Treasury and Taxation: EU Financial Transaction Tax Gets Green Light

October 11, 2012

Eleven countries approve measure to tax trades but the UK holds out.

Euro CloseupEleven of the EU finance ministers who gathered on October 9 agreed to the introduction of a financial transaction tax in most of the block except, notably, for the main financial center, Britain. Enough countries supported the measure, backed by Germany and France that the EU can now go ahead with the project.

The Austrian foreign minister, Maria Fekter, said, “We will have a discussion and we will try to convince others, because I think this is a stabilizing measure and it would create funds for joined European safety nets, such as for example the deposit insurance scheme or the resolution of banks to reduce debt.”

Others were less enthusiastic. The foreign ministers of the Netherlands and Sweden both opposed the tax. Sweden, in particular, has an informed right to do so, having implemented and then pulled a 0.5 percent financial transaction tax of its own in 1984 after its equity market fell sharply. “We still think that the financial transaction tax is a very dangerous tax,” Swedish Finance Minister Anders Borg said.

Bankers and treasurers have expressed fear in the past that the FTT will reduce liquidity in the financial markets, causing inefficiencies and wider margins. Also, net hedging operations could be hard hit because even intra-group transactions will be subject to the tax.

According to a draft directive on the FTT, issued in February 2012, the FTT will apply to:

  • All financial transactions on the condition that at least one party to the transaction is established in a member state
  • A financial institution irrespective of whether it is acting in a principal or an agency capacity
  • Among others, pension funds, traditional and alternative funds, treasury companies of non-FIs, and potentially even individuals
  • Secondary market and derivatives transactions

The draft says the FTT will not apply to:

  • Primary market and spot transactions
  • Insurance contracts
  • Cash payments

Most details need to be worked out. For example, there is no consensus on what to do with the proceeds from the tax, although there is widespread agreement that they should help defray the cost of bailing out the banks.

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