The European Commission formally proposed a tax on financial trading in 11 countries yesterday (14 February), saying the levy could raise up to €35 billion each year and make banks more accountable following the 2008 banking crisis.
The European Commission set out how its financial transaction tax (FTT), aimed at making banks pay for taxpayer help they received in the financial crisis, would apply from next January, the rate at which it would be set, and safeguards to stop avoidance.
Critics said the tax would cut trading volumes, reduce the pensions of future retirees and could lead to double taxation on some transactions.
The plan was requested by 11 countries representing two-thirds of EU economic output that have already agreed to voluntarily press ahead with the tax after the bloc's 16 other members refused to back an earlier, pan-EU proposal.
Attempts to introduce a global "Tobin tax" – named after the US economist who proposed a tax on transactions in the 1970s – have also foundered due to US opposition.
EU Tax Commissioner Algirdas Šemeta said the bloc's financial sector was "under-taxed" to the tune of €18 billion.
"It lays the final paving stone on the road towards a common FTT in the EU," he said in a speech to present his plan.
Citizens only marginally affected
According to the Commission 85% of the targeted transactions, which will not include foreign exchange trading, take place between financial firms, but if some costs were passed on to consumers, this would not be "disproportionate".
"Any citizen buying, for example, €10,000 in shares would only pay a €10 euro tax on the transaction," it said.
It is less clear whether banks will pass on costs arising from the tax to professional and retail customers.
Member states will haggle over the plan, with changes likely before it takes effect. Only the 11 countries have a vote and their agreement must be unanimous for the plan to take effect.
The tax would be set at 0.01% for derivatives and 0.1% for stocks and bonds.
Many of the plan's basic elements follow the discarded pan-EU proposal, but the anti-avoidance safeguards have been beefed up and new exemptions added.
The new "issuance principle" means a transaction will be taxed whenever and wherever it takes place, if it involves a financial instrument issued in one of the 11 countries.
Effect on London will be key issue
This is aimed at stopping trades moving out of the so-called FTT zone to London or elsewhere and reinforces an earlier "residence principle" that says if a party to the transaction is based in the FTT area, or acting on behalf of a party based there, then the transaction will be taxed regardless of where it takes place.
The Commission says the combination will remove incentives to relocate trading, though not everyone is convinced.
Šemeta told a news conference the levy complied with international tax laws and he could take action to deal with double taxation if the issue arose, although the UK – which will be wary of any potential business lost in London – reserved its position.
The UK has already introduced a balance sheet levy on banks, but a European Commission analysis said it "will not be possible to avoid all incidents of double taxation within the entire EU27".
The safeguards may prove controversial for Britain, Europe's biggest financial trading centre, but it will not be able to stop the plan and will have no vote to amend it, though it could question the effect on the single market.
A British government spokesman said: “We will now study the proposal carefully in order to assess its impact on non-participating EU Member States and the single market.”
Austrian Finance Minister Maria Fekter backed the plan, meanwhile, saying she expected the levy to raise "at least" €500 million a year for her country's coffers.
How the tax will be spent by the countries concerned is still to be decided, although Commission proposals to use the tax to finance EU operations were previously rejected.
“As today’s proposal shows a unilateral European Financial Transactions Tax will hit growth for the countries taking part, which is why Britain was right not to participate in such a measure,” said a UK government spokesman.
“We are very disappointed with the Commission’s new FTT proposals,” said Markus Beyrer, director-general of BusinessEurope, the EU employers association. “The Commission has ignored warnings from members of the Council and Parliament that new proposals under enhanced co-operation must properly consider the impact on non-participating EU Member States. We continue to be concerned that this tax, by raising the cost of capital and encouraging business relocation, will damage growth and jobs,” Beyrer commented.
“The Commission’s proposal for a financial transaction tax in 11 EU member states is regrettable and likely to serve as another brake on economic growth,” according to
Simon Lewis, the chief executive at the Association for Financial Markets in Europe, said: “This tax will have a negative impact on business in several ways. The tax on equities will increase the cost of raising capital for Europe’s businesses – and the tax on bonds increases the cost of debt funding for both businesses and governments. The tax on derivatives will also have a negative impact on hedging transactions undertaken by the real economy in order to manage risk,” the AFME chief concluded.
Welcoming the basic architecture of the proposals and calling on the member states to implement the FTT quickly and to ensure the revenues are used to just ends and with a trans-national EU perspective, Green finance spokesperson Emilie Turunen (MEP, Denmark) said: “The Commission has today presented a sound proposal for the first trans-national financial transaction tax. The participating member states must now move swiftly to implement these plans and ensure the FTT becomes a reality. However, they must also agree a coherent and just approach on how to manage the revenues accruing, including a cross-border, European perspective.”
Also welcoming the move was Irish socialist MEP Nessa Childers, who said: “Today's is another important step toward tax justice in Europe. It is a happy day for everyone who wants the financial sector to pay something back to society after the financial crisis.”
Childers added: “The financial sector was a major cause of the crisis and has received over €4 trillion in public support in recent years in Europe. This tax would save Ireland over €500 million but Minister Noonan still insists on making a huge mistake by not signing Ireland up to it.”
The international consultancy group Cicero said in a statement:
"It is not difficult to see why progress towards reaching an agreement on an FTT has been protracted. Enormously popular with voters, politicians have been emboldened to press ahead despite continued warnings of the potentially damaging effect on the economy. The European Commission believes that the FTT will raise €30-35 billion annually. At present, it is proposed that funds would be retained at a national level but Member States discussed the possibility that funds would contribute towards the EU budget at the February 7/8 European Council. However, talk of imminent windfalls may be premature."
In September 2011, the Commission tabled a proposal for a common system of financial transactions tax.
Following lengthy discussions on the issue, it became clear in summer 2012 that unanimity between the 27 Member States would not be reached within a reasonable period.
Nonetheless, a number of Member States expressed a strong willingness to go ahead with the FTT. Therefore, in autumn 2012, 11 Member States wrote to the Commission, officially requesting enhanced cooperation on the financial transaction tax to be authorised, on the basis of the Commission's 2011 proposal.
On the basis of a further assessment, in October 2012 the Commission proposed a decision to allow enhanced cooperation on the FTT. This was backed by the European Parliament in December and agreed by European Finance Ministers at the ECOFIN in January 2013.
Once the green light for enhanced cooperation had been given, the Commission could proceed with the detailed proposal on the FTT to be applied by the 11 Member States, which it presented yesterday.
- 2013: Directive will now be discussed by Member States, with a view to its implementation under the 'enhanced cooperation' procedure. All 27 Member States may participate in the discussions on this proposal. However, only the 11 participating Member States will have a vote, and they must agree unanimously before it can be implemented.
- 1st Jan. 2014: FTT due to come into force within those countries joining in the enhanced co-operation procedure.