EU Proposed Financial Transaction Tax - Fortune Or Folly?

Author:Mr Peter Green, Thomas A. Humphreys, Jeremy C. Jennings-Mares and Richard Jerman
Profession:Morrison & Foerster LLP

Since the financial crisis, there has been frequent talk of the introduction of a financial transaction tax. This tax, often referred to as "Tobin tax" after its original advocator, James Tobin, in the 1970s, would impose a levy on individual transactions undertaken by a financial institution. The subject has been discussed at G20 summits since Pittsburgh in 2009,1 and the European Commission (the "Commission") has made no secret of its desire to implement the taxation across its 27 Member States.

On Wednesday 28 September in the annual State of the Union address, José Manuel Barroso, President of the Commission, announced the long anticipated proposal for a European financial transaction tax. The tax, if implemented, would impact financial transactions between financial institutions from 2014, charging 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts. The Commission believes the tax, with the potential to raise 57 billion euros per year, would "ensure that the financial sector makes a fair contribution at a time of financial consolidation"2 noting, among other things, the significant government bailouts to support the financial sector during the crisis.

There are significant doubts, however, as to whether the proposal will receive the necessary support to be passed, with business and financial groups in opposition and the UK Treasury unwilling to back such a tax, particularly if it does not have global effect.

Current Financial Taxes

One of the functions of the proposed financial transaction tax identified by the Commission is to harmonise and establish minimum standards for similar taxation provisions that have already been established by a number of European Member States. According to their research, ten countries in the European Union already have a form of taxation on financial transactions running at national level, and the new regulations would complement the existing provisions, providing an element of consistency across the markets, whilst still allowing Member States to build upon the tax with further domestic charges.

The UK, for example, has already implemented taxation in the wake of the financial crisis, responding to public reaction brought about by the substantial bail-outs that UK banks received. In January 2011, the UK introduced a bank levy.3 This taxation is based on the balance sheet positions of each financial institution at the end of the year, rather than imposing tax on every transaction that the institution engages in. The balance sheets are judged, depending on the different amounts of risk-weighted liabilities that the bank owns and the taxation is calculated from that weighting and is therefore designed to impose greater liability in respect of activities considered more...

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