Towards a Financial Transactions Tax? - European Union Committee Contents


CHAPTER 7: SUMMARY OF CONCLUSIONS

161.  This Committee has undertaken a detailed analysis of the European Commission's controversial proposals for a Financial Transaction Tax (FTT). We have been disappointed in what we have discovered. We have found the Commission's proposed model wanting in many respects, and unlikely to fulfil the objectives that the Commission itself has set. We find the Commission's proposed residence principle to be impractical and unworkable, and conclude that there is a significant risk that financial institutions would relocate outside the EU if an FTT is introduced. In the light of these flaws, it is our view that the Government should refuse to agree to this proposal. Yet the debate on taxation of the financial sector should not be lightly dismissed. It has been suggested that an FTT may be adopted by some or all euro area Member States, or that a tax of a similar kind to the UK Stamp Duty might be pursued. The implications for the UK and the EU as a whole are considerable, and we urge the Government to redouble their efforts to ensure that the UK is able to influence the ongoing debate. (summary)

Chapter 2: Assessing the Commission's objectives

162.  Whilst an attempt to avoid fragmentation in the internal market for financial services may be a commendable aim, it is not at all clear how the Commission's proposal for a new tax would help achieve this. (paragraph 15)

163.  The Commission's proposal combines two distinct issues—firstly, whether the financial sector should make a financial contribution to dealing with the effects of the ongoing financial crisis, and secondly, whether the financial sector is under-taxed. (paragraph 24)

164.  The issue of whether the financial sector is under-taxed is particularly nuanced. The evidence we heard focussed on whether or not the financial sector's exemption from VAT could be regarded as preferential treatment. In our view, whilst the financial sector may derive some advantage from the VAT exemption, it is also clear that financial institutions incur a large amount of irrecoverable VAT. Any case for increasing taxation of the financial sector needs to rest on more solid foundations than this. (paragraph 25)

165.  Furthermore, whilst we acknowledge the strength of public anger against the financial sector, and the widespread view that a form of taxation should be introduced to ensure that those who contributed to the current crisis should contribute to its costs, it is important to recognise that not all elements of the financial sector bear equal (or even any) responsibility for the crisis. Caution should therefore be observed before introducing any proposal that would have a blanket effect on all elements of the financial sector. Therefore, whilst there may be a case for increased taxation of at least some parts of the financial sector, it does not follow that the Commission's Financial Transaction Tax proposal is the most appropriate means by which to achieve this. Much depends upon the specific details of the Commission's proposals. (paragraph 26)

166.  We heard divergent views as to whether high-frequency trading and other related transactions, regarded by the Commission as inefficient, should be discouraged. We note the equally divergent evidence as to the impact of such transactions on market volatility. In our view, it is not yet clear whether and to what degree such activity has a detrimental effect on the national, EU and global economy. (paragraph 37)

167.  Yet even if the case is made that such transactions should be discouraged, it is far from clear that a Financial Transaction Tax is the best way to achieve this. We note the concerns of several witnesses that such a tax would be too blunt an instrument to tackle the issue effectively, since it would impinge upon other transactions and parts of the financial sector that are not seen to be problematic. Again, much depends upon the specific details of the Commission's proposal. (paragraph 38)

168.  We note that the Commission itself has brought forward proposals to improve regulation of these markets, for instance through the current Markets in Financial Instruments Directive (MiFID) and the Market Abuse Regulation (MAR) proposals. Whatever the merits or otherwise of these specific proposals, it is our view that focussed regulation is likely to be a more effective means by which to tackle undesirable market behaviour arising from the use of such transactions. (paragraph 39)

169.  The question of the EU budget, and whether an FTT could form a potential revenue stream for it, lies outside the scope of this inquiry. Notwithstanding this, we note the concern with which this objective was viewed by several of our witnesses, including, notably, those who advocated the introduction of an FTT, many of whom have stressed that revenues should be used to tackle such issues as global poverty and climate change. The use to which any revenues from an FTT would be put is evidently a matter of contention amongst its supporters. That the Commission has so far failed to secure support for its objective of using an FTT as a revenue stream for the EU budget suggests that such an objective is unlikely to be met. (paragraph 44)

170.  Seeking to set a pioneering precedent in the development of a new policy is often to be commended. Yet given the palpable lack of appetite for the introduction of a tax amongst other nations, most notably the USA, the Commission's argument that an EU-wide FTT will pave the way for the introduction of a global tax appears to us to be wholly unrealistic. (paragraph 49)

171.  The Commission has set out a number of objectives behind its proposal for a Financial Transaction Tax. Yet we are not convinced that the proposed model would meet any of them. It is difficult to see how the Commission proposal can pave the way for a global tax, whilst the case for using an FTT as a new revenue stream for the EU budget is contentious to say the least. Whilst there is a stronger case for asking the financial sector to make a contribution to the costs of the financial crisis, and for seeking to deter certain transactions, in neither case is the Commission's position compelling. Furthermore, whilst we acknowledge the strength of public anger against the financial sector, and the widespread view that those who contributed to the current financial crisis should contribute to its costs, we fear that a Financial Transaction Tax is the wrong way to seek to meet such demands. In our view, the case for introducing a new tax needs to be based on an assessment of its efficiency, simplicity, the ease with which it can be collected and whether it is open to abuse. Much depends on how well the FTT might be designed. (paragraph 50)

Chapter 3: Assessing the Commission's proposal

172.  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. (paragraph 58)

173.  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. (paragraph 66)

174.  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. (paragraph 78)

175.  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 effect on EU GDP should be resisted. (paragraph 79)

176.  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. (paragraph 87)

177.  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. (paragraph 100)

178.  We have 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. (paragraph 103)

Chapter 4: The effect of an FTT on the UK

179.  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. (paragraph 118)

THE IMPACT OF A EURO AREA FTT ON THE UK

180.  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. (paragraph 128)

ASSESSING THE GOVERNMENT'S POSITION

181.  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. (paragraph 135)

182.  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. (paragraph 136)

Chapter 5: Alternatives to a Financial Transaction Tax

183.  Several witnesses strongly advocated the introduction of a Financial Activities Tax (FAT). Whilst we note that this model may hold certain advantages in comparison to a Financial Transaction Tax, notably making it more difficult for financial institutions to pass on the tax burden, it may also hold drawbacks, for instance in taxing all financial institutions' activities regardless of how beneficial they are. Whilst there may be a case for further exploration of the case for an FAT, in the current economic climate there is a need for caution before introducing any new taxation of the financial sector that might impair economic growth. (paragraph 145)

184.  We note the growing interest amongst other Member States in adopting a model of financial sector taxation similar to the UK Stamp Duty. The Commission continues to stress the case, as it sees it, for an FTT, yet given the manifest weakness of the Commission's FTT proposal and the tentative moves being made in other Member States, led by President Sarkozy, it appears that a tax on the Stamp Duty model is more likely to be introduced. If it is accepted that a robust case for the introduction of a new tax on the financial sector can be made, then this proposal may bear further exploration. Yet whether the support for such a measure spreads beyond France to other Member States, whether there is any prospect of an EU-wide basis for such a tax, what the base and rate of the tax would be, and what the potential impact of such developments would be on the UK and its own Stamp Duty regime, remain uncertain. In this context we strongly urge the Government to continue their dialogue with EU partners and other Member States as they seek to determine whether the UK Stamp Duty model would be a more appropriate basis for taxation of the financial sector at the EU level. (paragraph 155)


 
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