EU finance ministers – led Germany, France, Italy and
Spain – approved a much-feared tax proposal, amid
howls of protests from financial market players.
The prospect of an EU-wide financial transaction tax (FTT)
was first proposed by the European Commission (EC) in 2010.
While the proposal was welcomed by a number of European
nations, including France, Germany and Spain, it was resisted
by others, such as the UK, Czech Republic and Sweden.
With an EU-wide FTT looking unlikely, the EC suggested the
tax could be implemented only by the countries supporting the
FTT, which also includes Austria, Belgium, Estonia, Greece,
Portugal, Slovakia and Slovenia.
This is made possible by the principle of enhanced
co-operation, under which a minimum of nine member states can
move forward with an initiative even when other member states
do not wish to adopt it. The proposal was approved in December
by the European Parliament.
What will be taxed?
Unlike the 0.5% stamp duty the UK levies on share trades,
the new tax will also apply to financial derivative
transactions. The FTT is expected to tax share and bond trades
at 0.1% and derivatives trades at 0.01%. While the UK has
abstained, it is expected the tax will apply to any trades
involving at least one counterparty based in one of the
participating countries – even if the trade takes
place outside of the tax zone.
Derivatives have come into particular public focus over
their role in accelerating the losses suffered by banks in the
more recent financial crisis, says Nicholas Brewer, senior
analyst, Aite Group.
The transaction tax is positioned as a way of taxing these
apparently toxic instruments to produce funds which can be used
for the public good – either in supporting failing
banks in the future or in reducing the budget deficits of
countries which are felt to have been increased by the
imprudent and speculative actions of banks which lead to the
2008 financial crisis.
Objectives and consequences
While the FTT has attracted much attention, some believe the
overall purpose of the proposed tax is not clear. Is it
primarily intended to increase tax revenues, or to enforce
behavioural change from banks?
If the main objective is to raise revenues, the amount the
FTT could raise is far from certain. While the European
Commission originally estimated that an EU-wide FTT would raise
57 billion a year, other studies have suggested the tax could
reduce overall tax revenues.
If the objective is simply to make banks pay more tax, one
question is how this will impact on the other pressures on the
industry: to build more capital and to increase lending.
It is also unclear who will end up absorbing the higher
costs and what consequences might arise. If products become too
expensive, people will be less inclined to buy them. While the
level of tax proposed by the EU is relatively low, there might
be a compounding effect for securities that pass through a
number of parties during the course of a transaction.
In January 2012, a report by Oliver Wyman estimated that,
under the EU-wide FTT, the cost of a 25 million EUR/USD
one-week swap would rise from 279 to at least 2,779. The
report also says that, according to previous studies, as much
as 90% of the additional tax burden on FIs [financial
institutions] is generally passed on to end-users.
Another concern is that the FTT will drive transactions away
from the countries that apply the tax. This concern is not
unfounded. When Sweden introduced a 0.5% stamp duty on
financial transactions taking place within the country in 1984,
the volume of trades taking place in the country fell
dramatically and the tax was dropped in 1991. The scope of the
FTT is different, as it will apply to transactions with parties
based outside of the tax zone – however, it might
still result in activity being moved to different
The way the new tax operates means that companies operating
in the 11 countries will need to pay the tax –
regardless of where the transactions are executed, says
The effect of this is that smaller and mid-sized firms will
almost certainly end up paying the tax, whilst larger
multi-national corporations will more likely be able to move
the affected transactions to other jurisdictions outside of the
11 countries, and hence avoid paying the tax.
While the tax could be implemented as early as January 2014,
it is likely that there will be a prolonged negotiation about
its calibration and exact rate. Nevertheless, the very
principle of the FTT is bedevilled by competing regulatory
objectives and threatens negative liquidity- and
capital-consuming consequences, market players conclude.
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