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The European Commission recently proposed an EU-wide financial transaction tax (FTT) on a range of transactions to which a financial institution is a party. In simple terms every time a bank, stockbroker, insurance company, pension fund, financial leasing company, special purpose vehicle, collective investment scheme or holding company buys or sells stocks, shares, bonds or derivatives (for themselves or on behalf of a customer) they will pay a tax of between 0.01 per cent (for derivatives) or 0.1 per cent (for other financial transactions), although member states will be free to set higher rates.

The FTT will be charged on the gross value of the transactions rather in the way that UK stamp duty or stamp duty reserve tax is charged. It matters not whether the party selling has made a profit or loss on the transaction.

The stated purpose of the tax is to raise funds to pay for bank bail-outs following the financial crash and in addition it is expected that as the tax is payable each time a transaction takes place, the effect will be to curb high frequency low margin trading which is seen as high risk and has been blamed for a lot of the recent financial debacle.

The Commission propose that the FTT will apply from 1 January 2014. However, this will require the unanimous approval of all 27 member states, at least some of whom may be concerned that the burden of the tax will fall disproportionally on those states with developed financial sectors, such as the UK, and that the proceeds will be substantially used to fund the EU budget becoming a de facto EU tax which the UK claims is illegal under existing treaties.

The UK government are also concerned that unless any such tax is introduced on a global basis then the tax can easily be avoided by relocating outside the EU. If, as is planned, this tax is only imposed in Europe many financial institutions may relocate all or most of their trading functions to other financial centres such as New York, Hong Kong or Singapore thus adversely affecting the economies of those EU states with major financial sectors.

There is no expectation that a global FTT is ever going to be acceptable and the UK has made it clear that it will veto an EU-wide tax (it will not be alone in this either). However eleven member states (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain) have applied to introduce a FTT under the EU enhanced cooperation procedure. This procedure permits certain measures to be implemented by a group of member states, without the consent of any other member states who do not participate in that measure.

There are doubts as to whether such a move is permissible under current EU law particularly as the tax will still be charged on transactions carried out in non participating states where one of the parties is located in a participating state or where the financial instrument (say stocks or shares) relates to an entity located in a participating state or listed on a stock or other financial exchange in a participating state. So a UK bank selling shares in a French company to a US client will have to pay the FTT.

This proposal is likely to end up in the courts so time will tell whether it ever gets off the ground. However if it does it could cause major problems for financial centres such as London or Edinburgh.

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Category: Taxation

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