Wednesday, December 28, 2011

EU Tax Commissioner Says Financial Transactions Tax Will Advance in 2012

A consensus is growing in the European Union on the efficacy of a financial transactions tax that should presage quick progress towards enactment of legislation in 2012, said EU Tax Commissioner Algirdas Semeta. In remarks before a European Parliament group, the Commissioner noted that a financial transactions tax is the only policy instrument that can ensure that financial institutions make a fair and substantial contribution to public finances, can discourage high frequency trading, and can reduce competitive distortions. Neither a financial activity tax, nor a bank levy, nor a levy on bonuses, nor exposing financial services to VAT would deliver on all these goals, he remarked.

The European Commission has recommended that a financial transaction tax be applied to all financial transactions, in particular those carried out on organized markets such as the trade of equity, bonds, derivatives, and currencies. The tax would be levied at a relatively low statutory rate and would apply each time the underlying asset was traded.

After a first debate on the Commission’s proposal for a financial transactions tax in the ECOFIN in November, the Tax Commissioner has detected the start of a convergence of views among the Euro zone members. The proposal must now be analyzed in detail by the Member States.

It is important to be clear on the scope of this tax, emphasized the Commissioner. The financial transactions tax will tax the trading typically carried out by financial institutions. The day-to-day financial activities of ordinary citizens or companies will not to be taxed, he pointed out, and neither would be the primary markets where companies and governments issue securities necessary to finance their activities. Therefore, financing of the real economy such as industrial projects will not be directly affected, he added, thereby mitigating the risk of adverse economic effects.

Moreover, the tax rate proposed is very low in order not to penalize medium and long term investing strategies. Only aggressive and very active investment strategies, such as high frequency trading or very actively-managed pension and hedge funds, will be affected.

In addition, the proposal contains measures to fight tax avoidance effects. In this respect,together with low tax rates differentiated per product group, the Commission proposes taxation at the place of establishment of the financial institution. In combination with other administrative tax cooperation instruments and regulatory reforms aiming at more financial market transparency, it will adequately target tax avoidance. As a result, reasoned the Commissioner, delocalization would not be an option for avoiding the tax, unless the operator wants to completely abandon European markets and clients in the European markets.