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EU TRANSACTION TAX: ADDITIONAL BURDENS ON BANKS?

March 2012 - Tax & Private Client. Legal Developments by Wolf Theiss.

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The finance ministers of the European Union met again last week to discuss the plan of introducing a single EU financial transaction tax. According to the plan, a 0.1 percent tax would be levied on bond and capital transactions, while a 0.01 percent tax would be charged on derivatives transactions.

Up to 57 billion euro in tax could be collected by the EU budget, which would generate substantial surplus revenue for an EU budget which is currently only financed with Member State contributions.

Talks have been underway in the EU for some time in relation to the introduction of a tax on financial transactions. The concept is not new — approximately forty countries apply a similar tax all over the world. In the past year, 29 billion euro was collected by these states through the various financial organisations.

“The European Commission put forth the initial proposal for the introduction of the transaction tax on the level of the EU. The Commission argued that currently banks assume a relatively small tax burden in comparison to other participants in society, and the financial sector would more fairly contribute to public dues by way of the new tax. The single EU tax would furthermore remedy imbalances on the internal market, as presently, Member States tax financial services in significantly varying degrees and this seriously distorts competition” said Dr. Balázs Békés, tax partner of Faludi Wolf Theiss Attorneys at Law.

In addition to the Commission, several Member States support the idea, including Germany, France, Austria, Italy and Spain. The transaction tax could even have beneficial effects for Member States in the long term if the collected tax revenues could replace the payments made by the Member States. Presently the EU does not collect independent revenues, as there is no single EU corporate tax or personal income tax, but Member States contribute to the EU budget with their payments. If financial transactions were taxed, according to some plans the collected revenues would partly or entirely replace the payments made by Member States and ease the burdens of Member States. Others argue that the revenues collected from a possible transaction tax could be allocated to the implementation of Community objectives, such as the slowing down of climate change or development.

There are also many opponents to the proposal. Great Britain, the Czech Republic, the Netherlands and Sweden expressed serious doubts about the transaction tax. The opposition of the British has recently posed an obstacle to the process aiming at the introduction of the single transaction tax. The British, who have been taxing financial transactions since 1989, oppose the approval of the proposal because they are concerned that the introduction of the new tax would significantly throttle the British economy; currently 80 percent of European financial transactions are conducted through London.

At the meeting of EU finance ministers held a few days ago, several problematic issues were discussed, but no major breakthrough was achieved. As a continuation of the meeting, the Council is expected to hold a new political debate on the issue on 21 June 2012.

Decision making is particularly difficult in the European Union in relation to tax issues, as such decisions must be unanimously approved by the Member States. Some experts argue that it is possible that upon German and French pressure, Member States who support the idea will introduce the transaction tax in a narrower scope, in the framework of so-called “enhanced cooperation”, possibly as early as the end of this year. “Enhanced cooperation” is enabled by the Lisbon Treaty, but in the framework of this only participating Member States would assume any obligations. Non-participating Member States may decide any time to subsequently assume these commitments.

“Beyond the possible implementation of “enhanced cooperation” in a narrower scope, it is currently very doubtful whether the EU transaction tax will be introduced. The proposal of the Commission must be approved by the Member States with a unanimous vote, and this means that the veto of any of the 27 Member States may prevent final approval. The date of the approval of the single EU tax therefore remains quite uncertain” said Dr. Balázs Békés.

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