4 Taxation: a financial transaction tax
| (33179)
14942/11
+ ADDs 1-20
COM(11) 594
| Draft Directive on a common system of financial transaction tax and amending Directive 2008/7/EC
|
| Legal base | Article 113 TFEU; consultation; unanimity
|
| Document originated | 28 September 2011
|
| Deposited in Parliament | 30 September 2011
|
| Department | HM Treasury
|
| Basis of consideration | EM of 12 October 2011
|
| Previous Committee Report | None
|
| To be discussed in Council | Not known
|
| Committee's assessment | Legally and politically important
|
| Committee's decision | Not cleared; further information requested
|
Background
4.1 In October 2010 the Commission presented a Communication,
Taxation of the financial sector, in which it discussed
the possibility of a financial transaction tax (FTT) or a financial
activities tax (FAT) for the EU. It concluded that:
- an FTT could be an appropriate option as a revenue raiser
if applied globally, whereas there were significant avoidance
and competitive risks for an EU only FTT;
- an FAT, in its most extensive form, could be
interpreted as a tax on a proxy for total value added generated
by financial sector companies; and
- there was potential for an FAT in the EU context.[3]
4.2 In February 2011 the Commission opened a public
consultation on an FTT and the Government responded to this on
19 May 2011.
4.3 In June 2011 the Commission presented its proposals
for the Multiannual Financial Framework for 2014-2020. These included
the idea of a FTT as a new resource to finance the EU Budget.[4]
The document
4.4 This draft Directive would introduce a FTT. The
Commission says that the objective of the proposal is to:
- avoid fragmentation in the
single market for financial services, in the context of the increasing
number of uncoordinated national tax measures in place;
- ensure that the financial services sector makes
a fair contribution to covering the costs of the recent crisis
and to ensure a level playing field with other sectors from a
taxation perspective; and
- create appropriate disincentives for transactions
that do not enhance efficiency of the financial markets and complement
regulatory measures aimed at avoiding future crises.
The Commission adds that the proposal also has the
aims of:
- opening up a new revenue stream
to gradually displace an element of current national contributions
to the EU Budget, as suggested in its proposals for the Multiannual
Financial Framework for 2014-2020; and
- contributing to the international debate over
how a FTT could be effectively designed and implemented.
The Commission suggests that a FTT could raise €57
(£49) billion per year.
4.5 The main provisions of the draft Directive are
that it would:
- apply to a very broad range
of financial instruments, consistent with the definitions contained
in the Markets in Financial Instruments Directive (secondary trading
in equities and bonds, together with equity, interest rate, foreign
exchange and commodity derivatives);
- not apply to primary markets, or currency spot
transactions, with the aim of ensuring that the tax would not
contravene the free movement of capital;
- not apply directly to day to day financial activities
relevant for citizens and businesses, for example, mortgage lending,
insurance contracts or payment services;
- not apply to transactions with the EU, the European
Atomic Energy Commission, European Central Bank, the European
Investment Bank and central banks of Member States;
- apply to a broad definition of financial institutions
(including banks, insurers, asset managers, pension funds), with
definitions drawn from existing Directives;
- not apply to central counter parties, central
securities depositories and international central securities depositories,
when exercising such functions;
- apply on the basis of residence — the tax
would be collected directly from EU financial institutions involved
in transactions of the relevant financial instruments, for example,
a transaction involving a French bank would necessitate the collection
of the tax from that French bank;
- provide that a financial institution be treated
as established in a Member State where it had been authorised
by a Member State to act as a financial institution, had a registered
seat in a Member State, its permanent address or usual residence
was located in a Member State, it had a branch within that Member
State or was acting on behalf of a financial institution established
in a Member State;
- apply where at least one of the parties to the
transaction was established in a Member State — so the transaction
itself would not have to be undertaken within the EU for the tax
to apply;
- provide that where this proposal and the Capital
Duties Directive (concerning indirect taxes on the raising of
capital) fall into conflict, this proposal would take precedence;
- place the responsibility on individual Member
States to collect the tax where the financial institution is established
in their jurisdiction and to ensure that the tax is levied accurately
to prevent evasion, avoidance and abuse; and
- allow the Commission to adopt delegated acts
to specify measures on the prevention of evasion, avoidance and
abuse.
4.6 The Commission proposes that:
- Member States would set minimum
tax rates of 0.1% (10 basis points) of the value of equity and
bond transactions and 0.01% (one basis point) on the notional
value of derivatives transactions;
- this tax rate would apply to all financial institution
counterparties to the transaction established in the EU;
- if, for example, a derivatives transaction took
place between two EU financial institutions, this would mean that
the tax rate applied to the transaction would be 0.02% (two basis
points); and
- if a derivatives transaction took place between
an EU financial institution and a non-EU business the tax applied
would be on the EU financial institution and, therefore 0.01%
(one basis point).
The Commission suggests that the proposed rates are
low enough to minimise delocalisation risks.
4.7 The draft Directive is accompanied by an impact
assessment, which together with its annexes and an executive summary
runs to over 1,200 pages.
The Government's view
4.8 The Financial Secretary to the Treasury (Mr Mark
Hoban) reminds us that, in the context of the Multiannual Financial
Framework for 2014-2020, the Government strongly opposes any new
EU taxes to fund the EU Budget and opposes the Commission's proposal
in this area. The Minister then comments on fundamental rights
compliance and subsidiarity. On the former he says that adoption
of an FTT could be challenged, notably under Article 1, Protocol
1 of the European Convention on Human Rights (peaceful enjoyment
of possessions).
4.9 On subsidiarity the Minister says that:
- the Government is concerned
that the subsidiarity principle has not been applied correctly
by the Commission in drafting this proposal;
- the Commission argues that FTTs must be adopted
by the EU and not on a national basis because "an EU definition
is essential to avoid the relocation of transactions and market
participants";
- it argues that a uniform definition at EU level
is necessary to ensure the proper functioning of the single market
and to avoid distortions of competition within the EU —
thus the FTT proposal satisfies the subsidiarity principle;
- first, it is unclear why the Commission feels
that an EU FTT would deliver on its stated objectives better than
domestic taxes;
- there also appears to be a contradiction in that
the proposal sets minimum rates for FTTs, with the aim of avoiding
relocation;
- financial services are not confined to an EU
marketplace — EU financial institutions are global concerns;
- to introduce an EU wide tax would not avoid the
relocation of transactions and market participants — only
a global tax could retain a level playing field for the financial
sector and retain the competitiveness of EU financial institutions;
- imposition of the tax would also heighten the
risk of relocation within the EU; and
- for these reasons the Government believes that
the proposal violates the subsidiarity principle.
4.10 The Minister introduces his remarks about the
policy implications of the draft Directive by saying that:
- the proposal has wide ranging
policy implications for the UK and EU, given the broad scope of
the proposed tax;
- the UK has the largest financial sector of any
EU economy; and
- this therefore implies that the UK will face
the most significant economic impacts as a consequence of the
tax.
4.11 The Minister next discusses the Commission's
impact assessment accompanying the proposal, saying that:
- it assesses the impacts of
the proposed tax in a range of areas and is supported by a range
of annexes examining specific aspects of the tax in more detail;
- in some cases views presented in the assessment
do not seem consistent with evidence provided in the more detailed
annexes;
- the assessment does not provide an overall estimate
of the impact of the tax on the financial services sector in the
EU;
- it acknowledges, however, that risk of relocation
of activity is significant;
- in calculating revenue potential of the tax the
assessment assumes a 10% relocation of equity and bond markets
and a 70% or 90% relocation of trading in derivatives;
- it acknowledges that regulatory measures are
likely to be more effective than an FTT in promoting financial
stability and that there is no clear evidence that an FTT would
reduce market volatility;
- although the Commission's explanatory memorandum
estimates revenues from the tax at €57 (£49) billion
per year, the assessment gives a central estimate of €37
(£32) billion per year;
- the difference may be due to the assessment assuming
total tax rates of 0.1% for equity and bond trades and 0.01% for
derivative trades, while the Commission assumes these rates apply
to both sides of the transaction;
- these revenue estimates do not take account of
any reduction in other tax receipts caused by the introduction
of a FTT, for example the impact on corporation tax receipts;
- the Commission does not attempt to calculate
individual Member States' contributions to revenue raised;
- the Government, however, estimates that over
50% of revenues raised across the EU would derive from activity
in the UK;
- the UK share of revenues raised is sensitive
to assumptions on the extent of relocation of derivatives markets
— a lower level of relocation of derivatives market activity
would increase the UK's share of total revenues raised;
- the Commission asserts that the GDP loss associated
with its FTT proposal is expected to be limited to around 0.5%
in the long-run;
- the assessment, however, does not include an
assessment of the overall GDP impact of the FTT as proposed;
- GDP figures in the assessment are derived from
a model of a more limited tax applying only to equities and bonds;
- this model is unable to capture relocation effects;
- with a tax rate of 0.1% the model finds that
EU GDP drops 1.76% in the long-run, with an accompanying drop
in employment of 0.2%;
- a tax rate of 0.2%, as implied by the Commission's
explanatory memorandum, leads to a 3.43% long-run drop in EU GDP
and 0.34% drop in employment;
- these effects stem from the increase in business's
cost of capital caused by the tax;
- the assessment points out that the significant
economic impact of the tax derives from the cascading effect of
the tax, whereby transactions in the same production chain are
taxed several times; and
- taking these figures in turn and before taking
into account relocation effects, in real economic impacts it can
be estimated that a reduction of 1.76% of EU GDP equates to a
fall in economic output of €216 (£186) billion, a fall
in employment of 0.2% equates to a loss of 478,000 jobs, a 3.43
% fall in EU GDP equates to a fall in economic output worth €421
(£362) billion and a 0.34% fall in employment equates to
a loss of 812,000 jobs.
4.12 Turning to the Government's own view, the Minister
tells us that it has identified a range of issues for concern,
which it is actively seeking to understand more fully and to carefully
consider the implications. He outlines these for us, saying that:
- the Commission has chosen a
legal base, Article 113 TFEU, which relies upon demonstrating
that this tax is necessary to ensure the continued functioning
of the single market;
- this poses particular problems if some Member
States wished to progress this through enhanced cooperation;
- the Commission proposal admits that the tax would
be likely to lead to significant relocation of financial activity
away from the EU, while the potential impact of the tax on activity
carried out by EU institutions in other jurisdictions risks damaging
the international competitiveness of the EU's financial services
sector;
- the migration of business away from London, and
other EU financial centres (including Paris, Frankfurt), would
also see negative impacts on the infrastructure in place to support
these activities, such as legal, administration, IT and accountancy;
- making the EU's financial sector internationally
uncompetitive is inconsistent with aims for growth and job creation;
- the Government does not believe that it is right
to impose a tax which will clearly impact on economic growth across
the EU, with the UK bearing a disproportionate share of this impact;
- the impact on market volatility is difficult
to confirm — there is no clear evidence that the proposal
would improve market stability or that it would effectively target,
for example, high volume currency derivative trading;
- to attempt this would first require agreement
on what transactions should be targeted in trying to reduce market
volatility;
- even if agreement could be reached on defining
a set of efficiency undermining transactions, it would then be
necessary to understand if the proposal could effectively do this,
while not detrimentally impacting on transactions that do enhance
the efficiency of the financial markets;
- the Commission's proposed tax rates fail to take
any such conditions into account, only that they are significant
compared to typical current transaction costs in the markets concerned
and in many cases would lead to transaction costs more than doubling;
- this would not only potentially dis-incentivise
transactions that do enhance efficiency of the markets, but would
be likely to lead to a dramatic reduction in market liquidity,
impacting on ordinary investors;
- it is unclear whether the proposed tax would
be an economically efficient way of raising revenue;
- the impact assessment refers to a 2010 study
for the European Parliament which "concludes that other taxes
would be more promising as a tool for raising revenue";
- in its report to the G20 last year, the IMF did
not offer an endorsement of a FTT;
- the tax would increase not just direct costs
of trading itself but also costs related to complying with the
tax, such as administrative burdens;
- there are serious doubts about whether the proposed
tax would be a sustainable source of revenue;
- Sweden introduced a FTT in the 1980s, which led
to the volume of bond trades falling by 85% and futures trades
by 98%;
- it also did not deliver a sustainable revenue
stream, and in fact the revenue it did deliver was largely offset
by declines in revenue from other taxes;
- the tax would not just affect banks and bankers,
but also increase costs for consumers through this tax being paid
by insurers, asset managers, pension funds, industry including
manufacturing and the broader service sector;
- the Commission proposal would forbid Member States
from maintaining existing national transaction taxes, such as
the UK's stamp tax on shares regime;
- abolition of this tax would deny the UK a simple,
effective and sustainable revenue stream of over £3 billion
per year;
- the stamp duty differs from the EU proposal in
that the UK's carefully targeted stamp tax on shares (STS) is
fundamentally different from the Commission's all-encompassing
and poorly designed FTT;
- STS is efficient, enforceable and minimises impacts
on market liquidity;
- the FTT as currently proposed by the Commission
is inefficient, easy to avoid through relocation and would lead
to dramatic reductions in market liquidity;
- the Government has already introduced a bank
levy which reflects the risks banks pose to the financial system
and the wider economy;
- the Commission's argument that the FTT is justified
to ensure financial institutions make a fair contribution to recovering
the costs of the crisis takes no account of existing national
measures to achieve this objective, such as the UK bank levy;
- to the extent that the FTT would cause certain
types of trading to cease to take place in the UK, this would
have negative impacts on revenues from existing tax regimes, such
as corporation tax and income tax; and
- the provision that the Commission could adopt
delegated acts to specify measures on prevention of evasion, avoidance,
and abuse causes concern, because the Commission might seek to
use this power to agree important aspects of the regime, rather
than just focusing on the methods through which the draft Directive
would be complied with.
4.13 Finally, the Minister summarises the Government
view, saying that:
- the proposal creates a number
of areas of concern for the UK; and
- whilst the Government is not opposed to FTTs
in principle, these should only be contemplated at a global level.
Conclusion
4.14 We are clear that this proposal needs to
be debated. However, we do not wish to recommend such a debate
until we have an indication from the Government as to whether
this proposal is being dismissed out of hand or whether the text
will be discussed before the matter is voted on (at which point
we presume the Government would veto the proposal, unless a similar
measure had been adopted globally).
4.15 We take this opportunity, however, to ask
the Minister about the legal base of the proposal. The case law
of the Court of Justice of the EU makes plain that the choice
of legal base for an EU measure must rest on objective factors,
which include the aim and content of the measure, to enable judicial
review by the Court.[5]
In addition, the Court has held that the legal base must enable
a determination of whether the EU is competent to act, consistent
with the principle of conferral of powers under Article 5(2) TEU.[6]
However, it is only the predominant legal base that should be
cited: where a measure has a twofold purpose but one is predominant
and the other merely incidental, the measure must have a single
legal base, corresponding to "the predominant aim or component".[7]
Exceptionally, where a measure "pursues a number of objectives,
or has several components", which are closely linked but
none of which is secondary to the other, more than one legal base
will have to be cited, unless the legislative procedures for each
legal base are incompatible.[8]
4.16 With these rules in mind, in terms of the
aim of the proposal we note that the first recital says that it
"stems from the desire to ensure the financial sector contribute
to covering the costs of the crisis and that it is taxed in a
fair way vis-à-vis other sectors for the future;
to dis-incentivise excessively risky activities by financial institutions;
to complement regulatory measures aimed at avoiding future crises
and to generate additional revenue for general budgets or specific
policy purposes" — four aims in all, but none referring
to the internal market. The second recital does, however, concern
the internal market, but it serves as a justification for action
at EU level rather than setting out an objective: it states that
the features of the FTT should be harmonised at EU level in order
to prevent distortions and thus ensure the proper functioning
of the internal market through unilateral measures taken by Member
States. The first two recitals are consistent with the introductory
paragraph of the explanatory memorandum, where we note in particular
that "[t]he purpose of the proposal is to provide a common
European approach to this issue that is consistent with the
internal market."
4.17 In a similar vein, we note that the "objectives"
of the proposal in the Commission's impact assessment are stated
to be, in order: "[r]aising revenue and adequate contribution
from the financial sector to tax revenues"; "[l]imiting
undesirable market behaviour and thereby stabilizing markets";
and last (and seemingly least) "[i]nternal market aspects
(avoid double taxation and distortion of competition)".[9]
This again is consistent with the two stated policy goals of the
proposal in the impact assessment: "[f]irstly, the generation
of additional tax revenue. Secondly, the use of taxes as a tool
to improve the functioning of the financial markets in general."[10]
4.18 From the this contextual analysis we think
there are strong arguments to conclude that the predominant aim
of the FTT is not "to ensure the establishment and the functioning
of the internal market and to avoid distortion of completion",
as it must be should Article 113 TFEU be the correct legal base;
rather it is to ensure the financial sector contributes to the
economic losses it caused; to dis-incentivise excessively risky
activities by financial institutions; and to raise revenue for
the EU budget. We see nothing in the content of the proposed Articles
to contradict this view.
4.19 So we ask the Minister to say whether he
agrees with us that the proper functioning of the internal market
appears to be a secondary aim of the proposal; and if he agrees,
to say whether he thinks the EU has the powers conferred upon
it to legislate for the purposes described in the paragraph above,
which are also set out in the first recital.
4.20 If, however, the Minister thinks the internal
market is the predominant aim, we ask him to say whether he is
satisfied that the national financial transaction taxes adopted
by ten Member States so far, and, we are told by the Commission,
to be adopted by an unspecified number of other Member States,
are likely a) to lead to future obstacles to trade in the internal
market and b) that this proposal will prevent such obstacles arising,
according to the test laid down by the Court of Justice.[11]
4.21 We are currently considering the compliance
of this proposal with the principle of subsidiarity (the House
has until 5 December 2011 to issue a Reasoned Opinion on non-compliance
with subsidiarity). But we would be grateful for replies to our
questions above before we come to a final conclusion on subsidiarity.
Accordingly, we ask the Minister to respond in time for our meeting
of 9 November 2011.
4.22 In the meantime the proposal remains under
scrutiny.
3 (32095) 15282/10 + ADD 1: see HC 428-ix (2010-11),
chapter 2 (24 November 2010) and Gen Co Debs, European
Committee B, 7 February 2011, cols 3-23. Back
4
(32986) 12478/11 + ADDs 1-2 (Section 2.2 of the Commission's Explanatory
Memorandum, Section 2 of ADD 1 and Part III of ADD 2) (32994)
12475/11 + ADDs 1-3 (Section 3): see HC 428-xxxv (2010-12), chapter
1 (7 September 2011). Back
5
See Case C-155/07, para 34, for example. Back
6
Case C-370/07, paras 46 and 47. Back
7
Case C-155/07, para 35. Back
8
As above, paras 36 and 37. Back
9
Section 4.1-4.3, pp. 25-28. Back
10
Section 3, p. 9. Back
11
See C-301/06, paras 63, 64 and 71. And C-58/08, para 33 (cited
in the impact assessment at p. 23). Back
|
