After a first (failed) attempt by the European Commission to introduce a common system for a broad based FTT in the EU in 2011, the proposal has gained new life when 11 Eurozone countries were able to agree on the proposal and move it forward under the ‘enhanced cooperation framework’. France, Germany, Belgium, Austria, Portugal, Greece, Slovenia and Estonia were the initial eight countries on board. Italy, Spain and Slovakia joined the group as well, thereby surpassing the nine members limit required. This updated FTT proposal looks! very similar to the one original proposed by the European Commission. It is thought that the tax will be levied at 0.1% on shares and bonds and at 0.01% across derivative contracts subject to approval. Last October, the European tax commissioner confirmed that there were no legal obstacles to the FTT proposal by the 11 countries. The plan will have to be accepted by EU members and to receive support from the EU Parliament before it can be implemented.
The FTT, also called Tobin tax, was originally seen as a way to discourage excessive speculation (through reducing the level of financial transactions) without discouraging any other activity. It is argued that – in theory – such a tax should lead to better decision-making in the financial sector and to a just contribution of the financial sector to the EU economy.
The UK has so far been opposed to the introduction of the FTT at EU level on the grounds that it would! harm the competitiveness of the UK financial sector and of Lo! ndon in particular. Currently, the majority of financial transactions in Europe come through London. According to the http://www.longfinance.net/fcf-gfci.html” target=”_blank”>Global Financial Centres Index, London ranks as the top financial centre in the world in terms of competitiveness along the dimensions of people, infrastructure, market access, business environment and general competitiveness. According to http://www.thecityuk.com/financial-services-in-the-uk/uk-by-region/” target=”_blank”>City UK, the financial services sector already contributes to 13% of UK GDP and to employment as it counts around 2 million people across the country. Introducing the FTT without the US and other major financially relevant countries is seen as presenting major risks for the UK economy and the City of London.
In reality and should the FTT be implemented, the picture appears rather mixed. On the one hand, the FTT is seen as a way for the financial sector to contribute to public finances and to stabilise market. Moreover, it could reduce the fragmentation of the single market through a single system for taxing financial transactions covering at least 11 member states. On the other hand, however, the FTT has been criticised for the possible inefficiencies it would create as large financial institutions will be likely to pass their costs on to consumers and investors, thereby diminishing further the prospects for growth. Further, and as it won’t be a global measure, this is likely to favour the displacement of financial dealings elsewhere to avoid taxation.
To some extent should the FTT be introduced by the 11 countries, the tax would be applied on any transaction on bonds, shares and derivatives where one of the parties is based in a country wher! e the tax is introduced. Given this, it seems that City and ot! her UK f inancial institutions are likely to be liable despite the UK’s refusal to sign up.
Food for thought:
- Is the FTT really going to have an impact in terms of financial stability?
- To what extent is the FTT merely replacing something that already exists in various countries. e.g. the Stamp Duty?
- What other implications could the implementation of the FTT by other European countries have on financial activity in the UK?
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The Long Finance Community team