Despite strong opposition from the UK, the European Commission has recently proposed a draft Council directive on a common system of financial transaction tax. The introduction of a EU-wide financial transaction tax is part of Barroso’s plans for deeper economic integration in the EU.
The proposal is based on Article 113 TFEU whereby the Council, acting unanimously, shall adopt “provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation” but only if such “harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.” Hence, according to the Commission, the proposal is necessary to ensure the proper functioning of the internal market. Ten member states have already introduced some forms of financial transaction taxation, therefore, the Commission, and in particular Barroso, believes “that action at EU level could prove both more effective and efficient than uncoordinated action by Member States…” Consequently, the Commission proposal is intended “to avoid fragmentation in the internal market for financial services” and “to ensure that financial institutions make a fair contribution to covering the costs of the recent crisis.”
The Commission proposal would harmonise Member States’ taxes on financial transactions. It would apply to “ financial institutions operating financial transactions” and introduces a harmonised base and minimum tax rates. Member States would not be, therefore, allowed to maintain or introduce taxes on financial transactions other than the FTT or VAT.
The Commission believes that the revenues of the FTT could be around 57 EUR billion every year in the whole EU. Then, according to the Commission such revenues “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 has pointed out “Part of the tax would be used as an EU own resource which would partly reduce national contributions.” But, “Member States might decide to increase the part of the revenues by taxing financial transactions at a higher rate.” It is important to recall that last June the Commission put forward a Proposal for a Council Decision on the system of own resources of the European Union, where it has identified a FTT as a new own resource to be entered in the EU budget. According to the Commission 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. Brussels should reduce member states contributions by cutting the budget not by introducing EU taxes to raise money. In this way member states would lose control over how much they send to Brussels. Taxation is a key part of Member States sovereignty and such proposals would encroach on national tax sovereignty. As Bill Cash said “The people who decide the taxation of this country exclusively are those in the Westminster Parliament on behalf of the voters of the UK.”
If such proposals go ahead the UK could become the main net contributor to the EU budget. In fact, a FTT “would be a tax on the City of London”, as Vicky Ford MEP said. Moreover she noted, "Imposing a tax of this nature without a global agreement would cause some of our financial services sector to relocate, losing the UK billions in tax revenues and costing untold jobs." The UK is home to Europe’s biggest financial centre, such tax is, therefore, an attack on the City of London.
The Council is 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. In fact, in a letter to the European commissioner for taxation and customs, Algirdas Šemeta, Germany's finance minister, Wolfgang Schäuble, and France's finance minister, François Baroin, asked the European Commission to put forward a proposal. They said "Although the Toronto G20 meeting demonstrated that a global agreement is very difficult to achieve, we strongly believe that the implementation of a financial transaction tax at the European level would be a crucial step on the path to reaching a global consensus in a way that does not affect European competitiveness…” In this letter the finance ministers included suggestions on how to implement the FTT, that the Commission has followed.
According to the Financial Times, Jean-Claude Trichet has called, before the summer, for plans for a financial transaction tax to be ditched, he said “I call for great, great prudence in introducing something which is not done at a global level,” Mr Trichet stressed “Let’s be sure we don’t do something we might regret one day … If certain transactions are considerably more costly in Europe than in other parts of the world, they will be done overseas.” The Commission believes that its proposal would contribute to the development of a FTT at global level. Brussels plan is to introduce the tax at EU level hopping this will convince G20 partners to follow suit. The plan is to push for the adoption of a financial transactions tax at the G20 Summit on 3-4 November, which is set to fail. Brussels has failed so far to convince the G20 that a transaction tax should be introduced at a global level. According to a European Parliament press release, Algirdas Semeta told the Economic and Monetary Affairs Committee MEPs that “he was fully aware that it would not yet be possible to go global.”
The government is not against the FTT in principle but believes it must be imposed at a global level otherwise financial institutions will move out of the EU to avoid its application. 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. According to Kay Swinburne MEP, spokesman on economic and monetary affairs, "Industry experts believe banks could switch as much as 30% of the value of their trades through Singapore and away from London without running into trouble from the regulators."
The Commission has noted “The FTT comes with a higher risk of relocation or disappearance of transactions, especially with respect to frequent short-term transactions” and that it has higher effect than the FTA on GDP and employment. In fact, the Commission pointed out that “The reason for this negative effect is the increase in the cost of capital, as the taxed persons will try to pass the tax through to their clients, and which then negatively interacts with investment.” 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%,”
There is widespread opinion that such tax won’t stabilise the markets and it would undermine economic growth. As noticed by Howard Wheeldon such tax would “tear what remains of Europe’s financial industry apart.” According to Euractiv, the head of taxation at the Association of Chartered Certified Accountants (ACCA), Chas Roy-Chowdhury, said "We believe that [a European FTT] would lead to even slower growth in the region and the migration of financial institutions to other financial centers of the world such as Hong Kong, Shanghai, Singapore or New York…” The chief executive of the European Banking Federation (EBF), Guido Ravoet, pointed out "No taxation measure should be detrimental to growth, impede European competition and end up driving business out of Europe.” He stressed that "In adopting a Directive, EU legislators need to carefully look at ways to prevent such a tax from seriously damaging the European economy…”
If such proposal is adopted, the tax on the financial sector would come into force from 1 January 2014. The tax would apply to financial transactions carried out by financial institutions (investment firms, organized markets, credit institutions, insurance and reinsurance undertakings, collective investment undertakings and their managers, pension funds and their managers, holding companies, financial leasing companies) acting as party to a financial transaction, either for their own account or for the account of other persons. Under the Commission proposal the scope of the tax would be broad, because it would cover transactions relating to all types of financial instruments. The scope covers, therefore, instruments, which are negotiable on the capital market, money-market instruments, units or shares in collective investment undertakings and derivatives agreements. It not only covers trade in organised markets but also covers other types of trades including over-the-counter trade. It not only includes the transfer of ownership but also the obligation entered into. In fact, the Commission has said “The financial transaction tax aims at taxing the 85% of financial transactions that take place between financial institutions.” Under the draft directive, transactions with the European Central Bank and national central banks would not be subject to FTT as well as transactions such as conclusion of insurance contracts, house mortgages, consumer credits or payment services. According to the Commission citizens and small businesses would not be taxed. However, Brooke Masters, Jeremy Grant and Chris Bryant have recently written in The Financial Times “According to bankers and corporate executives, Mr Barroso’s stated target, the banks, will probably be able to pass much of the cost on to their customers and shift their internal hedging transactions out of Europe.” Joanna Cound from BlackRock was quoted as saying “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,”
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. If there are different financial institutions established in different member states, those member states will be competent to subject the transaction to tax at the rates they have set in observance with the draft directive.
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.
Under the draft proposal, the FTT would become chargeable for each financial transaction at the moment it occurs. All Member States would have to apply the FTT’s rates in force when the tax becomes chargeable. 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.
In order to ensure that FTT due to the tax authorities is effectively paid, Member States would be required to lay down registration, accounting and reporting obligations. They would also be required to introduce measures to prevent evasion.
It is important to mention, that the tax was turned down, at a recent COSAC meeting (Conference of Parliamentary Committees for Union Affairs of Parliaments of the European Union), by a large majority. Only few member states, including Germany voted in favour.
David Cameron and George Osborne are expected to lead opposition to the Commission’s proposals. Unanimity is required at the Council, therefore the UK can veto such damaging proposal. 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.
