2 Taxation and financial services
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15282/10
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COM(10) 549
| Commission Communication: Taxation of the financial sector
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| Legal base | —
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| Document originated | 7 October 2010
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| Deposited in Parliament | 22 October 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 16 November 2010
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| Previous Committee Report | None
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| To be discussed in Council | None planned
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| Committee's assessment | Politically important
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| Committee's decision | For debate in European Committee B
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Background
2.1 The June 2010 European Council concluded that "[t]he
EU should lead efforts to set a global approach for introducing
systems for levies and taxes on financial institutions with a
view to maintaining a world-wide level playing field and will
strongly defend this position with its G-20 partners. The introduction
of a global financial transaction tax should be explored and developed
further in that context". The October 2010 European Council
added that "Further work is necessary on levies and taxes
on financial institutions, at both the international and internal
levels. In line with the Council's report,[2]
there should be further coordination between the different levy
schemes in place in order to avoid double-charging. The Council
is invited to report back to the European Council in December
2010. The different options regarding the taxation of the financial
sector should also be examined, as well as good practices aimed
at impeding tax havens and tax evasion".
The document
2.2 The Commission Communication and an accompanying staff working
document assess key issues relating to two proposals for new forms
of taxation in the financial sector — Financial Activities
Taxes and Financial Transaction Taxes. The proposals are assessed
against three main policy objectives:
- enhance the efficiency and stability of financial markets
and reduce their volatility and the harmful effects of excessive
risk-taking;
- ensure that the financial sector makes a fair
and substantial contribution to public finances; and
- enable the financial sector to contribute to
fiscal consolidation in the aftermath of the crisis.
The Commission, noting that individual Member States
are implementing national tax measures, asserts that:
- such developments should take
place in a coordinated framework to avoid tax arbitrage, double
taxation and to create a level playing field in the EU;
- any tax measures must be seen in broader context
of regulatory reform; and
- the cumulative impact of such measures should
be borne in mind.
2.3 On a Financial Transaction Tax (FTT) the Commission
says that:
- a FTT is designed to tax the
value of single transactions and is applied to a broad range of
financial instruments;
- estimates of the potential revenue and the economic
impact vary considerably, depending on the base and scope of the
tax;
- the revenue generated would be largely collected
in a limited number of countries, where trading activities are
concentrated, creating an uneven distribution; and
- the tax burden is likely to be partly distributed
to clients and "average customers" and would increase
the cost of capital for governments and companies.
The Commission:
- considers whether a broad-based
FTT could help stabilise financial markets by reducing short-term
speculative trading, concluding that it would need to be levied
directly on such speculative transactions and that such transactions
would be impossible to define; and
- concludes that a FTT could be an appropriate
option as a revenue raiser if applied globally, whereas there
are significant avoidance and competitive risks for an EU only
FTT.
2.4 On a Financial Activities Tax (FAT) the Commission
says that:
- a FAT, in its most extensive
form, falls on total profit and remuneration and, in contrast
to a FTT, taxes corporations;
- it can alternatively be designed to target economic
rents and/or risk;
- the IMF estimates the potential revenue from
a 5% extensive FAT to be €75 billion (£65.3 billion)
for 22 developed economies, which the Commission extrapolates
for the 27 EU economies to be €35 billion (£30.5 billion);
- a FAT would be better suited to raise revenue
for national consolidation, because the geographical distribution
of revenues is more even than a FTT;
- the effects on market efficiency and economic
stability depend on the exact design of the tax;
- an extensive a FAT does not directly affect the
existence of high-speed trading, as it is levied on all activities;
and
- the incentives for relocation resulting from
a EU FAT could be mitigated, but Member States acting in isolation
could create an uneven playing field.
The Commission concludes that:
- a FAT, in its most extensive
form, can be interpreted as a tax on a proxy for total value added
generated by financial sector companies; and
- there is potential for a FAT in the EU context.
2.5 The Commission's overall conclusions are that
there is greater potential for a Financial Activities Tax at EU-level,
but that further technical work is needed. It says that it will
therefore launch a comprehensive impact assessment of both options
in order to be in a position to make appropriate proposals on
policy actions by the summer of 2011.
The Government's view
2.6 The Exchequer Secretary to the Treasury (Mr David
Gauke), noting that this is a consultative document that makes
no legislative proposals, says that:
- if any legislative proposals
in this area were to be suggested, they would need to be examined
carefully for any implications for UK tax policy;
- any such proposals would be subject to the usual
scrutiny process and all EU tax matters require unanimity; and
- the Government will continue to engage with the
Commission as this work develops.
2.7 The Minister continues that:
- as announced in the June 2010
Budget, the Government is currently examining the costs and benefits
of a FAT on certain profits and remuneration;
- it will continue to work with international partners
monitoring developments in this area and the Commission Communication
is a valuable contribution to the evidence base;
- there would need to be further discussion around
whether the FTT model offers a stable and efficient mechanism;
- the IMF's report to the G20 on how the financial
sector can make a fair and substantial contribution[3]
endorsed a FAT but did not offer an endorsement of FTTs;
- the Commission makes some links to the VAT treatment
of financial services, indicating that a FAT in particular is
a possible proxy for the VAT exemption for financial services;
and
- while it must be recognised that exemption does
not mean "VAT free" (financial service firms are unable
to deduct much of the VAT they pay on expenditure), there are
clearly possible overlaps which the Government believes need to
recognised as this work goes forward.
Conclusion
2.8 Clearly the possibility of taxation specific
to the financial services sector raises important issues. Therefore
we think it would be appropriate for this Commission Communication
to be debated in European Committee B and we so recommend. Such
a debate would allow Members to examine the case for an EU level
proposal for such taxation and for the choice between a Financial
Transactions Tax and a Financial Activities Tax.
2 See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/117209.pdf.
Back
3
"A Fair and Substantial Contribution by the Financial Sector,
Final Report for the G-20", June 2010: see http://www.imf.org/external/np/g20/pdf/062710b.pdf. Back
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