoken out against the creation of an EU financial transactions tax. Margrethe Vestager, Danish Economics Minister, has recently said "Since everyone agrees that today's priority is to create jobs, we are very reluctant to support a proposal that would have the opposite effect, minimising growth and causing significant job losses”. Moreover, she recalled, "the European Commission suggests itself that you may lose 0.5 percent of growth, and the equivalent of hundreds of thousands of jobs" if such tax is introduced.
Meanwhile, the European Parliament's Committee on Economic and Monetary Affairs has started to examine the proposal for a financial transaction tax, and it has already emerged a broad agreement in favour of it. It seems that only the ECR group is opposed to the tax. The report on the Commission’s proposal would be put to a committee vote in April and then the plenary will vote in June.
Britain, Sweden, Malta and Denmark have now expressly opposed such proposal, as they fear investors would move from Europe. It is clear that there is no unanimity on it, consequently an EU-wide tax is impossible.
However, it has already been mentioned if unanimity is not reached, the FTT would be introduced by the so-called ‘enhanced cooperation’. Algirdas Semeta confirmed to the Economic and Monetary Affairs Committee MEPs that “it would be possible to use enhanced cooperation, with the tax being imposed on all institutions headquartered in the participating countries, thereby also taxing their activities outside.” Consequently, it would also have an impact in the City of London, as the tax would apply to any transaction involving investors based in the participating member states, even if it was executed in London. In fact, Algirdas Šemeta has recetly said to the Financial Times that a eurozone FTT would be “designed in such a way that it doesn’t matter where transactions are taking place. I think that London will lose out.” The Commission has defined the FTT´s territorial application on the basis of the “residence principle.” Hence, "The tax would not be based on where transactions take place but on the parties involved". A financial transaction would be taxable in the EU, if one of the parties to the transaction is established in the territory of a Member State. Taxation will take place in the Member State where the establishment of a financial institution is located, if this institution is party to the transaction, acting either for its own account or for the account of another person, or is acting in the name of party to the transaction. A transaction would not be subject to FTT if the establishments of the financial institutions, parties to the transaction, are located in a third country, however the third-country financial institution will be deemed to be established in the EU if one of the parties to transaction is established in the EU and, in this case, the transaction would become taxable in the Member State concerned.
It is important to note that according to the Commission it is necessary to introduce such tax to ensure the proper functioning of the internal market. However, one could say if enhanced cooperation is used to adopt the FTT, it could no longer be justified to avoid fragmentation in the internal market for financial services.
If such proposal is adopted, the tax on the financial sector would come into force from 1 January 2014. According to French Finance Minister, François Baroin, France and Germany are working together to change the Commission’s proposal so that the FTT can be in operation by 2013.
The Commission proposal would apply to “ financial institutions operating financial transactions” and introduces a harmonised base and minimum tax rates. According to the Commission citizens and small businesses would not be taxed. However, according to Joanna Cound from BlackRock “The FTT will hit hard pensioners and savers throughout Europe – not just the wealthy – because it applies to all financial transactions including those on behalf of pension and investment funds”. Mark Hoban also noted that the tax would not have just an impact on banks and bankers, in fact, it “also increase costs for consumers through this tax being paid by insurers, asset managers, pension funds, industry including manufacturing and the broader service sector;”
The Commission has proposed “minimum tax rates”, therefore member states would not be allowed to fix lower but higher rates. Hence, under the Commission proposal, the exchange of shares and bonds shall be taxed at 0.1 per cent whilst derivative contracts taxed at a rate of 0.01%. Member States would be required to apply the same rate to all financial transactions that fall under the same category. According to the Commission’s own impact assessment a “0.1%, a transaction tax on securities could, without the application of mitigating effects, reduce future GDP growth in the long run by 1.76% of GDP and of 0.17% at a rate of 0.01%,” . According to the Government such figures represent “a fall in economic output of €216 (£186) billion, a fall in employment of 0.2% equates to a loss of 478,000 jobs, a 3.43 % fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.” The Financial Times has recently reported that according to Oxera the FTT might result in a 2% cut to GDP.
Obviously, according to the Government it is not “right to impose a tax which will clearly impact on economic growth across the EU, with the UK bearing a disproportionate share of this impact;” The UK is home to Europe’s biggest financial centre, such tax is, therefore, an attack on the City of London. According to George Osborne “There would be no point introducing a financial transaction tax that led the next day to our foreign exchange markets moving to New York or Singapore or anywhere else.”
Under the Commission proposal a considerable percentage of the FTT revenue will come from transactions carried out in the UK, consequently investors would leave the City of London. The Government believes that over 50% of revenues raised in the EU would come from activity in the UK. According to the Commission such revenues could be around 57 EUR billion every year in the whole EU, and “can be wholly or partly used as own resource for the EU Budget replacing certain existing own resources paid out of national budgets…” The Commission beleives that the FTT could account around 22.7% of the EU own recourses by 2020. Soon, the Commission will present an own resource proposal setting out how the FTT will “serve as a source for the EU budget”, particularly how the revenues would be divided between the EU budget and national budgets. If such proposals go ahead the UK could become the main net contributor to the EU budget. France believes that the FTT’s revenues should also be used to reduce the debt of EU Member States.
