Financial Transaction Tax (FTT)

2014-10-13

As a way of ensuring that the financial sector “paid its fair share” of the financial crisis, the European Commission released a proposal on taxing financial transactions.  According to EU policy makers, the transaction tax would theoretically cut down on risky or unnecessary transactions, and the revenue generated would be used towards the EU budget.

Background

In March of 2011, the European Parliament approved an FTT as part of a non-legislative report by Greek MEP Anni Podimata (S&D) on innovative financing. Following that, it late September 2011, the European Commission released a formal proposal on an EU-wide FTT, where the exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts, at a rate of 0.01%.  Discussions advanced throughout the last few months of 2011 and during the first six months of 2012.  Despite support from it by a few large EU Member States, wide-spread support was lacking, and the Council of the European Union elected to end discussions about an EU-wide FTT.  Those Member States still interested in enacting an FTT, however, could do so via Enhanced Cooperation Agreement (ECA) whereby they elect to institute it amongst themselves.

After months of discussing the nature of the ECA, in January 2013, 11 EU Member States (Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovakia and Slovenia) agreed to ask the European Commission to release a new FTT proposal under the ECA, and the Commission did so on February 14, 2013.

Scope

The current proposal (from February 14, 2013) mirrors the September 2011 proposal in that it places a 0.1% tax on shares and bonds, and a 0.01% tax on derivatives.

The current proposal also contains a few additional substantive changes from 2011, most significantly with respect to expanded anti-avoidance and anti-abuse provisions. For instance, the 2013 FTT proposal includes both a “residence principle” (meaning that the tax will be due if any party to the transaction is established in a participating Member State, regardless of where the transaction takes place), as well as an “issuance principle” (meaning that financial instruments issued in the 11 Member States will be taxed when traded, even if those trading them are not established within the FTT-zone). Furthermore, explicit anti-abuse provisions are now included.

There are a few exemptions to the tax, notably EU Member States and other public bodies, when managing public debt.  Of note, pension funds are not exempt from the scope of the proposal.

Current Status

The 11 EU Member States began negotiations during the spring of 2013, meeting among themselves to iron out specific details on the FTT.  Despite their agreement on an FTT of some kind, the 11 ECA Member States disagree on a number of points, especially as countries such as France at Italy have instituted an FTT within their respective countries, and are supportive of their respective points of view.

Also, all 28 EU Member States continue to meet periodically to review the FTT proposal, especially to examine the way that the tax will be affected by additional EU financial regulation, such as MiFID or EMIR.    Additionally, Member States have been discussing the potential extraterritorial effects of the tax.  Due to the political nature of this dossier, and its potentially wide scope, discussions are expected to continue throughout 2014.

As discussions progress, it has become evident that there will likely be a number of changes to the FTT before it becomes implemented.  This includes potential reduction of scope and rates, as well as a staggered (or tiered) implementation timeline.

Issues Affecting the Policy Debate

European policy makers and EU Member States in favor of the tax routinely point to three issues guiding their choices on FTT:

  1. The need for the Financial Sector, as originators of the crisis, to make a “fair contribution.”  This refers both to the financial sectors’ acceptance of bailout funds as well as the fact that t is “under-taxed” by comparison to other sectors.
  2. To discourage risky trading activities, and help curtail high frequency trading
  3. To raise revenue for the European Union (part of the tax revenue would go to the general EU budget, part would go to the Member States)

European policy makers and EU Member States NOT in favor of the tax point to three main issues

  1. It will result in capital flight from affected countries, negatively affecting countries’ job markets
  2. It will affect all investors, including pensions funds
  3. It will, according to the  European Commission’s own impact assessment, result in a lower EU GDP

MFA Key Issues

  1. An FTT would negatively affect the value of financial assets, to the detriment of all investors (including retail and pension funds), as the asset would have to reflect the additional cost of the tax
  2. Unlikely to raise revenues as trading would circumvent affected areas
  3. Would result in loss of jobs as it would increase cost of capital, diverting funds away from reinvestment