EU Gives Green Light for Financial Transactions Tax
A group of 11 European Union (EU) countries have given the go-ahead to proceed with the introduction of a financial transactions tax (FTT), despite the opposition of other EU members including the UK.
The countries backing the ‘Tobin-style’ FTT – also dubbed the ‘Robin Hood tax’ in Europe – are Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain. The Netherlands might also lend its support, despite the FTT being opposed by its central bank, De Nederlandsche Bank (DNB).
The European Commission (EC) originally aimed for all 27 EU member states to adopt the FTT, but the plan was blocked by the UK on fears its impact on the City of London trading hub, Europe’s biggest financial centre, while several other countries were concerned that it would lead investors to switch trades to the US or Asia.
Trading in London will still be affected, as the levy can be imposed regardless of where a transaction takes place if either the buyer or seller is based in one of the 11 countries imposing the tax.
The FTT dates back to June 2010, when G20 leaders failed to agree on the imposition of Tobin-style taxes on financial transactions and the European Commission (EC) decided to go it alone, with taxes on the EU’s financial sector to generate revenue. It was officially presented on 28 September 2011 by EC president Jose Barroso, who said that the new tax was “to make the financial sector pay its fair share” following the public sector bail-outs that it had received since the financial crisis began in 2007-08.
Supporters of the FTT, who include German finance minister Wolfgang Schaeuble, argues that it can tackle activity deemed as speculative, such as high-frequency trading (HFT), by imposing a charge on every split-second, computer-driven deal.
Market Reactions
Not surprisingly, the decision to press ahead with the FTT was criticised by UK trade body the Confederation of British Industry (CBI). “The UK government is right to reject a Financial Transaction Tax as damaging for jobs and growth,” said Matthew Fell, CBI director for competitive markets.
“It is disappointing that Eurozone economies are pursuing the FTT, whose costs ultimately fall on consumers and businesses, and will be a drag on the eurozone recovery.
“This tax must not impinge on non-participating member states by including extra-territorial reach into financial services activity conducted in the UK. As the UK’s largest single trading partner, a healthy European economy is in everyone’s interests so we urge participating member states to reconsider this tax.”
Tax Implications
Taxand, the specialist tax advisory firm to multinational corporations (MNCs) warned that the FTT spelled uncertainty for major companies. “While supporters of the FTT will see the recent approval from 11 EU countries as a major coup, MNCs – specifically those in the financial services arena – will view these developments with concern, not only due to the lack of clarity on implementation, but also because of the potential for a distinctly unlevel playing field for trading across the continent,” said its chairman, Frédéric Donnedieu de Vabres.
“As things stand there is a striking lack of guidance on both the rate and scope of the new levy, leaving the financial sector in the dark as to how they might structure their equity, bond and derivative trading operations going forward.
“The implementation of the tax will also result in a trading dichotomy across Europe. As things stand, financial hubs such as Frankfurt, Paris and Madrid will be affected by the tax, with other centres of trading, including London, seemingly gaining a significant advantage through their resilience in not signing up to the agreement.
“What is clear is that implementation, in whatever form it finally takes, could have serious consequences for the overall competitiveness of Europe as a global hub for financial services. The lack of consistency in the taxation of trading could lead MNCs to avoid the continent altogether, instead looking to the US or Asia.”
However, charity War on Want, which launched a campaign for a Tobin-style tax in 1998 in the wake of the East Asian financial crisis, welcomed the decision as a major victory in the battle for a more equitable banking system. It estimates that the FTT will raise an estimated €37bn annually when it is introduced in 2014.
“Today marks a significant milestone in the long battle to secure a financial transaction tax in Europe,” said War on Want’s executive director, John Hilary. “Not only will the tax raise considerable sums of money for use in the fight against poverty, but it will also provide a mechanism to stabilise the trading system in future. At last the banks can start to repay some of their debt to European society.”