Bloomberg News

EU Proposes Financial-Transactions Tax to Start in 2014

September 28, 2011

(Updates with comment from the BBA in fourth paragraph.)

Sept. 28 (Bloomberg) -- The European Union proposed a financial-transactions tax that would take effect in 2014 and raise about 57 billion euros ($78 billion) a year, prompting renewed opposition from the U.K.

The proposal would apply a tax of 0.1 percent on trading of stocks and bonds, with a 0.01 percent rate for derivatives contracts, the European Commission, the EU executive, said today in Brussels. Those minimum rates would apply throughout the 27- nation bloc. The measure would deliver “a fair contribution from the financial sector,” EU Tax Commissioner Algirdas Semeta said.

European governments are split over the merits of a transactions tax, while British banks warn that an EU-only measure would drive business to other regions. The U.K., home to Europe’s biggest financial center, has opposed the move, which requires the unanimous support of all EU countries. The U.K. Treasury reiterated today that such a levy would need to apply globally.

“The consensus is that anything less than a globally applied, uniform tax would distort the markets and reward dissenting low-tax regimes rather than raising significant revenue,” the British Bankers’ Association, which lobbies for the country’s banking industry, said in a statement. “The U.K. would be particularly affected by any such tax as it is the world’s financial center.”

‘Frictions’

EU member states will discuss the proposal before the commission presents the plan to the Group of 20 nations at a November summit. U.S. Treasury Secretary Timothy F. Geithner said this month that a transaction tax could create “frictions” that would worsen the impact of a crisis without offering a protective reduction in volatility or risk-taking.

“Europe needs to focus on rebuilding its economies and fostering recovery. This proposal will do nothing to support either of those aims,” the Association for Financial Markets in Europe, a lobby group that represents banks and brokers including Goldman Sachs Group Inc., Deutsche Bank AG and UBS AG, said in an e-mailed statement. “Europe’s leaders should reject this proposal as potentially damaging to their economies and the financial system.”

The proposed tax is aimed at banks, investment firms, insurance companies, pension funds, stockbrokers and hedge funds, among other types of financial firms, the EU said. Spot foreign-exchange trades would not be covered by the tax, while currency derivatives are included.

Bond Auctions

Transactions with the European Central Bank and other central banks wouldn’t be covered by the tax, according to the proposal. It also features an exemption for the “primary market,” which includes sovereign and corporate bond auctions.

“The tax would aim at covering 85 percent of the transactions that take place between financial institutions,” according to the proposal. The EU is seeking to insulate households and small businesses from the levy, and says banks could charge “not excessive” fees such as a 10-euro fee on a 10,000-euro stock purchase.

The tax would “ensure that the financial sector makes a fair contribution at a time of fiscal consolidation,” the commission said. It would affect market behavior and financial- industry business models, such as high-frequency and automated trading, the EU said.

Additional Tax

The BBA said “banks conduct transactions for their customers, therefore any tax on transactions would be an additional tax on customers.”

The plan drew support from Oxfam International and Catholic Development Agencies, who said the measure would increase justice and provide funding for environmental and social goals. Oxfam said the U.K. has existing taxes that haven’t had a big negative effect on London business, suggesting that the EU proposal also would not do harm.

French President Nicolas Sarkozy and German Chancellor Angela Merkel have called for the EU to introduce its own transactions tax irrespective of whether other regions follow suit. The finance ministers of Spain and Belgium said on Sept. 17 that the euro area’s 17 governments should consider introducing their own transaction tax if no agreement were possible at the global or EU level.

Tax Commissioner Semeta, speaking in a press briefing today in Strasbourg, France, downplayed the prospect of narrowing the proposal’s scope.

‘Clear Benefits’

“There are clear benefits of the proposal for the United Kingdom,” Semeta said. “It will give additional revenues to our member states including the United Kingdom. Many member states need consolidation efforts and these additional revenues would be also beneficial for the U.K. At the same time, it would reduce the contribution of the United Kingdom to the EU budget.”

U.K. Business Secretary Vince Cable earlier today said taxation is a “national competence issue” and EU proposals for a levy on financial transactions cannot be forced on the U.K. Cable was speaking to Bloomberg Television from Istanbul.

Today’s announcement follows a 2010 proposal that failed to draw agreement among member nations. The financial industry says a transaction tax would affect the broader economy because banks would pass on costs to clients.

An impact assessment accompanying the proposal says that the plan would have a “long-run” negative impact of 0.5 percent of gross domestic product.

--With assistance from Jonathan Stearns in Strasbourg and Jon Menon, Liam Vaughan and Andrew Atkinson in London. Editors: Jones Hayden, Patrick G. Henry

To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net


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