Is Scaled-Back EU Financial Transaction Tax Likely?
Since the European Commission published in September a draft directive to impose a financial transaction tax (FTT) on EU member states, debate over the controversial proposal has been raging in the Council of the European Union (where ministers of the 27 EU member states sit) and the European Parliament, with policy makers subject to intense lobbying.
Under the European Commission proposal, the FTT would be imposed on all transactions involving financial instruments (shares, bonds, derivatives, structured financial products) undertaken between two financial institutions, if at least one of the financial institutions was established in the EU. Taxation would occur in the member state in which the financial institution involved in the transaction is located. The tax rate would be 0.1 percent for the trading of bonds and shares, and 0.01 percent for derivatives products (based on the notional). At these rates, the European Commission estimates in its impact assessment that the tax could raise approximately 57 billion euros per year.
Generally speaking, the financial services industry has been strongly lobbying against an FTT. The Association for Financial Markets in Europe (AFME), for one, widely publicized the survey it commissioned from the consultancy firm Oxera. In a review of the European Commission’s economic impact assessment of the proposed FTT, the consultancy firm strongly criticises the impact assessment along with the draft regulation, arguing that the proposed FTT is likely to have a significant and highly uncertain negative impact on the EU economy. Oxera’s review suggests that the negative impact on GDP is likely to be larger than is calculated by the Commission (or, alternatively, that the revenue raised by the tax will be lower). It also is warning against the uncertainty of financial services relocation and capital flight outside of the EU.
CFA Institute Members Oppose Financial Transaction Tax
For our part, we conducted last year a poll of 722 CFA Institute members in the EU and Switzerland to obtain feedback on the three taxation models proposed by the European Commission at the time. The results clearly illustrated that the FTT was the least-favoured taxation model and revealed two major concerns:
- Seventy-five percent of respondents said the costs of an FTT would be mainly borne by the end customer.
- If the FTT is not applied globally, the initiative will lead to regulatory arbitrage and undermine the competitiveness of the EU financial sector. In fact, 45 percent of respondents believe that an FTT would not be effective at any level, and 44 percent maintain it would be effective at the G20 level or higher. Only 5 percent think it would be most effective at the EU level.
In the political arena, the positions of national governments vary widely from one country to another. Some member states, notably the UK and Sweden, strongly oppose a financial transaction tax. Because unanimous support from all 27 member states is needed for it to go forward, an EU-wide financial transaction tax is very unlikely. But other member states that are strongly in favor of an FTT, like France, are willing to go ahead at the national level.
Group of Nine Could Fast-Track Proposal
A potentially more powerful move is a joint letter sent on 7 February by governments of nine EU member states (Germany, Austria, Italy, Belgium, Spain, Finland, France, Greece, and Portugal) to Denmark, which holds the rotating presidency of the Council of the European Union, requesting accelerated implementation of the financial transaction tax. The fact that nine member states signed the letter is meaningful, as this is the minimum number of countries required for the “enhanced cooperation mechanism” established by the 2009 Lisbon Treaty, which permits a subgroup of EU member states to cooperate in a specific area within EU structures, even though not all 27 EU member states are involved. In practice, it means that these nine member states could jointly introduce legislation on the FTT.
The European Parliament is a well known and strong advocate of the FTT. Although it has only “consultative power” on this proposal (meaning that it is the Council that solely can make a decision), it published earlier this week a report with proposed amendments to the draft directive published by the Commission in September. Notably, it proposes that financial institutions located outside the EU pay a FTT if they trade securities originally issued in the European Union. And while it would rather see an FTT implemented across all 27 EU member states, it supports its introduction, even if limited to a certain number of countries (i.e. the nine member states referenced above).
While we wondered in an October 2011 blog post if a financial transaction tax was going to become reality, it is obvious today that the FTT proposal is slowly gaining momentum. It still seems very unlikely that an FTT would be implemented at the EU level, but the probability that it could be introduced in a limited number of member states is clearly growing.