Next week (5 October), the European Commission will unveil a proposal for a financial transactions tax which will hit a wide variety of trades and financial institutions.
The tax has gained support in the EU from governments and taxpayers who bore the brunt of expensive bank bailouts. But, London, with over half of the EU's financial business, will only back the tax if all financial centres in the world, like Hong Kong, Shanghai, Singapore and New York, are using the same regime.
"Once they see the proposal, I think they will review this supposition," a Commission source said. The source appeared confident that the UK will support the tax because the proposal contains a very wide scope of transactions, actors, rates and uses of revenues.
The draft FTT, obtained by EurActiv, sets a low minimum rate, includes all institutions, except counterparties and central banks, and revenues can be used for both the EU budget and national coffers.
This is, however, still the initial draft which will be subject to scrutiny from the member states, the European Parliament and lobbyists wishing to influence the legislation.
Other EU sources however are adamant that the Commission will have a harder time than it thinks convincing the UK of the tax's merits. "Look at Sweden in the nineties, all of that business just migrated to London," one said, citing a transaction levy that was introduced in Sweden in 1984 and abolished in 1991.
But NGOs say the comparison is unfair. The EU's FTT, like the UK's current tax, the Stamp Duty on shares, will be paid no matter where the trader resides as long as the company is registered in the EU. In Sweden, the tax only affected transactions within their borders.
"Ultimately, the Swedish FTT was badly designed and therefore not very effective. But to say that all FTTs won't work, just because there were flaws in the Swedish FTT, is a bit of a slippery slope argument that doesn’t really work," said Charlotte Gill, Policy and Communications Officer at Stamp Out Poverty.
Though the UK will have to align its stamp duty to the proposal, the Commission source said this should be painless as the EU's proposed minimum rate will be far lower than the duty's current rate at 0.5%.
Previous leaks from the Commission have set the rate at 0.2% and estimated this would raise €30-50 billion annually.
The UK's stamp duty, which predates even the establishment of the EU, still suffers opposition from the country's financial lobby for raising the cost of capital and lowering the value of pensions.
According to a 2009 study by the Oxera consultancy, the Stamp Duty makes equity capital more expensive by up to 12 per cent in some sectors, such as technology.
While the European Commission admits that its FTT will raise the cost of capital and slightly lower GDP, it does not say by how much. "The impact assessment also showed small negative effects on GDP and employment cannot be avoided since they are related to the increase in the cost of capital," the draft states.
Claire Davenport
