EU Financial Transaction Tax: fact or fiction?

The Financial Transaction Tax (‘FTT’) has been a highly debated topic ever since 2009, when, after he world financial downturn set in, the problem of enhancing the regulatory framework of the financial sector was raised.

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Some argued that closer and more efficient surveillance can be accompanied by additional taxation, which would cover the additional costs of the regulatory system and may replace, at least in part, the contribution of governments to the capitalisation of financial institutions in a number of European states.


Thus, the FTT has come to be regarded as a sort of ‘pay-back’ from the financial sector in return for the state aid it enjoyed between 2009 and 2010, all the more so since the financial sector, unlike other industries, still benefits from a tax advantage, namely the exemption from the value added tax. Aside from yielding additional tax receipts, the FTT is intended as a tool to be used in the policy of deterring the speculative transactions which do not add value to financial markets, but instead entail systemic risks.


Paradoxically enough, a tax on financial transactions is no new topic. It used to be in force in the US in the last century, before it was abolished in the mid-60s. In the UK, a similar system is still in use whereby a stamp duty of 0.5% of the transaction  value is levied on certain financial transactions.


How does such a tax work? Any transaction involving financial instruments, carried out  between financial institutions is subject to this tax, to be paid by the buyer; this means the trading cost will go up directly by this very amount.


In the European Union, things are more complicated due to the commitments undertaken by each Member State, i.e. refraining from taking steps that will cause competition distortions or adversely affect the operating of each domestic market. This raises legitimate questions about the way such a step would affect the competitiveness of the European banking sector as compared to the American and Asian ones, about the level of the harmonised tax (or whether it should be up to the Member States to decide their own respective tax levels) or about the tax implementation requirements.


Even though there are many questions still to be answered, there already are some states where the tax is in force: France (effective from 1 August 2012) and Hungary (effective from 1 January 2013), but this does not mean there are no controversies about the tax impact analysis, the administration cost etc.


While every Member State is making an individual effort, the European Commission is seeking to impose a harmonised view of the matter and in 2011 even came up with a proposed directive on a common system of FTT (2011/0261).


The goal of this approach is to secure a coherent common system in Europe, ensure the financial sector contributes its duty to the public finances and assure a more efficient financial sector trading concerned about the overall public welfare.


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