Last March, the EU finance ministers, at an informal meeting, discussed the Commission proposal for a directive aimed at introducing a financial transaction tax in the EU and considered compromise alternatives to the financial transaction tax. It has become crystal clear that the EU Member States could not be more divided on this issue. Whereas the UK, Sweden, Malta, Netherlands and Denmark and are against the introduction of the FTT in the EU, Belgium, Greece, Hungary, Portugal, Italy and Spain, led by France and Germany, support the idea. 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 damaging proposal and David Cameron has vowed to use it. In fact, David Cameron and George Osborne are leading opposition to the Commission’s proposal.
According to the Commission’s initial 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%”. The Government has pointed out that 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;” Unsurprisingly, the European Commission replied by saying, "The commission's own figures have been misused and misrepresented to create doomsday scenarios around the impact on growth, jobs and competitiveness" hence, it has decided to revise its impact assessment, and it has now estimated that EU GDP will be 0.28% lower than initially thought. However, as Dr Kay Swinburne MEP, European Conservatives and Reformists group economics spokesman noted, "The assessment was clear: a FTT will lead to job losses, slow growth, and businesses leaving the EU altogether.”
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 would come from transactions carried out in the UK, consequently investors would leave the City of London. George Osborne said, “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.” Moreover, there is widespread opinion that such tax won’t stabilise the markets and it would undermine economic growth. Elisabeth Thand Ringqvist, the chief executive of the Företagarna Swedish federation of business owners, in a letter to The Financial Times, called on the MEPs to learn from the negative impact that a financial transaction tax had in Sweden in the 1990s, she stressed "The impact of a Tobin tax on European competitiveness and growth is clear – it will decrease growth”. Nevertheless, on 23 May the European Parliament voted to approve the Commission proposal for an EU-wide financial transaction tax. The ECR group has been against the introduction of the FTT and tabled a motion to reject the whole proposal. However, the European Parliament legislative resolution on the proposal for a Council directive on a common system of financial transaction tax passed with 487 votes in favour, 152 against and 46 abstentions. It is important to note that the proposal is subject to the special legislative procedure (consultation), hence the European Parliament is merely consulted and the Council is not bound by the Parliament’s opinion. It is impossible to reach an agreement among the 27 EU member states on the Commission proposal, consequently the FTT proposal should be ditched once and for all.
However, 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. Moreover, it is important to note that 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, 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 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;” The ECJ 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 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.
Furthermore, 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 recall that under Article 326 TFEU enhanced cooperation “shall not undermine the internal market or economic, social and territorial cohesion. It shall not constitute a barrier to or discrimination in trade between Member States, nor shall it distort competition between them.” If these criteria are not complied with the use of enhanced cooperation could be challenged at the ECJ. According to the European Parliament it is possible to use the enhance cooperation procedure, but it states that “an introduction of FTT in a particularly limited number of Member States could lead to a significant distortion of competition in the internal market and comprehensive measures should be taken in order to ensure that such a move does not negatively affect the functioning of the internal market.”
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. 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, Mark Hoban has pointed out 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%.
It is important to recall that last March, the EU finance ministers, at an informal meeting, considered compromise alternatives to the financial transaction tax, namely the introduction of a tax similar to the UK’s stamp duty. 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.
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 note that Angela Merkel has recently said, "The federal government, as agreed with the opposition, will campaign for [a financial transaction tax]."
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. 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. The European Commission has 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.
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. 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. In a note further explaining the residence principle and the territoriality of the proposal, the Commission said “The only possibility for EU resident entities to avoid the proposed tax is to relocate themselves to third countries completely or through the formation of subsidiaries and in both cases give up their European customer base, a strategy which it is unlikely to be adopted.” The European Parliament has kept the "residence principle" proposed by the Commission, but it added an issuance principle, which would extend the scope of the proposal to transactions involving financial instruments issued in the EU.
