The European Commission’s proposals for a financial transaction tax (FTT) to be implemented in 11 EU member states have attracted widespread opposition. Of particular concern to financial institutions is the very broad scope of the proposed tax, its extra-territorial reach and the likely impact of the tax on the financial markets and wider economy. While little progress has been made toward implementing this, we offer a summary of the latest activity from Brussels.
At the end of January 2015, the participating Member States released a joint statement confirming their renewed commitment to reach an agreement on an EU FTT.
- It clarified that the tax should be based on the ‘principle of the widest possible base’ (it is assumed this means derivatives remaining in scope) and low tax rates.
- The target start date remains 1 January 2016.
- No further detail on the tax was included in the joint statement.
However, at the end of February 2015, the EU FTT working group met to discuss the proposed tax and it is understood no progress has been made on any of the key issues.
- The European Commission is understood to be arguing that taxing market-making activities would complement and support existing financial market regulation (although it could also have something to do with the fact that the European Commission sees the taxation of market makers as a key source of revenue).Other parties are known to support a market makers exemption.
- The European Commission is still arguing in favour of the ‘residence principle’. Very broadly, this is where the tax applies to financial institutions depending on where they (and their counterparties) are located.
- There is clearly no agreement on how the tax revenue will be collected and how collection mechanisms would apply to financial institutions resident outside the EU.
- Some Member States have complained that the collection mechanism is being discussed before agreement has been reached on the scope of the tax.
In summary, the following fundamental questions remain outstanding:
- Will derivatives fall within the scope of the EU FTT?
- What will be the tax base for financial instruments within scope?
- Will taxation depend on the residence of the financial institution (the residence principle) or where the financial instrument was issued (the issuance principle)? Or perhaps both?
- How will tax revenue be collected from institutions located all over the world (the original February 2013 proposal was oddly silent on this issue)?
- Is the proposed start date of 1 January 2016 feasible? Whilst there is no certainty, this appears unlikely.
The current Presidency of the Council of the European Union is Latvia. As Latvia is not one of the 11 participating Member States, some believe the proposed EU FTT is not high on its agenda and negotiations may falter.
The next working group is not scheduled until May, leaving very little time to agree on the scope and mechanics of the proposed tax.
KPMG will continue to keep firms apprised of any veering in the wind.