Commission backs €25bn ‘Financial Activities Tax’

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The European Commission is putting its weight today (7 October) behind a Financial Activities Tax (FAT) at EU level, saying it could bring cash-strapped governments up to 25 billion euros in revenue from the banking sector in the wake of the global financial crisis.

The Commission paper endorsing the FAT, to be issued later today, is non-binding but could be followed up by formal legislative proposals at a later stage if backed by EU member states at a summit on 28-29 October.

The Commission's endorsement of an FAT signals the EU executive's preference for a tax applicable on financial institutions such as banks and insurance companies rather than capital flows.

EU Tax Commissioner Algirdas Šemeta, who is due to announce the measure today, says the tax should be applied at European level, regardless of its possible adoption worldwide.

In contrast, a Financial Transactions Tax (FTT), which is strongly backed by Germany and the European Socialists, would apply to all capital movements but would have been impossible without an agreement at global level, an option which appears highly unlikely.

"At EU level, the Commission recommends that a Financial Activities Tax (FAT) would be the preferable option," reads the Commission paper, to be issued today.

According to the EU executive, the alternative FTT would present "considerable risks, particularly of relocation, in its unilateral introduction". Meanwhile, "risks are considerably lower with the FAT, because profits and wages are less mobile than trading," it argues.

The FAT is also deemed more suited to the objective of targeting the financial sector since the tax would apply to corporations instead of all international financial transfers, as would be the case with an FTT.

Brussels estimates that revenues from the application of a FAT at EU level could reach up to €25 billion annually if the tax rate is 5%. How this money would be used will be subject to further debate should the proposal be approved.

The Commission paper is expected to be debated by the finance ministers of the 27 EU countries at a 19 October meeting in Luxembourg.

EU leaders could then endorse the idea at a Brussels summit on 28-29 October, ahead of the G20 summit in Seoul in mid-November.

The end of the FTT?

EU officials insist that Brussels does not want to give up on an FTT and will continue to push for its introduction at global level.

But today's decision has potentially dealt a fatal blow to this option, which enjoys strong backing from the European Socialists. Indeed, G20 leaders have showed little support for the FTT and linking its introduction in Europe to a global consensus could put the final nail in its coffin.

According to Commission estimates, the FTT could generate revenues of up to €60 billion annually if applied worldwide with a 0.1% rate. If the tax were also applied to derivatives, revenue would amount to around €600 billion per year.

Making the banks pay

The Commission's arguments for backing a tax on the financial sector are well-known. Brussels considers the sector as a "major cause" of the global financial crisis and notes that it received "substantial government support over the past few years".

"It should therefore properly contribute to the cost of re-building Europe's economies and bolstering public finances," reads the Commission paper.

Moreover, the financial sector is currently exempted from value added tax (VAT). Applying some form of taxation would therefore "ensure that this sector is not under-taxed compared to others," the Commission argues.

The proposal comes as the EU is also considering a bank levy to fund future possible bail-outs in the banking sector.

EU Taxation Commissioner Algirdas Šemeta said: "There are good reasons for taxing the financial sector, and feasible ways to do so. I believe that the ideas that the Commission has put forward today are the right ones to ensure that the financial sector makes a fair contribution to the most pressing EU and global challenges."

His colleague Janusz Lewandowski, in charge of the EU budget, had initially suggested applying an FTT at EU level, regardless of global approval, but he later backed down.

EU Trade Commissioner Karel De Gucht expressed doubts about the impact of taxing the banking system and raising fears about the possible effect of such taxation on EU growth.

UK MEP Kay Swinburne, economic and monetary affairs spokesperson for the European Conservatives and Reformists (ECR) group, welcomed the Commission's announcement that an EU-wide FTT should not be introduced and criticised the European Socialists for their pro-regulation stance.

"71% of a European FTT would be paid in the UK - over four times more than Germany and over ten times more than France. This would be a disproportionate and perverse tax on the City of London which would do little to modify behaviour,'' she stated.

"Socialists are constantly calling for the EU to 'regulate global finance' as if the four corners of the financial world end at Europe's border. It is time that they dropped this ludicrous campaign that could destroy the goose that lays the golden egg for businesses of all sizes across the EU. Financial markets are global and highly mobile,'' added Dr. Swinburne.

"The EU needs to drop this fixation with granting itself tax-raising powers of any kind. The EU must remain subservient to national governments, and the best way of ensuring this accountability is through the budget process. If the EU has the power to raise its own taxes it becomes the master of the national governments, not their servant,'' she went on.

"The European Commission is more favourable towards the concept of banking levies similar to those being discussed in the UK. However, this should ultimately be a matter for national governments to decide based on their own market conditions," concluded the MEP.

The Greens/EFA group in the European Parliament criticised the Commission for not outlining any concrete proposals for taxing the finance sector and called for legislative action on an EU financial transactions tax (FTT).

"Today's communication gives a grudging recognition of the feasibility of an EU-level financial transaction tax. However, we regret that this recognition has been tempered by the same old the flawed counter-arguments that the Commission continues to trundle out," said German Green MEP Sven Giegold

"It is regrettable that the Commission wants to delay the implementation of any FTT as this will deprive EU governments of an important source of revenue at a time when taxpayers' money is being used to bail out banks. Rather than rehashing flawed old arguments, it is high time that the Commission stops stalling and comes forward with a concrete legislative proposal for an EU financial transaction tax," he added.

Belgian Green MEP Philippe Lamberts added: "There is a growing recognition that the FTT would both make the financial sector pay for the crisis it has triggered, and regulate the sector to avoid future crises. EU action would also give a boost to efforts to agree a global financial transaction tax, which is clearly the ultimate goal. If the Commission insists on delaying any proposal, EU governments must push for action."

Oxfam praised the European Commission's paper on taxing the financial sector, calling it a ''victory for people over profits'' as the move would raise billions of euros to tackle the serious global challenges of development and climate change.

''Taxing big finance is both just and economically sensible, reducing dangerous casino capitalism and raising big amounts of money to help those hit hardest in Europe and in the poorest countries. EU leaders must now sign on the dotted line when they meet at the end of the month and push for a speedier timetable for action than summer 2011, as proposed by the Commission,'' stated Elise Ford, head of Oxfam's EU office.

A tax on financial activities (FAT) relates to the total sum of profits and remunerations of financial institutions. It would therefore tax corporations, rather than the individual actors involved in a financial transaction.

By contrast, a tax on financial transactions (FTT) would hit all kinds of capital movement, including equity, bonds and derivatives.

The tax, also referred to as a 'Tobin Tax' in honour of James Tobin, who won the Nobel Prize in 1981 for his work on financial markets, was initially aimed at limiting short-term currency speculation.

The Group of 20 most industrialised nations in the world (G20) has so far shown much more interest in a FAT than an FTT. The first discussions at EU level on the two options were carried out at the Ecofin Council at the beginning of September on the basis of a European Commission informal document.

  • 19 Oct. 2010: EU Ecofin Council to discuss FAT and FTT proposals.
  • 28-29 Oct. 2010: EU summit to discuss FAT and FTT proposals.
  • 11-12 Nov. 2010: G20 summit in Seoul to discuss introducing FAT and FTT at global level.

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