House of Lords - Towards a Financial Transactions Tax?

Towards a Financial Transactions Tax? - European Union Committee Contents

CHAPTER 4: the effect of an ftt on the uk

a) The significance of the financial sector in the UK and EU economy

105. One key element of our assessment of the Commission's proposal concerns its likely impact upon the City of London and upon the wider UK economy. This question is of vital importance given the importance of the financial sector, not only for the domestic UK economy, but also for the EU as a whole.

106. Several witnesses stressed the strategic importance of the UK financial sector. The Mayor of London told us that it was "a key London industry and a significant employer, accounting for around 330,000, or 8% of London's workforce and around 20% of London's Gross Value Added Tax ... London is, effectively, with New York one of only two genuinely global financial services centres in the world ... In simple terms, London is the EU's primary financial services centre and it competes globally for business."[157]

107. The New City Initiative stated that the financial services sector in the UK contributed 11.2% of the Exchequer's total tax receipts for 2010, and that one-third of all financial services jobs in the UK are based in London, accounting for 36% of the capital's entire workforce. They pointed out that the UK accounts for one-third of all private equity funds in Europe, with a higher daily foreign exchange turnover than New York and Tokyo combined and the largest hedge funds market in Europe.[158]

108. AIMA stated that the UK has the largest financial derivatives market, with an average daily turnover in interest rate derivatives of just over $1.4 trillion, equivalent to approximately 46% of the total. Furthermore, the UK has the largest asset management business in Europe, accounting for just under a third of the entire market.[159]

b) Assessing the impact of an FTT on the UK

109. In the light of this, several witnesses expressed to us their concern that an FTT could have an extremely damaging impact on London and the UK. Members of the New City Initiative warned that its introduction "would precipitate London's demise as a major financial centre by 2015, a grim prediction under any circumstances, but particularly so at a time when the City has never been more important as both an engine for the economy and a provider of jobs, taxes and exports."[160] The BBA agreed that London's pre-eminence as an international financial centre could not continue in the wake of an EU FTT.[161]

110. One particular concern was that, because of the size of its financial sector, the Commission's proposal would have a disproportionate effect on the UK compared with other EU Member States. The City of London Corporation argued that the concentration of EU and international financial services activity in the London markets, in areas including bond and equity issuance and trading, foreign exchange, asset management, insurance and reinsurance, meant that the impact on the UK would be unfavourable and disproportionate.[162] John Vella, Clemens Fuest and Tim Schmidt-Eisenlohr estimated that, on the basis of the Commission's figures, revenue raised in the UK would be 4.6 times higher than revenue raised in Germany and 10.9 times higher than revenue raised in France, and that 71.3% of overall revenue would be expected to come from the UK.[163]

111. Some witnesses told us that the proposal that tax revenues would accrue to the government(s) where the parties to a financial transaction reside would result in a net transfer of revenue from the UK to other Member States. Peter Sinclair, Professor of Economics, University of Birmingham, argued that a substantial slice of FTT proceeds, as much as 18%, would be transferred from the UK exchequer to other EU governments.[164] Richard Woolhouse agreed.[165]

112. Others expressed concern at the threat of significant relocation away from the City. The City of London Corporation cited trading in non-EU or euro and Sterling denominated equities and bonds, foreign exchange transactions in non-EU currencies and insurance or reinsurance contracts, as examples of transactions that could relocate.[166] BlackRock cited Clifford Chance's estimate that this could amount to a loss of about £60 billion in revenue a year.[167] The Mayor of London agreed that "an FTT would drive business to financial centres outside the EU and have a substantial negative impact on GDP across the EU ... Given the preponderance of financial services in London—and the centrality of financial services to London's economy—the impact would be keenly felt in the UK's capital city, with firms moving and jobs lost."[168]

113. On the other hand, the European Commission argued that the impact on the City of London and on the UK would be "rather limited", as traders would simply adjust their business models. It argued that the elements that would be affected most, namely high-frequency trading (HFT) and highly-leveraged transactions, were "typically not very labour intensive." Furthermore, since the City of London is often the booking centre for financial transactions only, it was argued that the burden would not necessarily fall on British citizens.[169]

114. In the TUC's view, an FTT had the potential to raise £20 billion in revenue in the UK on top of the sums raised by the Stamp Duty on shares. They argued that an FTT would have a beneficial effect on the UK economy by redistributing wealth from the well off to the less well off both in terms of creating disincentives for the sort of activity that produces inflated salaries and huge bonuses, and in terms of the better use to which the tax revenue and capital would be put.[170]

115. Others were sceptical about the threat of relocation, citing London's compensating overriding strengths as a financial centre. Stamp Out Poverty pointed to the importance for the banking sector of the safety net provided by the state, which was only possible in countries with sufficiently large economies to under-write large institutions. They also argued that London's infrastructure offers immediate access to information, support services, and trading partners, which, combined with London's location between the Asian and US markets, made relocation look unattractive.[171]

116. Owen Tudor pointed to the advantage of scale, in that "there are more people there to do business with so it makes sense to be there."[172] David Hillman asserted that financial institutions are here "because London provides them with this unique trading window: the eastern markets at the beginning of the day and the US markets at the end of the day." As we have seen, he pointed out that financial institutions did not relocate when a UK bank bonus tax was introduced.[173]

117. Commissioner Šemeta told us that the Commission estimated that it would collect around €10 billion per year in revenue from the UK, or 21% of the overall total.[174] In terms of the threat of relocation, he told us that "London is a good financial centre in which to do business. You have perfect trading platforms and a perfectly developed financial sector, with very educated people engaged in this activity. That creates huge added value for the financial sector here in London ... we do not see any incentive to our financial institutions to move from London to third countries."[175]

118. We have heard divergent views concerning the likely impact of an FTT on the City of London and on the wider UK economy. This once again emphasises that considerable uncertainty remains in terms of the likely impact of an FTT. Such uncertainty is alarming, not least given the UK financial sector's strategic importance not only for the UK economy, but for the economic health of the EU as a whole. The UK financial sector is a major asset to the EU, in particular in terms of the single market, in providing a more developed capital market than existed before. We remain deeply concerned that an EU-wide FTT such as the Commission propose could have a serious detrimental impact on the UK, in particular by giving financial institutions an incentive to relocate away from London, either by the institution itself physically relocating, or by setting up a subsidiary outside the EU. Noting the evidence we have heard that over 70% of revenue could be expected to come from the UK, we also question the appropriateness of a proposal that would have such a disproportionate impact on one Member State above all others. On these grounds alone, the Commission's proposals are unacceptable.

c) The impact of a euro area FTT

119. In the light of these fears, the UK Government have remained consistently opposed to the introduction of an EU-wide tax. Given that EU-wide taxation proposals require unanimity amongst Member States, the likelihood of an FTT being introduced across all 27 EU Member States appears remote. Speculation has therefore grown as to the likelihood of an FTT being adopted amongst a smaller group of Member States, centred on the euro area, from which the UK would almost certainly stand apart. We asked our witnesses to assess the likely impact of such a tax on the UK.

120. AIMA argued that, whilst the introduction of an FTT by certain euro area countries alone would be less damaging on the UK economy than an EU-wide tax, nonetheless the UK financial services industry would still be affected. They pointed out that UK banks would often still have euro area counterparties and operations in euro area countries. Similarly, banks based in the euro area countries might have operations in the UK which could be subject to the tax.[176]

121. Nigel Fleming told us that UK financial institutions conducting transactions with EU counterparties would become liable, and that "the level of connectivity between the London market and eurozone market is too great" for its impact to go unfelt.[177] Joanna Cound pointed out that 30% of the European asset management industry is based in the UK, and such cross-border activity would suffer dramatically.[178]

122. Some witnesses pointed to the implications of the residence principle for the City if the FTT was introduced only amongst euro area Member States. Nigel Fleming imagined that Deutsche Bank would ensure that it conducted its London activities through a subsidiary rather than a branch so that it was not caught by the tax.[179]

123. On the other hand, some witnesses thought that the impact on the UK of such a tax could be beneficial. The BBA and Sony Kapoor both argued that a euro area FTT could result in a migration of business towards the UK from euro area countries.[180]

124. The Financial Secretary to the Treasury told us that "if the eurozone wishes to proceed on this by themselves, then that is clearly a matter for them. If they wanted to use EU institutions, they could do that through the enhanced co-operation mechanism and that would clearly be a choice that they would need to think about. In that sort of situation, London would be affected in the same way that Hong Kong, New York or Singapore would be."[181]

125. Prior to appearing before us, Commissioner Šemeta was reported as stating that "the UK would lose a lot if other members decide to move ahead with a financial transactions tax. Because of its design, [Britain] will be subject to the tax, but at the same time, it will not receive any money from it."[182] In his oral evidence, the Commissioner stressed that "we are promoting this proposal for all 27 member states and we would like to have the United Kingdom on board. We consider the United Kingdom a very important element in all these efforts, and we will continue to push for this solution." Yet, "if the United Kingdom is outside but the transactions in the United Kingdom are initiated by any financial intermediary inside the FTT, the tax will be due to that country where that financial institution is resident."[183]

126. As we have seen, the Commission has made clear that counterparties resident outside the EU would still be liable for the tax when conducting transactions with EU-resident counterparties. The Commission explained that the same principle would apply if the UK were outside the jurisdiction of the FTT. For instance, a transaction between a UK and a German bank would trigger the tax, with the result that revenues from both sides would go to the German authorities rather than the UK ones.[184]

127. The fact that a euro area-only FTT Directive would not apply to the UK would not prevent it being collected from UK financial institutions. Using the Commission's example, the German tax authorities could request the UK tax authorities to collect the FTT from the UK institution: the legal basis for the request would be the EU regime for mutual assistance on tax matters, and such requests would have to be met. More likely the German tax authorities would rely on the provisions of the proposal imposing on the German bank joint and several liability for the FTT imposed on the UK bank.[185] Knowing this, the German bank would be likely to ensure, through its contractual relations with the UK bank, that it would be indemnified by the UK bank.[186]

128. We note the conflicting views of our witnesses as to the potential impact of an FTT comprising some or all of the euro area Member States on those who choose not to participate, such as the UK. If, as is likely, the Directive creating a euro area FTT equates the UK with third countries, there would still be very significant effects on the UK financial sector. UK financial institutions entering into financial transactions with euro area financial institutions would still be liable for the FTT, which could be collected through EU mutual assistance for the recovery of tax or as a result of the provisions of joint and several liability. We urge the Government to work to ensure that UK financial institutions are not damaged, and that UK tax authorities' workload is not increased, by an FTT introduced by certain EU Member States.

d) Assessing the Government's position

129. As we have seen, the UK Government, whilst not opposed to a global tax, have consistently opposed the introduction of an EU-wide Financial Transaction Tax. A number of witnesses discussed the UK Government's position. Some such as the New City Initiative strongly urged the UK Government to continue to "take a firm stance in opposition to the implementation of a Financial Transaction Tax in the EU."[187]

130. On the other hand, Richard Gower was fearful of "the extent to which the Treasury acted as a lobbying outfit for the financial sector. There is significant regulatory capture going on."[188] Owen Tudor thought that the Government had adopted "a fundamentally inconsistent view". In his opinion, "politics is being played ... they are willing to buy a bit of credibility and a bit of goodwill by saying that they want it to happen globally when they do not think it is going to happen."[189] David Hillman referred to the reported remarks of President Sarkozy, that "when people speak about how they would like to see a global FTT, that is really code for the fact that they do not ever want to see an FTT".[190]

131. Arlene McCarthy MEP stressed the importance of UK engagement in the EU legislative process, since an FTT introduced by some EU Members, even without UK participation, is likely to have significant effects on the City of London, as the major European financial centre. In her view, the UK faced a practical choice: "to closely engage with this proposal and argue for a well designed tax that could raise much needed funds, support financial stability and the real economy and would have strong public support, or to step back from the debate, veto UK participation from the outset, and ignore the public will while risking a damaging outcome for both our financial sector and our real economy." She warned of the danger of the UK losing any influence over the design of the FTT but still being affected by its operation.[191]

132. The Financial Secretary to the Treasury told us that "the Government's position is that we do not disagree with FTTs in principle, but that these should only be considered at a global level." This was because a key risk with an FTT introduced at a sub-global level is that it would provide an incentive for financial institutions to relocate to avoid the tax, particularly given the global nature of the financial services sector.[192]

133. On the Government's contribution to the ongoing debate, he said that the UK continues to debate these issues at ECOFIN, and that the Chancellor engages in that discussion with his European counterparts.[193] He told us that it was "very clear that the Commission and other member states value our expertise ... No member state is better equipped to advise on the intricacies of a transaction tax than the UK, given the complexity and sophistication of the UK markets. What is always very challenging is to ensure that we are seen not as lecturing other member states but offering helpful advice where appropriate."[194] He added that "there are numerous potential variants of FTTs, and it is sensible not to dismiss any such proposals without full and careful consideration."[195]

134. Commissioner Šemeta told us that "it is in the overall European interest to have strong financial centres in London as well as in Paris and Frankfurt. In this context, we need the UK on board, actively engaged in the discussions on the design, fine-tuning and implementation of the financial transaction tax ... the United Kingdom is also a very active participant in this discussion and I sincerely welcome its participation."[196]

135. Whilst noting the Financial Secretary to the Treasury's assertion that the UK has no objection in principle to a global FTT, the Government's support for a global tax has been lukewarm at best. We find the Minister's explanation unconvincing. If the Government do support the introduction of a global tax then they should make the case for it. If, however, their true position is that they oppose a Financial Transaction Tax outright, then they should say so.

136. Like all EU-wide taxation proposals, the Commission's proposal for an FTT requires unanimity amongst Member States. Given our conclusion that the Commission's proposed model is both impractical and unworkable, it is our view that the Government should refuse to agree to this proposal. Notwithstanding this, we recognise that the debate on whether and how the financial sector should be taxed will nevertheless continue. Given this, and given the potential consequences not only for the UK but for the EU as a whole, it is vital that the Government remain actively engaged in this debate. The UK has considerable expertise to bring to bear, and we are pleased to hear from both the Minister and the Commissioner that the UK has been an active participant in these discussions. We urge the Government to redouble such efforts.

157 Mayor of London. Back

158 New City Initiative. Back

159 AIMA. Back

160 New City Initiative. Back

161 BBA. Back

162 City of London Corporation. Back

163 Oxford University Centre for Business Taxation. Back

164 Peter Sinclair. Back

165 Q 12. Back

166 City of London Corporation. Back

167 BlackRock. Back

168 Mayor of London. Back