Documents considered by the Committee on 24 November - European Scrutiny Committee Contents

2 Taxation and financial services



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COM(10) 549

Commission Communication: Taxation of the financial sector

Legal base
Document originated7 October 2010
Deposited in Parliament22 October 2010
DepartmentHM Treasury
Basis of considerationEM of 16 November 2010
Previous Committee ReportNone
To be discussed in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionFor debate in European Committee B


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.


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  Back

3   "A Fair and Substantial Contribution by the Financial Sector, Final Report for the G-20", June 2010: see Back

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