Only three of 27 EU Member States are clearly in favour.
The European Commission’s proposal for an EU wide tax on financial transactions (FTT) has generated much public and political discussion since it was published on September 28, 2011. President Sarkozy this week announced proposals for a French FTT to be introduced in July 2012, and the issue has been high on the agenda of many EU Member States’ governments, leading to a British veto of recent proposals for fundamental EU reforms addressing the ongoing economic crisis.
The FTT is set to apply to a whole range of financial transactions, including those with derivatives. Not only financial institutions per se but also both holding companies and SPVs will be regarded as taxpayers.
Notwithstanding the potential economic benefits cited by the Commission, there has been significant criticism of the proposal, in particular as to whether it would in fact achieve its economic objectives and as regards its potential negative impact on EU Member States financial sectors and GDP as a whole.
KPMG’s EU Tax Centre, with the help of KPMG member firms and their EU Tax and Financial Services Tax networks, has prepared an informal ´FTT Thermometer´ which displays KPMG member firms’ understanding of the overall position of their respective governments on the FTT proposals.
The review shows that of the 27 Member States, currently only three Member States are clearly in favour, with three clearly against. That leaves another 21 in varying degrees of support, opposition or indecision.
“In Russia, it is hardly likely that the introduction of such a tax would be approved by the business community. One only has to recall the storm of protest provoked by the attempt to impose additional tax charges on the interest payments on Russian companies’ eurobonds. On the other hand, our financial sector is still so poorly developed (for example, the amount of open interest on exchange-traded derivatives in Russia makes up 0.014% of the global total), that it is unlikely that the tax would raise significant income for the budget. Furthermore, it is obvious that ‘an attempt to cut a piece of meat from a newborn calf will most probably lead to a fatal outcome for it’,” comments Mikhail Klementiev, Head of Financial Services at KPMG in Russia and the CIS.
“With only three countries clearly in favour, the Commission’s proposal obviously has a long way to go” says Hugh von Bergen, head of KPMG’s Global Financial Services Tax Group. “Some of the Member States which are nominally in favour of the proposal support this subject to an FTT being introduced globally, and the reality is that global introduction is not going to happen, at least not in the foreseeable future. So seen from this angle, the prospects of introduction by the EU seem very uncertain” cautions von Bergen.
“Despite certain Member States’ concerns about relocation and the impact of the proposal on GDP, the Merkel/Sarkozy initiative to push forward the FTT, if necessary on a ‘short-track’ basis with just a few EU Member States, is a strong message to the ‘doubting’ EU Member States” notes Mikhail.
“The Swedish experience of introducing an FTT back in the 1980’s, which caused the bottom to fall out of the Swedish financial markets, is a vivid illustration of what many fear may happen if the FTT is introduced in the EU and may well be driving a lot of the current opposition to the proposal. In these difficult economic times governments are going to be looking very critically at anything that may drive business away or anything that reduces GDP” warns Mikhail.
“As our overview shows, a lot of Member States still have reservations about the Commission’s proposal” says Mikhail. “These are being fuelled by reports such as that produced last December for the Italian Association of Financial Intermediaries and the Nordic Securities Association, that concluded that the ‘proposed FTT is likely to have a significant and highly uncertain negative impact on the EU economy – not just for international financial centres such as London, but for all business and investors in the EU’.”
“So far little attention has been paid to the question who gets the revenue from an EU FTT” notes Mikhail. “The Commission sees this as a kind of EU tax that would at least in part support the EU budget. However, even if the principle of an EU FTT was accepted, the question how the revenue is shared out – as between the EU and Member States but also between the Member States themselves - is likely to be hotly debated.” Warns Mikhail.
Economic background to EU FTT proposal
A tax on financial sector transactions would be an answer to a number of problems largely associated with the financial sector crisis, according to the explanatory memorandum to the European Commission’s draft directive. In particular it would:
The European Commission’s original indications were that the directive could generate revenues of around 57 billion euros annually at EU level. Notwithstanding these assumed benefits, the European Commission estimated a negative impact on GDP of between 0.53% and 1.76%. Since then the European Commission is understood to have amended this estimate down to between 0.2% and 0.3%. However, the assumptions underlying these estimates are complex and controversial.
Scope of the FTT proposal
The FTT would be imposed on transactions involving financial instruments carried out by at least one EU based financial institution. The FTT has been designed to cover a wide range of financial transactions, including the purchase and sale of financial instruments such as shares and bonds but also the conclusion of derivatives agreements such as options and futures relating to securities or commodities.
The draft directive provides for a minimum level of FTT of 0.1 percent for financial transactions other than those related to derivatives agreements and 0.01 percent in the case of derivative agreements.
It is only aimed at taxing transactions involving financial institutions and not transactions carried out by ordinary individuals or businesses, such as the conclusion of insurance contracts, nor should it affect most primary market operations. Financial institutions are broadly defined under the draft directive to include traditional financial institutions such as banks and investment entities, but could also cover holding companies, and special purpose vehicles, such as securitization vehicles. Financial institutions can be subject to the FTT even if they act in the name or for the account of another person.
In order for the directive to apply, at least one of the parties to the transaction would need to be established in a Member State. Non EU-based financial institutions may, in certain circumstances, also become subject to the FTT if the transaction involves an EU counter-party. The FTT is chargeable for each financial institution, i.e. the overall rates applicable to a transaction involving two EU counterparties would be 0.2 percent and 0.02 percent for non-derivative and derivative transactions respectively.
Reactions to the FTT proposal
There has been considerable public and political discussion since the proposal was issued. A clear concern that has been raised is the risk that financial sector business will relocate outside the EU to jurisdictions that do not impose such a tax. For this reason a number of governments are understood to only be willing to support the proposal if the FTT is introduced globally. Notwithstanding this concern, both Germany and France have indicated that, if agreement could not be reached across the whole EU (27 Member States), the tax could be introduced by a smaller group, such as the eurozone members. Some Member States are understood to take the position that introduction in the EU would be sufficient to address this issue. Questions have also been raised as to whether the FTT is actually the most appropriate instrument to address the economic objectives put forward by the European Commission.
Notes to editor
The FTT thermometer is based on a snap-shot survey carried out between January 18, 2012 and January 20, 2012 within KPMG member firms of their understanding of their respective governments’ positions, for example as expressed in public reactions from relevant public figures or in informal discussions. The FTT thermometer contains an element of subjectivity and does not necessarily reflect positions expressed in official publications. Moreover taking into account the politically sensitive nature of the FTT initiative, positions within the EU could suffer significant changes in a relatively short timeframe.