Out-Law / Your Daily Need-To-Know

Eleven EU states back introduction of financial transaction tax

Out-Law News | 11 Oct 2012 | 10:59 am | 2 min. read

The EU is to press ahead with plans to introduce a controversial tax on financial transactions between European banks, following assurances that the proposal will receive the backing of enough member states.

The proposed financial transaction tax (FTT), which would be charged where financial instruments in participating states are traded between banks, is intended to ensure that the financial sector makes a higher contribution towards covering the cost of future Government bailouts.

Tax Commissioner Algirdas Šemeta said that the Commission had received "clear assurances" from Estonia, Spain, Italy and Slovakia that they would support a proposal for "enhanced cooperation" between a limited number of EU member states. Seven countries – Germany, France, Belgium, Austria, Slovenia, Portugal and Greece – have already called on the Commission to introduce the tax.

"I proposed this tax as a source of new revenue from an under-taxed sector, and as a means of encouraging more responsible trading," Šemeta said. "It would also prevent a patchwork of national bank taxes from creating difficulties for businesses in the Single Market. The [FTT] is about fair taxation, smart taxation and a stronger, more coordinated approach to taxing the financial sector. These objectives remain valid and fully achievable."

He said that he would do "everything possible" to deliver a draft Decision on the new tax to the Economic and Financial Affairs Council (ECOFIN) before its next meeting in November. ECOFIN, which deals with fiscal and economic policy matters, is made up of the economics and finance ministers of the various EU member states.

The Commission proposed a directive (31-page / 110KB PDF) aimed at introducing an EU-wide FTT last year, but a Council discussion in June revealed that there was insufficient support for the proposal. The original proposal would have applied where financial instruments such as shares, bonds, securities and derivatives were traded between banks where at least one party was located in the EU.

The UK has never supported an EU-specific FTT, stating that any tax would have to be applied "globally" to prevent financial traders rerouting their transactions to counties outside the EU. In a highly critical report on the proposal, published in March, the House of Lords denounced the tax as "flawed" and warned that its adoption by the UK would force banks to relocate from the UK's financial centre in the City of London.

Similarly, Ireland has said it will opt out of the tax due to the risk of losing jobs in the financial services sector to the UK. Speaking to the Irish Times after this month's ECOFIN meeting, the country's Minister for Finance Michael Noonan said that if Ireland was to accept an FTT that did not extend to the UK there would be a "transfer of business from Dublin to London". Around 33,000 people work in the financial sector in Ireland, Noonan told the newspaper.

The "enhanced cooperation" process can be used as a "last resort" once the Council establishes that certain objectives cannot be attained within a reasonable period by the EU as whole, provided that at least nine member states participate. Those states must submit a request to the Commission, specifying the scope and objectives of the proposed enhanced cooperation agreement, and the Commission may then submit a proposal to the Council to that effect.