Opinion among respondents to the recent consultation on a proposed financial transaction tax was ‘strongly polarised’, the European Commission said. Little has changed, judging by initial reaction to the Commission’s detailed proposal for a Council Directive introducing a Europe-wide FTT.
The Commission declared last week that the financial sector was ‘under-taxed’.
An FTT could raise €57bn a year, and would ensure that the sector made a fair contribution at a time of fiscal consolidation in the member states.
‘In the last three years, member states – I should say, taxpayers – have granted aid and provided guarantees of €4.6 trillion to the financial sector, said EC president José Manuel Barroso.
‘It is time for the financial sector to make a contribution back to society.’
HM Treasury would ‘absolutely resist’ any tax that was not introduced globally, a spokesman told the BBC. ‘We would not do anything that is not in the UK's interests.’
The government has said an FTT would need to be applied globally to prevent the relocation of financial services. In June Mark Hoban, Financial Secretary to the Treasury, said it was ‘willing to engage in further international discussions of such taxes’.
The FTT would be levied from 2014 on ‘all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU’, the Commission said.
The exchange of shares and bonds would be taxed at 0.1%, and derivative contracts at a rate of 0.01%.
A coordinated framework at EU level would help to strengthen the EU single market, help to reduce competitive distortions in the single market, discourage risky trading activities and ‘complement regulatory measures aimed at avoiding future crises’.
Revenues would be shared between the EU and member states.
‘Part of the tax would be used as an EU own resource which would partly reduce national contributions. Member states might decide to increase the [sic] part of the revenues by taxing financial transactions at a higher rate.’
Tom Aston, KPMG
The Commission’s proposal was ‘completely misguided’, said the CBI’s Deputy Director-General Neil Bentley, at a time when it was ‘clear that Europe needs a relentless focus on growth’.
The British Bankers Association (BBA) said a cross-border tax on transactions had been a talking point ‘on campuses and in business schools’ since the 1970s.
‘The consensus is that anything less than a globally-applied, uniform tax would distort the markets and reward dissenting low-tax regimes rather than raising significant revenue.
'The UK would be particularly affected by any such tax as it is the world’s financial centre. Four of every five financial transactions in the EU take place in the UK.’
Kay Swinburne, Conservative MEP and spokesman on economic and monetary affairs, was quoted in The Times as saying: ‘This is not an EU-wide tax but a tax on the City of London ... Any European FTT which included the UK, but not the rest of the G20 group of leading economic nations, would simply lead to a draining-away of business to other parts of the globe.’
Tom Aston, financial services tax partner at KPMG, said an FTT would fundamentally change, and in some cases destroy, the business models of European financial institutions.
Writing in this week’s Tax Journal his KPMG colleague, tax partner Sarah Lane, said the proposal was ‘a blunderbuss’ with a number of ‘stings in the tail’.
David Hillman, Robin Hood Tax campaign
Frédéric Donnedieu de Vabres, Chairman of Taxand, said a ‘blanket international tax’ would ‘undoubtedly hit certain countries and regions harder than others’ and could ‘drive investment out of Europe’.
London First, a business group whose members include many of the banks and large law and accountancy firms, warned that ‘taxing foot-loose financial service transactions in London and the rest of the EU but not in other financial centres like New York and Singapore’ would result in ‘less business being done here’, leading to fewer jobs and lower tax revenues.
Brendan Barber, the TUC General Secretary, welcomed the proposal as ‘a major step forward’.
An FTT would provide ‘much needed revenue for tackling climate change, global poverty and cutting public sector deficits’.
David Hillman, spokesman for the Robin Hood Tax campaign, said: ‘While the UK government defends the interests of the City’s privileged few, [this proposal] shows Europe is ready to ensure banks pay their dues to society.’
But he added that European leaders should ‘listen to Bill Gates and ensure money goes to poor people at home and abroad hit by the economic crisis’.
The Financial Times had reported that early indications of a report by Microsoft’s founder, to be presented to next month’s G20 summit, suggested that ‘[an FTT] could generate nearly $50bn for development aid if applied across the G20 grouping of leading economies’.
A discussion note circulating at IMF meetings ‘suggested [Gates] thought the tax was feasible and capable of raising huge revenues’, wrote John Plender, the FT columnist.
CIDSE, an alliance of Catholic development agencies, called on European finance ministers to endorse the proposal, making sure that ‘sufficient money is earmarked for the fight against poverty and climate change’.
CIDSE said the proposal was vague about what FTT revenues should be spent on, adding that it was ‘inconceivable that they would simply go to replenish the EU budget or national coffers’.
The Commission estimated that the financial sector ‘enjoys a tax advantage of approximately €18 billion a year because of VAT exemption on financial services’.
But Colin Graham, insurance tax leader at PwC, said he suspected that ‘further analysis could show the VAT exemption provides no tax advantage whatsoever’. He added: ‘The reality is the sector already pays very significant amounts of irrecoverable VAT to EU governments which would become recoverable if the sector became subject to tax.’
The proposal for a Council Directive on ‘a common system of financial transaction tax’, published on 28 September, is available on the European Commission website.
The financial sector played a major role in causing the recent financial crisis while ‘governments and European citizens at large have borne the cost’, the Commission said in an explanatory note. ‘There is a strong consensus within Europe and internationally that the financial sector should contribute more fairly given the costs of dealing with the crisis and the current under-taxation of the sector.’
A common European approach to financial sector taxation was needed to avoid fragmentation, in view of an increasing number of ‘uncoordinated national tax measures’. Harmonisation would ‘ensure the smooth functioning of the single market’.
The proposal would be a ‘first step’ to ensuring a level playing field with other sectors, the Commission said.
In a footnote, it pointed out that most financial and insurance services are exempt from VAT. This is ‘due to difficulties in measuring the taxable base’, according to the Commission’s FAQs.
Exemption is advantageous where a supply is made to the general public or another VAT-exempt business, because no VAT is charged. The supplier is, however, generally unable to reclaim any related ‘input tax’ on expenses.
The Commission’s impact assessment noted that ‘the extent to which the [VAT] exemption constitutes a tax advantage for the financial sector is an unsettled empirical question’. The limited data available indicated that the argument that the exemption might be an advantage for the sector ‘has some merits’.
The FTT would contain ‘mitigating design features’ including use of the residence principle and the exclusion of transactions on ‘primary markets’.
The proposed minimum rates would be ‘low enough so that delocalisation risks are minimised’. But the Commission also intended to ‘explore ways to introduce an FTT at global level, notably with its international partners in the G20’.
The negative impact of the FTT on GDP in the long run was expected to be ‘limited to around 0.5%’.
An increase in transaction costs would erode marginal profits. High volume, low margin transactions might have to be replaced by ‘algorithms that trigger less numerous but higher margin transactions’, the Commission said.
The FTT would have ‘progressive distributional effects’ since higher income groups ‘benefit more’ from financial services, it suggested.
The idea of an FTT was explored in October 2010 in the Commission’s paper Taxation of the Financial Sector.
A public consultation followed in February 2011. Citizens, NGOs and trade unions were generally in favour of an FTT. According to a recent Eurobarometer survey, ‘65% of Europeans’ approve of the idea.
However, financial organisations and the ‘business, accounting/consulting and real estate subgroups’ generally opposed ‘any and all types of additional tax burden on the financial sector or financial markets in general’.
The respondents included Oxfam, which submitted that taxing the financial sector would be ‘the most progressive and popular measure’ to tackle the deficit ‘created by the financial institutions’ folly’. The VAT exemption was, Oxfam claimed, ‘an unjustified distortion in favour of the financial industry’.
But the BBA questioned whether the Commission’s questions as framed in the consultation document – in particular ‘their leading nature and the multiple choice approach taken by the Commission, inviting subjective speculation’ – would provide a satisfactory evidence base.
The BBA said the consultation focused on the tax borne by the financial sector and whether or not the sector was under-taxed. ‘Care should be taken in designing any tax to consider who will bear the cost of [additional taxation],’ it said.
‘The cost of additional taxation does not ultimately “stick” in the sector and there are only three groups that will bear the cost of additional taxes. That is, shareholders, employees and counterparties (ie. customers and to some degree suppliers).’
Opinion among respondents to the recent consultation on a proposed financial transaction tax was ‘strongly polarised’, the European Commission said. Little has changed, judging by initial reaction to the Commission’s detailed proposal for a Council Directive introducing a Europe-wide FTT.
The Commission declared last week that the financial sector was ‘under-taxed’.
An FTT could raise €57bn a year, and would ensure that the sector made a fair contribution at a time of fiscal consolidation in the member states.
‘In the last three years, member states – I should say, taxpayers – have granted aid and provided guarantees of €4.6 trillion to the financial sector, said EC president José Manuel Barroso.
‘It is time for the financial sector to make a contribution back to society.’
HM Treasury would ‘absolutely resist’ any tax that was not introduced globally, a spokesman told the BBC. ‘We would not do anything that is not in the UK's interests.’
The government has said an FTT would need to be applied globally to prevent the relocation of financial services. In June Mark Hoban, Financial Secretary to the Treasury, said it was ‘willing to engage in further international discussions of such taxes’.
The FTT would be levied from 2014 on ‘all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU’, the Commission said.
The exchange of shares and bonds would be taxed at 0.1%, and derivative contracts at a rate of 0.01%.
A coordinated framework at EU level would help to strengthen the EU single market, help to reduce competitive distortions in the single market, discourage risky trading activities and ‘complement regulatory measures aimed at avoiding future crises’.
Revenues would be shared between the EU and member states.
‘Part of the tax would be used as an EU own resource which would partly reduce national contributions. Member states might decide to increase the [sic] part of the revenues by taxing financial transactions at a higher rate.’
Tom Aston, KPMG
The Commission’s proposal was ‘completely misguided’, said the CBI’s Deputy Director-General Neil Bentley, at a time when it was ‘clear that Europe needs a relentless focus on growth’.
The British Bankers Association (BBA) said a cross-border tax on transactions had been a talking point ‘on campuses and in business schools’ since the 1970s.
‘The consensus is that anything less than a globally-applied, uniform tax would distort the markets and reward dissenting low-tax regimes rather than raising significant revenue.
'The UK would be particularly affected by any such tax as it is the world’s financial centre. Four of every five financial transactions in the EU take place in the UK.’
Kay Swinburne, Conservative MEP and spokesman on economic and monetary affairs, was quoted in The Times as saying: ‘This is not an EU-wide tax but a tax on the City of London ... Any European FTT which included the UK, but not the rest of the G20 group of leading economic nations, would simply lead to a draining-away of business to other parts of the globe.’
Tom Aston, financial services tax partner at KPMG, said an FTT would fundamentally change, and in some cases destroy, the business models of European financial institutions.
Writing in this week’s Tax Journal his KPMG colleague, tax partner Sarah Lane, said the proposal was ‘a blunderbuss’ with a number of ‘stings in the tail’.
David Hillman, Robin Hood Tax campaign
Frédéric Donnedieu de Vabres, Chairman of Taxand, said a ‘blanket international tax’ would ‘undoubtedly hit certain countries and regions harder than others’ and could ‘drive investment out of Europe’.
London First, a business group whose members include many of the banks and large law and accountancy firms, warned that ‘taxing foot-loose financial service transactions in London and the rest of the EU but not in other financial centres like New York and Singapore’ would result in ‘less business being done here’, leading to fewer jobs and lower tax revenues.
Brendan Barber, the TUC General Secretary, welcomed the proposal as ‘a major step forward’.
An FTT would provide ‘much needed revenue for tackling climate change, global poverty and cutting public sector deficits’.
David Hillman, spokesman for the Robin Hood Tax campaign, said: ‘While the UK government defends the interests of the City’s privileged few, [this proposal] shows Europe is ready to ensure banks pay their dues to society.’
But he added that European leaders should ‘listen to Bill Gates and ensure money goes to poor people at home and abroad hit by the economic crisis’.
The Financial Times had reported that early indications of a report by Microsoft’s founder, to be presented to next month’s G20 summit, suggested that ‘[an FTT] could generate nearly $50bn for development aid if applied across the G20 grouping of leading economies’.
A discussion note circulating at IMF meetings ‘suggested [Gates] thought the tax was feasible and capable of raising huge revenues’, wrote John Plender, the FT columnist.
CIDSE, an alliance of Catholic development agencies, called on European finance ministers to endorse the proposal, making sure that ‘sufficient money is earmarked for the fight against poverty and climate change’.
CIDSE said the proposal was vague about what FTT revenues should be spent on, adding that it was ‘inconceivable that they would simply go to replenish the EU budget or national coffers’.
The Commission estimated that the financial sector ‘enjoys a tax advantage of approximately €18 billion a year because of VAT exemption on financial services’.
But Colin Graham, insurance tax leader at PwC, said he suspected that ‘further analysis could show the VAT exemption provides no tax advantage whatsoever’. He added: ‘The reality is the sector already pays very significant amounts of irrecoverable VAT to EU governments which would become recoverable if the sector became subject to tax.’
The proposal for a Council Directive on ‘a common system of financial transaction tax’, published on 28 September, is available on the European Commission website.
The financial sector played a major role in causing the recent financial crisis while ‘governments and European citizens at large have borne the cost’, the Commission said in an explanatory note. ‘There is a strong consensus within Europe and internationally that the financial sector should contribute more fairly given the costs of dealing with the crisis and the current under-taxation of the sector.’
A common European approach to financial sector taxation was needed to avoid fragmentation, in view of an increasing number of ‘uncoordinated national tax measures’. Harmonisation would ‘ensure the smooth functioning of the single market’.
The proposal would be a ‘first step’ to ensuring a level playing field with other sectors, the Commission said.
In a footnote, it pointed out that most financial and insurance services are exempt from VAT. This is ‘due to difficulties in measuring the taxable base’, according to the Commission’s FAQs.
Exemption is advantageous where a supply is made to the general public or another VAT-exempt business, because no VAT is charged. The supplier is, however, generally unable to reclaim any related ‘input tax’ on expenses.
The Commission’s impact assessment noted that ‘the extent to which the [VAT] exemption constitutes a tax advantage for the financial sector is an unsettled empirical question’. The limited data available indicated that the argument that the exemption might be an advantage for the sector ‘has some merits’.
The FTT would contain ‘mitigating design features’ including use of the residence principle and the exclusion of transactions on ‘primary markets’.
The proposed minimum rates would be ‘low enough so that delocalisation risks are minimised’. But the Commission also intended to ‘explore ways to introduce an FTT at global level, notably with its international partners in the G20’.
The negative impact of the FTT on GDP in the long run was expected to be ‘limited to around 0.5%’.
An increase in transaction costs would erode marginal profits. High volume, low margin transactions might have to be replaced by ‘algorithms that trigger less numerous but higher margin transactions’, the Commission said.
The FTT would have ‘progressive distributional effects’ since higher income groups ‘benefit more’ from financial services, it suggested.
The idea of an FTT was explored in October 2010 in the Commission’s paper Taxation of the Financial Sector.
A public consultation followed in February 2011. Citizens, NGOs and trade unions were generally in favour of an FTT. According to a recent Eurobarometer survey, ‘65% of Europeans’ approve of the idea.
However, financial organisations and the ‘business, accounting/consulting and real estate subgroups’ generally opposed ‘any and all types of additional tax burden on the financial sector or financial markets in general’.
The respondents included Oxfam, which submitted that taxing the financial sector would be ‘the most progressive and popular measure’ to tackle the deficit ‘created by the financial institutions’ folly’. The VAT exemption was, Oxfam claimed, ‘an unjustified distortion in favour of the financial industry’.
But the BBA questioned whether the Commission’s questions as framed in the consultation document – in particular ‘their leading nature and the multiple choice approach taken by the Commission, inviting subjective speculation’ – would provide a satisfactory evidence base.
The BBA said the consultation focused on the tax borne by the financial sector and whether or not the sector was under-taxed. ‘Care should be taken in designing any tax to consider who will bear the cost of [additional taxation],’ it said.
‘The cost of additional taxation does not ultimately “stick” in the sector and there are only three groups that will bear the cost of additional taxes. That is, shareholders, employees and counterparties (ie. customers and to some degree suppliers).’
