CHAPTER 4: the effect of an ftt on the
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."
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.
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.
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."
The BBA agreed that London's pre-eminence as an international
financial centre could not continue in the wake of an EU FTT.
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
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.
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.
Richard Woolhouse agreed.
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.
BlackRock cited Clifford Chance's estimate that this could amount
to a loss of about £60 billion in revenue a year.
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 Londonand the centrality of financial services
to London's economythe impact would be keenly felt in the
UK's capital city, with firms moving and jobs lost."
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.
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.
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
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."
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.
117. Commissioner emeta 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.
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."
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
c) The impact of a euro area
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.
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.
Joanna Cound pointed out that 30% of the European asset management
industry is based in the UK, and such cross-border activity would
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.
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.
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."
125. Prior to appearing before us, Commissioner
emeta 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."
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
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.
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.
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.
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
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."
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."
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."
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".
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.
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
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.
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."
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."
134. Commissioner emeta 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."
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
New City Initiative. Back
New City Initiative. Back
City of London Corporation. Back
Oxford University Centre for Business Taxation. Back
Peter Sinclair. Back
Q 12. Back
City of London Corporation. Back
Mayor of London. Back
European Commission Directorate-General Taxation and Customs Union. Back
Stamp Out Poverty. Back
Q 9. Back
Q 50. See above, para 65. Back
Q 136. Back
Q 131. Back
QQ 80-1. Back
Q 80. Back
BBA, Q 96. Back
Q 98. Back
'Britain will pay Tobin tax anyway, EU warns', by Stanley Pignal,
Financial Times, 23 January 2012. Back
Q 137. Back
European Commission, supplementary written evidence. Back
COM (2011) 594 FINAL, op. cit., Article 9(3). Back
Directive 2010/24/EC, implemented in the UK by the Finance Act
New City Initiative. See also Lloyds. Back
Q 30. Back
Q 12. Back
Q 54. Back
Arlene McCarthy MEP. Back
Mark Hoban MP, Financial Secretary to the Treasury, supplementary
written evidence. Back
Q 103. Back
Q 120. Back
Mark Hoban MP, Financial Secretary to the Treasury, supplementary
written evidence. Back
QQ 121, 133. Back