Last September the European Commission proposed a directive aimed at introducing a financial transaction tax in the EU. It is important to note that 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.”
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, Czech Republic, Malta 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. In the meantime, nine EU member states, including Austria, Belgium, Finland, Greece, Spain, Portugal and Italy, led by France and Germany, sent a joint letter to the Danish government, which holds the rotating presidency of the EU's Council of Ministers, asking it "to accelerate the analysis and negotiation process" of the European Commission’s proposal for the FTT. These member states are calling for a first reading agreement to be reached by the end of 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’. The fact that nine member states have signed the above-mentioned letter, is noteworthy as nine is the minimum number of member states required in order to use the ‘enhanced co-operation' mechanism to adopt such proposal. 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.
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". 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, the European Commissioner for taxation and customs union, has 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.” 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.
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.
In his speech at the World Economic Forum in Davos, David Cameron said that the Brussels's plan for a financial transaction tax is "simply madness". Moreover, he recalled that the European Commission's own original impact assessment “showed a Financial Transactions Tax could reduce the GDP of the EU by 200 billion euros, cost nearly 500,000 jobs and force as much as 90 per cent of some markets away from the EU." Unsurprisingly, the European Commission replied by saying that the study mentioned by David Cameron was "being read completely out of context." Algirdas Semeta said "The commission's own figures have been misused and misrepresented to create doomsday scenarios around the impact on growth, jobs and competitiveness," hence, the Commission has decided to revise its impact assessment of a proposed financial transactions tax. As Dr Kay Swinburne MEP, European Conservatives and Reformists group economics spokesman said, the European Commission “is now treating impact assessments like referenda: keep asking until you get the answer you want.” Dr Kay Swinburne noted that "The assessment was clear: a FTT will lead to job losses, slow growth, and businesses leaving the EU altogether.” Moreover she stressed that “The commission wants to whitewash these warnings” and “is adamant it will impose this tax, regardless of the consequences.”
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. 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 believes that the FTT could account around 22.7% of the EU own resources 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.
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,” Moreover, in an article for The Daily Telegraph, Karl Sigfrid, Swedish MP, said "The real reason why consumers will have to carry the burden is that the banks, to safeguard their profit margins in a competitive market, would have to implement less generous customer policies.” Furthermore, he said “Customers would be saddled with higher fees, pay higher interest on their mortgages and see less growth in their savings. People will also be hit if they have stakes in pension funds that engage in frequent financial transactions, so add that to the bill.”
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 City A.M. has recently reported that according to a report published by the Global Financial Markets Association (GFMA) “the cost of trading foreign exchange will soar by up to 18 times if an EU Tobin tax becomes law”. Moreover, the Alternative Investment Management Association has also said “As well as undermining the EU’s single market, the FTT would be likely to reduce EU taxpayers’ savings and pensioners’ incomes, lead to a reduction in the level of investment in the real economy, send asset prices lower, widen spreads, hinder efficient price discovery and increase market volatility.”
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…” In a letter to The Daily Telegraph, an alliance of bankers and city trade associations, British Bankers’ Association, TheCityUK, International Swaps and Derivatives Association, Investment Management Association and Association of British Insurers, said “The proposed FTT would not achieve the stated aims, and would have a fundamental and negative impact on the European economy and employment across all sectors.”
