Last March, the Economic and Financial Affairs Council held a debate on the Commission proposal for a directive aimed at introducing a financial transaction tax in the EU. It has become crystal clear that the EU Member States could not be more divided on this issue. The Council decided therefore “to further analyse the Commission's proposal, whilst also exploring possible alternative routes, which will be discussed at an informal meeting of EU finance ministers in Copenhagen on 30 and 31 March.” It is important to note that unanimity is required in the Council for adoption of the draft directive. The UK has a veto over this proposal and David Cameron has vowed to use it. There is no unanimity on the proposal, consequently a EU-wide tax is impossible.
Whereas the UK, Sweden, Malta, Netherlands and Denmark and are against the introduction of the FTT in the EU, as they fear investors would move from Europe, Belgium, Greece, Hungary, Portugal, Italy and Spain, led by France and Germany, support the idea. It has already been mentioned if unanimity is not reached, the FTT would be introduced by the so-called enhanced cooperation. In fact, last February, nine EU member states, including France, Germany, Austria, Belgium, Finland, Greece, Spain, Portugal and Italy 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. It is noteworthy that nine is the minimum number of member states required in order to use the enhanced co-operation mechanism to adopt such proposal. Following a request by Member States that wish to establish enhanced cooperation, the Commission may submit a proposal to the Council to that effect. The Council will grant authorisation to proceed with the enhanced cooperation by a qualified majority of all Member States in the Council and after obtaining the consent of the European Parliament.
It is important to note that the EU member states, including France and Germany, recognising that there is no unanimity, not even within the eurozone, for the FTT as proposed by the European Commission, are considering the introduction of a tax similar to the UK’s stamp duty as an alternative to the FTT.
Unsurprisingly, the European Commission is not pleased with the Member States’s idea of proposing an alternative to the FTT, the Taxation Commissioner, Algirdas Semeta, told the European Parliament’s Economic and Monetary Affairs Committee “Any taxation of the financial sector must be based on the financial transaction tax model proposed by the Commission and Member States should not attempt to use "B or C plans”.
It is important to recall that the Commission wants to give “the EU budget a share of genuinely "own resources.” Hence, 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. The Commission noted that the revenues of the FTT could be around €57 billion every year in the whole EU. 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.” The Government believes that over 50% of revenues raised in the EU would come from activity in the UK. Hence, if such proposals go ahead the UK could become the main net contributor to the EU budget.
According to the Commission there is no alternative to the FTT, and one could wonder why the Commission is defending so vehemently its proposal to introduce it. As abovementioned, the FTT proposal is essential to the Commission’s plans for funding the EU’s multiannual financial framework for 2014 to 2020, and this is the reason why the Commission is pushing to introduce it. Ahead of the informal ECOFIN meeting in Copenhagen, José Manuel Barroso told members of national parliaments and the European Parliament that if adopted, as a new own resource of the EU budget, the financial transaction tax, as proposed by the European Commission, could reduce up to 50% the member states’ gross national income contribution to the EU’s budget. The European Commission is trying to persuade the member states to agree and implement a FTT by saying they will pay 50% into the general EU budget by 2020. But, several member states want such revenues to go to national budgets. It is important to recall the Government is against any new EU taxes to fund the EU budget. In fact, the Government does not believe that the UK could benefit from a EU financial transactions tax.
Initially, the European Commission estimated that the financial transaction tax could raise €57bn. But, it has recently estimated that an FTT would generate, by 2020, €81 billion per year. According to the European Commission “Assuming that the volume of taxable transaction will follow the evolution of the EU GNI, that €57bn will become €81bn in 2020.” The Commission proposed, therefore, that two thirds of that €81bn be used to fund EU’s budget, which amounts to €54.2bn whilst the remaining one third would be reserved for member states. According to the Commission’s proposal “the GNI national contributions would be €110bn in 2020 without an FTT”, consequently “With an FTT Member States could therefore save 50% of their GNI contribution for the EU budget.”
However, 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.
On 30 March, the EU finance ministers, at an informal meeting, discussed the Commission proposal and they also considered compromise alternatives to the financial transaction tax. Member States have not changed their position as Barroso was expecting.
Under the Commission proposal the scope of the tax would be broad, because it would cover transactions relating to all types of financial instruments, including units or shares in collective investment undertakings and derivatives agreements. 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%. It remains to be seen whether a EU wide stamp duty would be proposed and whether it would only cover share transactions, as in the UK, or whether it would also cover derivative transactions. Wolfgang Schäuble, the finance minister of Germany, presented a document at the meeting in Copenhagen, considering a stamp duty as an “intermediate step”. According to Europolitics the German paper says “This would not be the end of negotiations on the broader and more ambitious FTT sought by the Commission, which also covers bonds and derivatives, but the continuation of the negotiations should not impede the rapid implementation of a tax on shares”. Moreover, it says, “While this first step is put in place, we have to work to extend taxation to other instruments so that we can achieve the comprehensive taxation of financial transactions as proposed by the Commission.” Hence, the plan would be to introduce a tax similar to the UK’s stamp duty on shares, as a first step then broadening it to bonds and derivatives at a later stage. The UK should also veto such proposals as they entail further tax coordination by Brussels.
It is therefore crystal clear that it is impossible to reach an agreement among the 27 EU member states on the Commission proposal. The FTT proposal should therefore be ditched once and for all.
