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.