Friday, June 01, 2012

European Parliament Approves Financial Transaction Tax with Cross-Border Reach

The European Parliament approved the European Commission’s proposal for a financial transactions tax that would impose a 0.1 percent tax for shares and bonds and a 0.01 percent tax on derivatives. The approval is non-binding since Member States make individual tax decisions. But Parliament suggested using the enhanced cooperation provision to enable a subgroup of nine EU Members to adopt the tax if all the Members cannot agree.

The opinion maintains the Commission’s proposed timetable: a December 31, 2013 deadline for Member States to adopt implementing laws and December 31, 2014 for entry into force of these laws. 

The adopted text adds to the Commission proposal an issuance principle under which financial institutions located outside the EU would be obligated to pay the financial transaction tax if they traded securities originally issued within the EU. For example, shares in Siemens, originally issued in Germany and traded between Hong Kong and US financial institutions would be subject to the tax. The residence principle proposed by the Commission was retained, which means that shares issued outside of the EU but subsequently traded by at least one financial institution established within the EU would be subject to the tax.

Financial transactions conducted by pension funds are exempt from the tax. In addition, the text exempts transactions made on the primary market, such as purchasing securities from the issuer when such securities are first placed on the market.

In an effort to make evading the financial transaction tax  potentially far more expensive than paying it, the approved text links payment of the tax to the acquisition of legal ownership rights. This means that if the buyer of a security did not pay the tax, he or she could not be legally certain of owning that security.  As financial transaction tax rates would be low, Parliament expects this risk to far outweigh any potential financial gain from evasion.

The tax rate was set 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.

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, said EU Tax Commissioner Algirdas Semeta.  In recent 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.