A Europe-wide financial transaction tax (FTT) was initially proposed by the European Commission (EC) in September 2011 with the following objectives:
- To tackle fragmentation of the Single Market that an un-coordinated patchwork of national financial transaction taxes would create
- To ensure that the financial sector makes a fair and substantial contribution to public finances and covers the cost of the crisis, particularly as it is currently under-taxed compared to other sectors
- To create appropriate disincentives for financial transactions which do not contribute to the efficiency of financial markets or to the real economy
Agreement on the proposal could not, however, be reached by all 28 Member States so 11 countries requested ‘enhanced co-operation’. Enhanced co-operation is when, in the event it proves impossible to reach unanimous agreement within a reasonable period, a group of at least 9 Member States decides to move ahead with an initiative. In October 2012, the EC proposed a decision to allow enhanced co-operation on the FTT which was then backed by the European Parliament in December and agreed by European Finance Ministers at the ECOFIN in January 2013.
A proposal on the FTT to be applied by the 11 participating Member States, or FTT zone, was published on 14th February 2013 by the European Commission.
The 11 Member States are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia. Others can join later by request.
The scope of the tax is all asset classes, covering transactions carried out by financial institutions on all financial instruments and markets, once there is an established economic link to the FTT zone.
The “residence principle” is a core element to guard against the relocation of financial transactions. Under this principle, what counts is who is party to the transaction, not where it takes place. If a financial institution involved in the transaction is established in the FTT zone, or is acting on behalf of a party established in this zone, then the transaction will be taxed, regardless of where in the world it takes place.
The EC has added the “issuance principle” which means that a transaction will also be taxed, whenever and wherever it takes place, if it involves financial instruments issued in one of the participating Member States.
It is also worth noting that under the proposed Directive the 11 participating states will not be allowed to introduce taxes on financial transactions other than this FTT and VAT. So it seems likely that the new French and Italian FTTs will adapt to this EU proposal if adopted.
The applicable tax rates for the EU FTT are 0.1% (based on consideration) for shares and bonds, units of collective investment funds, money market instruments, repurchase agreements and securities lending agreements, and 0.01% (based on notional amount) for derivative products.
These are proposed minimum rates and participating Member States would be free to apply higher rates if they wished.
The tax would have to be paid by each financial institution involved in the transaction – buyer and seller – though this varies for some transaction types (e.g. repurchase agreements).
There is no mention of differing rates for exchange-traded and off-exchange trades, nor for high-frequency trades (HFT).
Depository receipts do not appear to be within scope of the FTT. However, their use is to be heavily scrutinised in terms of the extent to which they have replaced trading in the underlying security to ensure they are not being used for the purpose of tax avoidance.
Another interesting point is that in cases where the tax has not been paid in a timely manner, each party to the relevant transaction should be held jointly and severally liable for the outstanding payment. For electronic transactions the tax should be paid immediately, with a 3-day time limit deemed a suitable period for manual processing.
Discussions on the definition of possible uniform collection methods and implementing measures are yet to take place.
Spot currency transactions are not taxable, while currency derivatives are.
Commodity derivatives contracts are taxable, while physical commodity transactions are not.
The EC is keen to protect the real economy, excluding from the FTT day-to-day financial activities of ordinary citizens and businesses (e.g. insurance contracts, mortgage and business lending, credit card transactions, payment services, deposits, spot currency transactions, etc).
Primary issuance of shares and bonds, units of collective investment funds and certain restructuring operations will not be taxed.
Also excluded from the scope of the FTT are financial transactions with the European Central Bank and national central banks, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM).
Unlike the new French and Italian FTTs there are no exemptions in the February 2013 Commission proposal for pension funds, intra-group transactions, stock lending or repurchase agreements.
Consultation on the proposal is on-going with the European Parliament, the European Economic and Social Committee and national parliaments. All 28 Member States may participate in the discussions, but only the 11 participating in enhanced co-operation will have a vote and they must agree unanimously before it can be implemented.
On 18th June 2013 ECON MEPs voted to go ahead with the EU FTT under enhanced cooperation with some changes to proposed tax rates and exemptions.
The Parliament adopted the amended text on 3rd July and, although only acting in a consultative capacity, the Parliament can influence the final outcome.
At a meeting of EU finance ministers on 6th May 2014 a revised implementation timeline emerged along the lines of a gradual introduction of the tax, with a first phase in place by 1st January 2016 and details to be defined by the end of 2014. Negotiations are on-going and though originally planned for 2016, finance ministers from participating countries continue to debate the technical points and the tax is unlikely to come into force before 2018.
Last updated 18th July 2016