Towards a Financial Transactions Tax? - European Union Committee Contents

CHAPTER 3: assessing the commission's proposal

51.  We asked our witnesses for their assessment of the specific details of the Financial Transaction Tax model as set out by the Commission (the main elements of the proposal are set out in Box 3 below).


The principal design elements of the commission's proposal[75]
The principal design elements of the Commission's proposal include:
  • A broad-based tax applying to secondary trading in equities and bonds, as well as equity, interest rates, foreign exchange and commodity derivatives.
  • A tax rate of 0.1% for bonds and shares and 0.01% for other transactions including derivatives;
  • The application of the 'residence principle'—defined as taxation in the Member State of establishment of the financial institution, regardless of where the transaction took place;
  • The exclusion from the scope of the FTT of transactions on primary markets both for securities (shares and bonds) and currencies;
  • The exclusion of certain financial transactions, for example with the European Central Bank (ECB) and with national central banks, from the scope of the FTT.

a) The residence principle

52.  The so-called 'residence principle'—defined as taxation in the Member State of establishment of the financial institution, regardless of where the transaction took place—is a key aspect of the Commission's proposal for an FTT. A financial institution is to be treated as established in an EU Member State (and therefore liable for the tax) where any of the following apply:

  • It has been authorised by a Member State to act as a financial institution;
  • It has a registered seat in a Member State;
  • Its permanent address or usual residence is located in a Member State;
  • It has a branch within that Member State; or
  • It is a party to a financial transaction with a financial institution or other party established in a Member State.[76]

53.  We discussed with witnesses how the residence principle was likely to work in practice.[77] The Government's understanding was that the tax would apply to each counterparty to the transaction established in the EU. So, for example, if 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% (regardless of where the trade took place, whether in the EU or otherwise). 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, therefore 0.01%.[78]

54.  The Commission itself confirmed that, in the event that both counterparties were deemed as resident in the EU, then they would both pay in their country of establishment. It also added that a transaction between two counterparties not deemed resident in the EU would not be a taxable event. This would hold in cases where two EU banks or brokers only act as an intermediary or broker a deal such as an interest-rate swap in the name of two other banks which are not deemed to be resident in the EU. Thus the 'booking-centre function' of financial centres will not be affected by the FTT. However, the Commission stressed that in the event of a transaction between an EU-resident counterparty and a counterparty situated outside the EU, both parties would have to pay, in the country of establishment of the counterparty resident in the EU. The Commission added that the safety net of 'joint and several liability' would facilitate tax collection from non-EU parties. The Commission concluded that this means that counterparties not resident in the EU would indeed be subject to the tax.[79] In addition, the Commission's Explanatory Memorandum refers to EU and international instruments for cross-border recovery of taxes through mutual assistance.[80]

55.  Even those who were sympathetic to the case for an FTT were sceptical about the effectiveness of the Commission's proposal. Sony Kapoor told us that he had doubts about the legitimacy and the effectiveness of the residence principle.[81] David Hillman argued that the principle was "not robust enough",[82] and the TUC were not convinced that the residence principle was the most effective method of implementing an FTT.[83]

56.  Likewise, the BBA asserted that the residence principle was "a misnomer" because many of the determinants of residence are quite unrelated to where the institution was actually 'resident'. They foresaw significant difficulties in terms of the practical application of the residence principle.[84] The Investment Management Association (IMA) argued that the definition of 'residence' was very wide and was intended to ensure that "the FTT net is far-reaching."[85] In Nigel Fleming's view, the residence principle was "extraordinarily extraterritorial".[86]

57.  Other witnesses questioned the practical difficulties arising from the residence principle. The BBA argued that the FTT would be a costly tax to collect, since there will be multiple charging points.[87] AIMA stressed the enormous difficulty which the Commission would face in convincing international trading intermediaries to bear additional administrative costs in collecting and remitting the tax back to Europe.[88] The Financial Secretary to the Treasury stated that in a number of cases it is uncertain how the residence principle will operate in practice, where the participants are not clearly identifiable or their place of residence is not easily established. He added that it was far from clear how the proposal would work where, for example, a non-EU bank engaged with a non-EU broker regarding a transaction involving multiple investors based in different jurisdictions but including at least one based in the EU. He said that this would entail the non-EU bank knowing the proportions of transaction relating to each individual investor, and how much and to whom to pay for each element of the transaction.[89] On the other hand, the Commission argued that enforceability of the residence principle was relatively easy, as existing EU regulations provide the necessary information for effective tax collection. It added that details of enforcement will have to be implemented by Member States.[90]

58.  Commissioner Šemeta has sought to defend the proposed residence principle. Yet we find the widespread criticism of the proposal, including by advocates of an FTT, chastening. The Commission has made clear that counterparties not resident in the EU would nevertheless be liable for the tax when engaging in a transaction with an EU-resident counterparty. The Commission point to the provisions for joint and several liability, and the operation of mutual assistance. This is bound to be controversial. It is likely that non-EU financial institutions and countries would react to the proposal extremely negatively, with potentially serious consequences for the EU financial sector. Our witnesses have also pointed to particular practical difficulties, for instance in defining the place of residence and in determining how it would work in practice. In the light of this, it is our view that the residence principle proposed by the Commission is both wholly impractical and unworkable.

b) Scope and the potential for relocation

59.  Commissioner Šemeta justified the residence principle on the basis that it would prevent the significant relocation of financial activities. He argued that it was "very innovative", since "it does not matter where the transaction takes place; what matters is whether the person involved in the transaction has an economic link with the EU or not. If this is the case, even if the transaction takes place in Singapore or Hong Kong, it will be subject to taxation." As a result, he argued, also taking into account the low tax rate that the Commission proposed, relocation would not make sense.[91] Yet the Commission's Impact Assessment itself suggests that an EU-wide FTT would entail a relocation of transactions on securities markets by 10%, on spot currencies by 40% and on derivatives instruments by 70% or 90%.[92]

60.  In our view, the residence principle would create a strong incentive for financial institutions to bypass the FTT by themselves relocating. This could be achieved either by the institution itself physically relocating, or by setting up a subsidiary outside the EU.

61.  Several witnesses referred to the risk of relocation. The Association of Corporate Treasurers (ACT) believed that larger international groups would divert group funding or group hedging to more favourable regimes to the detriment of European financial markets.[93] Nigel Fleming agreed, warning that it could make firms' products uncompetitive.[94] Similarly, the Alternative Investment Management Association (AIMA) pointed to the risk of both transaction and physical migration away from Europe (especially London[95]) to New York, Singapore or Hong Kong. They argued that the FTT would encourage market participants who are not based within the EU to seek counterparties based outside the EU and thus avoid the FTT. They also argued that it would discourage investors based outside the EU from using EU asset managers to make transactions on non-EU exchanges.[96]

62.  Likewise BlackRock suggested that it was highly likely that financial institutions were going to invest considerable energy in seeking to limit their exposure to an FTT.[97] Bart Van Vooren, Assistant Professor, Faculty of Law, University of Copenhagen, warned that "implementing the financial transaction tax in a regionally or nationally fragmented way exponentially increases the risk of financial engineering to avoid the tax; with financial institutions fleeing the area where it has been implemented."[98]

63.  For John Vella, the risk of avoidance was one of the principal weaknesses of the FTT proposal. In his view, "a broad-based residence-based FTT, like that proposed by the Commission, is easy to avoid". However, the stamp duty model is much more difficult to avoid.[99] Mr Vella felt that there was a "double standard" in the Commission's case. He argued that, since the Commission warns that taxes adopted by individual countries would create a risk of relocation, then, by the same token, that argument would also apply if the EU adopts an FTT and the rest of the world does not.[100]

64.  Several witnesses referred to the experience of Sweden as an illustration of the risk of relocation. Sweden introduced a 0.5% tax on the purchase or sale of shares in 1984 and, according to the BBA, by 1990, some 30% of all Swedish equity trading had moved offshore, and more than 50% of all Swedish trading had moved to London. The volume of bond trading declined by 85%.[101] However, Commissioner Šemeta sought to reassure us that the Commission had "studied very carefully" the Swedish experience with an FTT and that they would avoid the same pitfalls. The Commissioner also told us that Sweden did not achieve a critical mass for introducing such a tax, which was why the Commission was pushing for a tax across all 27 Member States.[102] Other witnesses stressed that the Swedish tax was "badly designed" and fundamentally different from the Commission's proposal.[103]

65.  Some witnesses argued that the risk of relocation was exaggerated. Richard Gower argued that a well-designed FTT could significantly reduce the risk of business relocation. He cited international examples as demonstrating that it is possible to operate a tax successfully even on a regional basis. He also pointed out that every tax is avoided to some extent, and that to apply a "zero avoidance" bar to an FTT was unreasonable.[104] The TUC did not think that the rate of taxation of financial services was the main determinant of where a financial operation is based.[105] David Hillman pointed out that, when a bank bonus tax was introduced in the UK, many financial institutions threatened to relocate. In the event, none did.[106] However, the Financial Secretary to the Treasury disagreed, stating that one of the defining characteristics of the financial services sector is "just how mobile the industry is."[107]

66.  We have concluded that the residence principle proposed by the Commission is unworkable. Furthermore, we strongly disagree with the Commissioner's argument that the residence principle will overcome the significant risk of relocation to avoid the FTT. We remain deeply concerned that, should the Commission implement its Financial Transaction Tax model within the EU alone, financial institutions would relocate outside the EU, either by the institution itself physically relocating, or by setting up a subsidiary outside the EU, with serious consequences for the EU financial services industry and for the health of the EU economy as a whole. In our view, only an FTT implemented on a global scale will prevent EU-resident institutions being placed at a significant competitive disadvantage in comparison with leading global competitors. Yet, as we have already concluded, the chances of a global tax being introduced are extremely slim.

c) The economic impact of the tax on economic growth and market liquidity

67.  The potential economic impact of an FTT was a major point of discussion during the course of the inquiry. Witnesses focussed on two key concerns: the negative implications for growth and the potential reduction in liquidity in the financial markets. They are discussed in turn below.


68.  The European Commission's own Impact Assessment suggested that the introduction of an FTT would result in an overall total decrease of EU GDP in the long term of between 0.5% and 1.76%, depending upon the impact of certain "mitigating elements".[108]

69.  The majority of witnesses were highly alarmed at these figures, arguing for instance that an FTT would act as a "tax on growth".[109] The BBA considered it "extraordinary and counterintuitive that the European Commission should countenance introducing a tax which it acknowledges would significantly reduce the GDP of the EU."[110] The Association for Financial Markets in Europe (AFME) argued that "at a time when the risk of recession in Europe is increasing, the focus of EU policy should be on measures that enhance growth and jobs and not on measures that both discourage investment and fail to take account of the new regulatory requirements that are in train."[111]

70.  The CBI argued that the Commission's lower estimate was based on a number of questionable assumptions, including only factoring in the tax on securities and ignoring the tax on derivatives. They further pointed out that the Commission "has been unable to factor in the impact of a reduction in GDP caused by the new tax and points out that the deterioration of the tax base 'could go well beyond revenue shortfall'".[112] Richard Woolhouse told us that "this may be one of the only taxes proposed that will fail to raise any revenue."[113]

71.  Commissioner Šemeta regretted that "some of the figures that were derived in the preparatory stage of the impact assessment, such as the famous impact on GDP of 1.76%, were used to undermine the proposal." He explained that the design of the tax led the Commission to estimate the negative impact on GDP to be 0.53% in the long run. He told us that, since the approximate timeframe for this impact is a period of 40 years, the annual impact would be "negligible"—about 0.01% per annum. He further argued that all taxes have a negative impact on GDP when viewed in isolation, and that, in comparison with corporate income tax, the impact of an FTT would be low.[114]


72.  Several witnesses argued that an FTT would reduce liquidity and increase volatility in the marketplace.[115] For example, ISDA argued that a sudden reduction in the number of financial transactions would decrease liquidity and make the markets more volatile, thereby affecting the ability of banks to build up capital reserves.[116] The BBA agreed.[117] BlackRock argued that the experience of other countries which have adopted similar financial sector taxation schemes points to reduced liquidity in financial markets. With fewer trades the tax base would shrink and revenues from the tax would decrease. They argued that this meant that an FTT would not be a reliable source of revenue.[118]

73.  Notwithstanding this, others argued that the effect of an FTT on market liquidity was in fact difficult to predict, or could even be beneficial. The TUC told us that it was "extremely unlikely that even a negative impact would be significant enough to cause problems", as the FTT would simply reduce the incentive for high-frequency algorithmic trading, which, as we have seen, they considered to have a destabilising effect in any case. Duncan Weldon told us that was "the point of the financial transaction tax—as well as raising revenue, to stop certain types of trading."[119]


74.  As some of these observations suggest, much of the criticism that has been expressed has revolved around perceived flaws in the Commission's Impact Assessment. Several witnesses were deeply critical of the Impact Assessment. The BBA pointed out that "the [mitigating] factors are described in the Impact Assessment as being 'at the expense of scientific rigour' and carrying 'large caveats and uncertainties'."[120] AIMA noted the "extremely broad range" of revenue estimates that were "based upon many assumptions. We would certainly hope that, for a proposal with such significant implications, the analyses and estimates as to potential impact would be calculated with considerable precision."[121] David Hillman, a supporter of an FTT, told us that the models in the Impact Assessment "are now widely seen as flawed; therefore, the conclusions drawn from them are also flawed."[122]

75.  John Vella, Clemens Fuest and Tim Schmidt-Eisenlohr agreed that there were limitations in the models used by the Commission to estimate the revenue potential of these taxes and the size of the economic distortions they produce.[123] The IMA claimed that the cost assessment set out in the Impact Assessment underestimated the cost by half as it considered the tax effect on only one side of the transaction. They argued that, since the proposal is for the tax to apply both to the buyer and the seller, the fall in GDP could therefore be twice as high as the Commission's estimate.[124]

76.  Similarly, BlackRock argued that the figures in the Impact Assessment were based on a tax on purchases only and therefore underestimated the harm done to the real economy. Furthermore, they argued that these figures only took into account the increased costs of capital without modelling the cost of any decline or relocation of the financial sector outside the European Union.[125] ISDA added that the Commission's model was of limited value since it did not reflect the increased cost of hedging for corporate institutions, and also failed to reflect the multiple and cascading charges of the FTT.[126]

77.  Commissioner Šemeta told us that "it was our political decision to be fully transparent with our impact assessment, which was why we published not only the impact assessment but in the annexes ... all the work that was done in preparing the impact assessment." Yet, as he acknowledged, this assessment had been used to undermine the Commission's own case.[127]

78.  It is vital that the potential impact of a proposal with such significant implications as the Commission's Financial Transaction Tax model should be calculated with more rigour and reliability. We are therefore alarmed at the degree of criticism to which the Commission's Impact Assessment has been subjected. Whilst we note the Commissioner's argument that preparatory material was published in order to promote transparency, it remains the case, as he has conceded, that the document has significantly undermined the Commission's case.

79.  We are particularly concerned that the Commission's model may have failed to take into account all of the potential negative impacts on growth, and that the effects could therefore be more pronounced than the Impact Assessment suggests. The impact would be exacerbated further should our fears of significant relocation be realised. Commissioner Šemeta has suggested that the impact may be limited to a decrease in GDP of 0.53% in the long term. Yet even that figure is concerning. The potential impact on liquidity is also uncertain. At a time of ongoing financial crisis and at best fragile economic growth across the entire EU, we consider that a new tax which could have a substantial detrimental impact on EU GDP should be resisted.

d) Incidence

80.  'Incidence' refers to the question of who bears the true economic burden of a tax. With regard to the incidence of an FTT, the Commission's Impact Assessment states that a large part of the burden would fall on owners of traded financial instruments.[128] Yet we heard conflicting evidence on this issue.

81.  Stamp Out Poverty argued (citing research by the IMF) that an FTT would be highly progressive, falling on the richest individuals and institutions in society.[129] As David Hillman asked: "Who is primarily doing the trading of the bulk of the financial assets? They are the proprietary desks of banks, they are hedge funds, and the hedge funds' clients are high net-worth individuals. So the primary incidence is actually going to be borne by financial actors—it is progressive as a tax. The question is: will it be passed on? Will a bank then pass this through on to other services? That depends on the level of competition between banks."[130]

82.  Richard Gower agreed that the initial incidence of the FTT would be on the consumers of the assets being traded—"overwhelmingly high-income individuals". He contested the argument of some that pension funds would bear the costs of the tax, arguing that "it is difficult to avoid the assertion that certainly the initial incidence is highly progressive."[131]

83.  Other witnesses disagreed. The CBI argued that the ultimate impact of the FTT would be felt by end-users, not large financial firms and that, in most circumstances, the final tax burden would rest with investors and customers of financial services firms, in the form of higher prices for financial services or products, in affecting consumers' savings, and in reducing firms' ability to raise funds from banks or the market.[132]

84.  The ABI argued that the incidence of the tax would be felt by pension-holders, savers and insurance policy-holders, and would have an impact on a wide range of products, including mortgages, utility bills, and advance travel fares.[133] The IEA claimed that the incidence of the FTT "will be upon workers in the form of lower wages, upon consumers of financial products in higher prices and ... the loss [of income] will be greater than the revenues raised."[134]

85.  In John Vella's view, "we know that companies cannot bear tax, so the tax has to be passed on to somebody. Who exactly it is passed on to is always difficult to understand ... [but] the likelihood is that it will be passed on to final consumers through lower interest rates or through higher borrowing costs."[135]

86.  The Financial Secretary to the Treasury noted that the IMF report to the G20 in 2010 did indeed say that an FTT would likely be a progressive tax given that those with higher income levels engage in financial market activity to a greater extent than those with lower income. However, he pointed out that the same report also highlighted that in the long run the incidence of the tax would be likely to be passed to those on lower incomes. More broadly, he noted that the IMF did not endorse the introduction of an FTT, arguing that it would not be the most economically efficient way of taxing the financial sector.[136]

87.  The divergence of views that have been put to us demonstrate that it is difficult to predict with any accuracy what the true incidence of a Financial Transaction Tax would be. Whilst it may be the case, as the Commission suggests, that a large part of the initial incidence would fall on owners of financial instruments, we remain concerned that the tax burden will ultimately be passed on to consumers. In the current economic context, we do not believe that this is a risk worth taking.

e) The base and rate of the tax

88.  In this section we focus on discussions around the tax base and the rate of tax proposed by the Commission.


89.  The Commission proposes that an FTT should cover a broad range of financial instruments and derivatives, including secondary trading in equities and bonds, as well as equity, interest rates, foreign exchange and commodity derivatives, in line with the provisions of the Markets in Financial Instruments Directive (MiFID). The Commission justified this on the grounds that a narrow-based FTT would distort the market through the differentiation of various instruments, and would allow circumvention through the use of other instruments that are not subject to tax. It pointed to the UK Stamp Duty on shares as an example of where such circumvention had taken place, as traders were encouraged to trade in derivatives, such as contracts for difference. The Commission therefore advocated "the AAA approach—of all actors, all markets and all products".[137]

90.  Witnesses were divided on whether the tax should have a narrow or a broad basis. The IMA argued that a narrower based FTT (excluding bonds and derivatives) might be less harmful than a broad-based tax, but that this would produce other problems such as a distortion of market behaviour in order to take into account tax arbitrage opportunities.[138]

91.  Although they did not advocate an FTT, John Vella, Clemens Fuest and Tim Schmidt-Eisenlohr told us that a broad base would minimise the possibility of avoidance.[139] Stamp Out Poverty advocated a broad-based FTT, building on the model of the UK Stamp Duty on shares to include bonds, derivatives and the wholesale market in foreign exchange,[140] whereas BlackRock argued that restricting an FTT to currency transactions would reduce the impact of an FTT on investment returns but would still be detrimental to investors, particularly those outside the major currency zones.[141]

92.  The Commission's proposal would not apply to spot currency transactions.[142] Stamp Out Poverty described this exemption as "a serious omission" in the legislation.[143] Commissioner Šemeta told us that the Commission had been advised that there was a legal obstacle since the inclusion of currency transactions would be in contradiction to the principle of free movement of capital.[144]


93.  The Commission proposes that the minimum rates of tax that should be applied by Member States are 0.1% for bonds and shares and 0.01% for other kinds of transactions including derivatives. Commissioner Šemeta told us that these would be minimum rates, giving individual Member States the capacity to impose higher rates if they wished.[145] As we have seen, the Commission argues that the proposed rates are set low in order to minimise relocation risks.[146]

94.  Some witnesses made a favourable comparison with the 0.5% rate of the UK Stamp Duty on shares. The Commission argued that the UK's experience showed that a successful stock exchange could be maintained with such a rate of tax.[147]

95.  Dr Bart Van Vooren told us that setting the tax rate was not simply a question of guesswork to determine whether 0.01% was a politically acceptable or appropriately low tax rate, but rather that consideration was based on (i) how much the relevant market will decline given the tax rate charged, (ii) the limitations the chosen rate imposes on liquidity, (iii) the amount of avoidance and circumvention that are likely to occur, and (iv) the question of whether it is preferable to have a tax that is neutral across different asset classes or one that taxes assets differently.[148]

96.  Some witnesses expressed concern about the proposal to levy different rates of tax on shares and bonds compared with derivatives. According to AIMA, the use of different rates of tax could encourage market participants to trade more using over-the-counter (OTC) derivatives, which appears to be contrary to one of the Commission's objectives, i.e. to encourage market participants, instead, to trade more on exchanges.[149]

97.  In addition, AIMA argued that it is more important to distinguish tax rates based on product characteristics and market conditions than to use equal tax rates on notional amounts of different types of product class. They explained that a notional amount underlying interest rates futures with a short maturity is often a tenfold of the notional amount underlying equity index futures. As such, the tax burden for trading interest rates products with a short maturity normally comprises a relatively high taxable amount. It would therefore exponentially and excessively increase the tax burden of transacting financial instruments in a particular product class, in comparison with others.[150]


98.  Several witness expressed concern over a potential "cascade effect", in that, whilst the rate on a particular transaction appears low, the overall rate to effect a complete transaction could be much larger due to the long chain of trading and clearing that is often involved in securities transactions. A purchase of securities on the stock exchange, for example, ordinarily involves the sale and purchase by a number of parties, including brokers, clearing members and the central counterparty to the clearing system. It was argued that under the Commission's proposals, each sale will be subject to the FTT (with only the central counterparty exempt).[151] John Vella, Clemens Fuest and Tim Schmidt-Eisenlohr explained to us that "if a financial institution purchases an option to buy equities from another financial institution, they both pay the tax when the option is bought/sold, and, at least, again if the option is exercised and the equities are bought/sold."[152]

99.  AIMA provided us with an illustration of the "potentially onerous" cascade effect on a relatively simple transaction by a unit trust (see Figure 1 below). Commissioner Šemeta has argued that this threat is overstated since intermediaries would be exempt from the tax.[153] It is true that there are exemptions in Article 1 of the proposal which include central counterparties, but it is not clear to us to what extent this alleviates the threat of a cascade effect.[154]


Illustration of a potential cascade effect[155]

100.  Whilst the proposed rate of transaction tax appears relatively low, for instance in comparison to the rate of the UK Stamp Duty, the concerns of several of our witnesses about the danger of a potential cascade effect must be taken seriously. The likely effects are difficult to predict, but it does appear probable that the effective tax burden would tend to be considerably higher than the underlying base rate proposed by the Commission. This, in turn, would have an adverse knock-on effect on economic growth and the likelihood of relocation.

Overall conclusion

101.  The Commission's model for a Financial Transaction Tax has been subject to a considerable degree of criticism by our witnesses. We note in particular that even the advocates of an FTT were critical of this element of its proposal. Richard Gower told us that "I think we can probably all agree that the design of the FTT proposed by the Commission is not a particularly good one".[156]

102.  The evidence that we have heard bears this assessment out. Witnesses have pointed to the flaws in the proposed residence principle and have warned that a tax restricted to the EU alone would lead to significant relocation of financial institutions outside the EU. Furthermore, the Commission's modelling has been criticised, in particular in the context of its "flawed" Impact Assessment. Specific concerns have been raised that the Commission has not taken account of the potential for a cascade effect, nor of the danger that the true incidence of the tax will largely fall on consumers. However, perhaps the most damaging criticism relates to the likely impact on GDP. Commissioner Šemeta was at pains to point out to us that the Impact Assessment's most pessimistic forecast of a reduction in GDP of 1.76% was unlikely to be accurate. Yet in the context of the current financial crisis and the economic pressures being faced by many Member States, any reduction in GDP is highly undesirable. It has been argued that a well-designed EU tax could work effectively, yet we heard few concrete examples from our witnesses as to how the Commission proposal could be practically improved.

103.  In Chapter 2, we concluded that the proposed FTT would not meet the objectives that the Commission has identified. However, if a proposal on a question of such importance as this is to be seriously contemplated then it is imperative that any proposed tax is as well-designed as possible. In the light of the evidence that we have received, it is our view that the Commission's proposed model for a Financial Transaction Tax is both impractical and unworkable.

104.  Nevertheless, significant support for the introduction of a tax on the financial sector remains. It is therefore necessary to consider the likely impact of an FTT on the City of London, and the UK in general, as well as whether other potential models for taxation of the financial sector would be more viable. We turn to these issues in the following chapters.

75   See COM (2011) 594 FINAL, op cit. Back

76   COM (2011) 594 FINAL, op. cit, Article 3. See also Mark Hoban MP, Financial Secretary to the Treasury, supplementary written evidence.  Back

77   See for example AIMA.  Back

78   Mark Hoban MP, Financial Secretary to the Treasury, supplementary written evidence. For an explanation of the proposed tax rate see paras 93-101 below.  Back

79   European Commission, supplementary written evidence. Joint and several liability is defined as when a number of parties make a joint commitment under a contract and agree to be liable as a group as well as individually (jointly and severally) for that obligation to be fulfilled. See Back

80   COM 594 (2011) FINAL, op. cit. Back

81   Q 88. Back

82   Q 43. Back

83   TUC. Back

84   BBA.  Back

85   IMA. Back

86   Q 78. Back

87   BBA.  Back

88   AIMA. Back

89   Mark Hoban MP, Financial Secretary to the Treasury, supplementary written evidence.  Back

90   European Commission, supplementary written evidence.  Back

91   Q 130. See paras 93-101 below for a discussion of the rate of the tax. Back

92   Commission staff working paper Impact assessment accompanying the document "Proposal for a Council Directive on a common system of financial transaction tax and amending Directive 2008/7/EC (COM (2011) 594 final)", p. 49. Back

93   ACT. Back

94   Q 78. Back

95   We consider the impact on London in Chapter 4 below. Back

96   AIMA.  Back

97   BlackRock. Back

98   Bart Van Vooren. Back

99   Q 32. Back

100   Q 42. Back

101   BBA. Back

102   Q 133 and European Commission Directorate-General Taxation and Customs Union. Back

103   Duncan Weldon, Q 14. See also David Hillman, Q 32 and Owen Tudor, Q 9. Back

104   Q 47. Back

105   TUC. Back

106   Q 50.  Back

107   Q 108. Back

108   COM (2011) 594 FINAL, Commission Impact Assessment, op. cit., pp. 33, 50 and Box at pp. 51-2. Commissioner Šemeta told us that the time period that the Commission had in mind for these calculations was approximately 40 years. See para 71 below.  Back

109   AFME. Back

110   BBA. Back

111   AFME. Back

112   CBI. Back

113   Q 1. Back

114   Q 125. Back

115   Liquidity is defined as "cash, cash equivalents and other assets (liquid assets) that can be easily converted into cash (liquidated). In the case of a market, a stock or a commodity, the extent to which there are sufficient buyers and sellers to ensure that a few buy or sell orders would not move prices very much. Some markets are highly liquid; some are relatively illiquid. The term also means how easy it is to perform a transaction in a particular security or instrument. A liquid security, such as a share in a large listed company or a sovereign bond, is easy to price and can be bought or sold without significant price impact. With an illiquid instrument, trying to buy or sell may change the price, if it is even possible to transact." See  Back

116   ISDA. Back

117   BBA. Back

118   BlackRock. Back

119   Q 27. Back

120   BBA. Back

121   AIMA. Back

122   Q 45. Back

123   Oxford University Centre for Business Taxation. Back

124   IMA. Back

125   BlackRock. Back

126   ISDA. We discuss the potential cascading effect at paras 98-100 below.  Back

127   Q 125. Back

128   COM (2011) 594 FINAL, Commission Impact Assessment, op. cit., p. 53. Back

129   Stamp Out Poverty.  Back

130   Q 40. Back

131   Q 40. Back

132   CBI. Back

133   ABI. Back

134   IEA. Back

135   Q 39.  Back

136   Mark Hoban MP, Financial Secretary to the Treasury, supplementary written evidence.  Back

137   European Commission Directorate-General Taxation and Customs Union and Q 139.  Back

138   IMA. Back

139   Oxford University Centre for Business Taxation. Back

140   For a discussion of the UK Stamp Duty model, see Chapter 5 below.  Back

141   BlackRock. Back

142   A spot foreign exchange transaction involves the purchase of one currency against the sale of another at an agreed price for delivery on a value date which is usually the trade date plus two working days, the traditional 'spot value'. See  Back

143   Stamp Out Poverty. Back

144   Q 143. Back

145   Q 138. Back

146   COM (2011) 594 FINAL, op. cit and Q 131. See para 59 above. Back

147   European Commission Directorate-General Taxation and Customs Union. Back

148   Dr Bart Van Vooren. Back

149   AIMA. Back

150   Ibid. Back

151   BlackRock.  Back

152   Oxford University Centre for Business Taxation. Back

153   Chairpersons meeting, Finance and Fiscal Affairs Committees, Copenhagen, 19-20 March 2012.  Back

154   COM (2011) 594, op. cit. Back

155   AIMA. Back

156   Q 38. Back

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