The divisive tax

Eleven countries support financial tax scheme but businesses are worried about impact on growth.

A tax on financial transactions in 11 European Union member states will become a test of how far groups of countries are willing to plough ahead on economic legislation and leave others behind.

The tax, proposed for a limited set of countries by the European Commission on 14 February, does not unite all the eurozone countries – indeed, Luxembourg is one of its most vocal critics. Yet it does give an indication of what a future two-track Europe might look like as economic and monetary union is strengthened.

The Commission has been able to propose such legislation under the enhanced co-operation procedure, introduced under the Treaty of Amsterdam in 1999, which enables a minimum of nine member states to bring in new EU legislation. The Commission was forced into this aapproach after it became evident last year that not all member states would approve its original EU-wide proposal, put forward in September 2011.

Enhanced co-operation has been used twice before, for divorce law and to establish a unitary patent system. But this time is different: the taxation is so closely linked to member states’ economies and could have an impact on non-participating countries.

Algirdas Šemeta, the European commissioner for taxation, has deliberately come up with a broad-brush approach, to prevent investors simply moving out of the 11 countries to avoid the tax.

The Commission has proposed that both the buyer and the seller in any transaction will be taxed, as long as one of them is based in one of the participating countries. Furthermore, it has added to its 2011 proposal by stating that transactions of instruments issued in one of the 11 countries will be taxed even if neither buyer nor seller is based there. “All transactions with an established link to the FTT zone” is how the Commission describes its approach to where the levy should be imposed.

This has alarmed non-participating countries and businesses inside and outside the EU. A spokesman for the UK said that the plan would “hit growth for the countries taking part” while more work was needed to examine the impact on those outside. The US Treasury said it was worried about the consequences for US investors.

Simon Lewis, chief executive of the Association for Financial Markets in Europe, described the plan as “regrettable” and “another brake on economic growth”. He said that the imposition of “an FTT with extra-territorial reach” ran counter to the G20 objective to support policies that lead to sustainable and balanced growth.

Fact File

Countries taking part
Austria, Belgium, Estonia, France,
Germany, Greece, Italy, Portugal, Slovakia, Slovenia, Spain. Other EU
countries can join at any time.

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The tax rate
0.1% for transactions of
shares and bonds. 0.01% for derivatives trades.

Revenue
€30
billion-€35bn a year (according to the European Commission).

Where the
revenue will go
Still to be decided. Member states must make that
decision. The Commission says that a portion of it should go into the
central EU budget, resulting in a reduction in contributions for
participating member states. Some countries believe they should keep the
money.

Next steps
The plans will now be discussed by member states. All
27 will take part in the talks and their input will be taken into
account but only the 11 countries taking part will be able to vote on
the final text – and they must all agree. The European Parliament will
be consulted, but MEPs cannot alter the proposal.

Even with a Commission proposal in place for countries broadly in favour of the tax, much remains undecided. Non-participating countries will demand evidence that the tax will not have an impact on growth and the single market. The Commission will have to prove that it can get over legal hurdles such as the risk of double-taxation and the challenge of making clearing-houses based outside of the EU co-operate.

Even some participating countries still worry about the impact the tax could have on their borrowing costs.

All those problems will have to be overcome, even before the thorny question of what to do with the revenue is answered. What is clear is that a financial transaction tax in more than half of the eurozone will be another step towards a different, less homogeneous EU.