Wednesday, September 28, 2011

European Commission Proposes Financial Transactions Tax for the EU

The European Commission has proposed an EU-wide financial transactions tax similar to the financial transactions tax recently set forth in the Obama Administration's deficit reduction program. The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU. The financial instruments in question would be products such as shares, bonds, derivatives and structured financial products. Whether transactions were carried out on organized markets or over the counter would not make any difference since in both cases they would be taxed.

The exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts at a rate of 0.01%. The is estimated to raise approximately €57 billion every year.

The financial transaction tax is being imposed to ensure that the financial sector makes a fair contribution at a time of fiscal consolidation in the Member States. The financial sector played a role in the origins of the economic crisis, noted the Commission, and Governments and European citizens at large have borne the cost of massive taxpayer-funded bailouts to support the financial sector. Furthermore, the sector is currently under-taxed by comparison to other sectors. Financial services are, in the majority of cases, exempt from paying VAT, due to difficulties in measuring the taxable base, leading to the under-taxation of financial services.

The proposal would introduce new minimum tax rates and harmonize different existing taxes on financial transactions in the EU.. This will help to reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises. More broadly, the financial transaction tax at EU level would strengthen the EU's position to promote common rules for the introduction of such a tax at global level, notably through the G20.

Only transactions related to financial instruments would be covered by the financial transactions tax. This means that all transactions in which private households or SMEs were involved would fall out of the scope of the tax. For instance, house mortgages, bank borrowing by SMEs, or contributions to insurance contracts would not be included. Spot currency exchange transactions and the raising of capital by enterprises or public bodies, including e.g. public development banks through the issuance of bonds and shares on the primary market, would not be taxed either.