Sunday, November 06, 2011

US Will Pursue Financial Crisis Responsibility Fee Rather Than Financial Transactions Tax

At the recent G-20 Summit, President Obama clarified that, while he shares the objectives that German Chancellor Merkel and French President Sarkozy have in ensuring that the financial sector contributes an appropriate share to the resolution of crises, the US will pursue the financial crisis responsibility fee that his Administration has proposed rather than the financial transactions tax proposed by the European Commission.

Mike Froman, Deputy National Security Advisor for International Economic Affairs, said that the President made these points in conversations both with President Sarkozy and with Chancellor Merkel. While the US and EU are pursuing separate approaches, noted the White House advisor, both jurisdictions share in commonality the idea that the financial sector has an appropriate role to play in contributing to the resolution of the crisis, adding that there is broad consensus between the EU and the US about the ability of each to pursue this in their own way in whatever way they see to be most effective.

In their final communiqué from the Cannes Summit, the G-20 leaders acknowledged the initiatives in some member countries to tax the financial sector for various purposes, including a financial transaction tax, inter alia, to support development.

The President’s FY 2012 budget would impose an annual financial crisis responsibility fee based on liabilities of U.S.-based bank holding companies, broker-dealers, and companies that control broker-dealers and insured depository institutions. A principal rationale for the financial crisis responsibility fee is that it would provide a deterrent against excessive, and potentially risky, leverage and assets for the largest firms. The proposed rate has not been determined, but is expected to be approximately 0.075 percent of an applicable financial firm’s covered liabilities. An unspecified discount applies to certain sources of funding considered more stable, including long-term liabilities.

The fee would only apply to firms with worldwide consolidated assets of $50 billion or more. Firms with worldwide consolidated assets of less than $50 billion would not be subject to the fee for the period when their assets are below the threshold. United States subsidiaries of foreign firms that fall into these categories and that have assets of $50 billion or more also would be subject to the fee.

The European Commission has proposed an EU-wide financial transactions tax 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 tax is estimated to raise approximately €57 billion every year.