Out-Law News | 05 Apr 2012 | 3:30 pm | 2 min. read
In a report on the Commission's draft FTT Directive (15-page / 443KB PDF), the EBF predicted "probable unintended consequences" should the tax be introduced, including structural disruption to financial markets and a wider negative economic impact on individual member states. It added that the Commission's "flawed and not sufficiently comprehensive" impact assessment underpinning its proposals did not support the case for the introduction of a new tax.
"The EBF is unconvinced by the arguments put forward by the Commission to support the presentation of the proposed Directive. Furthermore, we refute entirely the assertion that the financial sector is under-taxed," it said in the report.
It urged the Commission to drop the proposals and instead "consider more appropriate ways to address issues such as reducing systemic risk and limiting speculation".
The EDF's report is the latest to criticise the proposed FTT. Last week an equally critical report by the House of Lords denounced the proposals as "flawed", and warned that they would force banks to relocate from the UK's financial centre in the City of London.
The new FTT would be charged where financial instruments such as shares, bonds, securities and derivatives are traded between banks where at least one party is located in the EU. Publishing its proposals for the new tax (31-page / 110KB PDF) in September, the Commission said that it would ensure that the financial sector made a "fair contribution" towards the costs of any future government bail-outs.
In its report, the EDF said that the draft Directive would not meet most of its own objectives if implemented as proposed. The Commission's proposals state that main objective of the FTT is to "ensure that the financial sector makes a fair contribution to public finances", with what the EDF said was an "underlying assumption" that the sector was insufficiently taxed. However, the financial services sector already "contributes greatly" through hidden VAT, corporate taxes and the bank levies introduced by several member states in the aftermath of the financial crisis, the EDF said.
Despite the general VAT exemption that applies to financial services, the EBF said, "VAT neutrality is not ensured in the same way as for other sectors". It added that plans to reform the VAT treatment of financial services, which have been discussed by member states without reaching agreement since 2007, were "a must - the FTT is not an alternative".
The Commission has also said that its proposals will limit undesirable market behaviour and help stabilise the market. However, the EDF said that it would instead "create market disruptions and significantly affect liquidity".
"In its impact assessment, the Commission explicitly assumes that 90% of derivatives could disappear as the result of the implementation of the FTT in the EU," the report said. "The EDF is stunned to see that such a disruption of the market is considered by the Commission as an acceptable consequence of the FTT, as if it were merely trivial collateral damage or even a welcome structural break."
A derivative is a type of financial contract linked to the underlying value of the asset to which it refers, such as the movement of interest rates or currency value, or the possible bankruptcy of a debtor. The collapse of financial services firm Lehmann Brothers, which began the financial crisis in 2008, was widely blamed on its leading role in the market for over-the-counter derivatives. The EDF said that before more detailed analysis of the "usefulness" of the contracts should be carried out before the Commission adopted more disruptive measures.
"Any concerns over potential market inefficiencies or possible systematic risks should be addressed by policymakers through appropriate financial markets regulation and supervision and not through an FTT," it added.
The FTT would also fail at its final objective, to raise revenues through transaction, because as currently designed it would result in the "massive delocalisation/disappearance of certain activities", the EDF said.