On 8 November, the Economic and Financial Affairs Council debated for the first time the Commission proposal for a directive aimed at introducing a financial transaction tax in the EU. The introduction of a EU-wide financial transaction tax is part of Barroso’s plans for deeper economic integration in the EU. 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. It is important to note that some Eurozone Member States are also against such proposal.
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 was to push for the adoption of a financial transactions tax at the G20 Summit on 3-4 November, which has failed. Whereas G20 countries, such as Japan and Brazil, favour the creation of a transaction tax, other including the US and China reject it. In fact, according to a European Parliament press release, Algirdas Semeta told the Economic and Monetary Affairs Committee’s 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.
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.” According to the Commission “A uniform definition at EU level of the essential features of a FTT is necessary to avoid undue relocations of transactions and market participants and substitution of financial instruments within the EU.” The Commission believes 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…”
The Financial Secretary to the Treasury, Mr Mark Hoban, said to the European Scrutiny Committee that the Commission proposal breaches the subsidiarity principle. The Government does not believe that an EU FTT would deliver better than domestic taxes the above mentioned objectives. Mark Hoban pointed out “to introduce an EU wide tax would not avoid the relocation of transactions and market participants”, in fact he stressed that the “imposition of the tax would also heighten the risk of relocation within the EU;”
According to the Commission, the proposal is intended “to ensure that financial institutions make a fair contribution to covering the costs of the recent crisis” and “to avoid fragmentation in the internal market for financial services.” The European Scrutiny Committee noted that the Commission has stated the objectives of the proposal in order "[r]aising revenue and adequate contribution from the financial sector to tax revenues"; "[l]imiting undesirable market behaviour and thereby stabilizing markets"; "[i]nternal market aspects ". The European Scrutiny Committee concluded therefore “that the predominant aim of the FTT is not "to ensure the establishment and the functioning of the internal market and to avoid distortion of completion", as it must be should Article 113 TFEU be the correct legal base; rather it is to ensure the financial sector contributes to the economic losses it caused; to dis-incentivise excessively risky activities by financial institutions; and to raise revenue for the EU budget.” Moreover, the European Scrutiny Committee noted that the internal market “serves as a justification for action at EU level rather than setting out an objective…”
Hence, taking into account the ECJ’s case law which states “the choice of the legal basis for a Community measure must rest on objective factors amenable to judicial review, which include the aim and content of that measure.” Moreover, the ECJ has held that if a EU measure pursues two and one is identifiable as the main one, “the measure must be founded on a single legal basis, namely that required by the main or predominant aim or component.” According to the ECJ “The legal basis must also be indicated in the light of the principle of the allocation of powers (…) according to which the Community must act within the limits of the powers conferred on it and of the objectives assigned to it by the Treaty.” The Court has held, accordingly, “that the choice of the appropriate legal basis has constitutional significance, since, having only conferred powers, the Community must tie the contested decision to a Treaty provision which empowers it to approve such a measure.” Consequently, one could wonder whether the EU has powers to put forward a financial transaction tax.
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. Consequently, the UK would have to abolish the stamp tax on shares regime, which generates revenue of over £3 billion per year.
The Commission believes that the revenues of the FTT could be around 57 EUR billion every year in the whole EU. However, the Government believes that the tax would not be “an economically efficient way of raising revenue.”
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 Government is against any new EU taxes to fund the EU budget. 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.
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. 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 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%,” 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.” 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;”
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.” The Government has pointed out that “there is no clear evidence that the proposal would improve market stability.” 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 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,” According to Mark Hoban such tax would increase trading costs as well as “costs related to complying with the tax”, including administrative costs. Moreover, the minister 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 defined the FTT´s territorial application on the basis of the “residence principle.” 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 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.” David Cameron and George Osborne are leading 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. Wolfgang Schäuble, Germany's finance minister also said "If we cannot reach an agreement at 27, then we must consider whether we should not introduce it first for the 17 eurozone members, in the confident expectation that it will soon be introduced for all 27".
Moreover, it is important to recall 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.
It is important to note that several eurozone member states including Italy, Luxembourg, Ireland and the Netherlands, have also shown concerns about the proposal. According to Jacek Rostowski, Polish finance minister, “It was evident that there is quite a divergence of opinion between the member states, not only between the 27 [EU members] but within the eurozone as well.” George Osborne said “It’s already clear that there will never be unanimity on this subject, two-thirds of countries are opposed.”