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KPMG’s EU Tax Centre
Barry Larking, Head of Knowledge Management
On September 28th 2011 the European Commission published a proposal for an EU wide tax on financial transactions.
The tax – if it is approved - would be imposed on financial institutions that carry out financial transactions in financial instruments in the EU, as from 2014.
More about the details in just a minute.
First, what does the Commission hope to achieve with this proposal? Well, the objectives include: making the financial sector pay for taxpayer support during the financial crisis, stabilizing the financial markets by replacing various existing national transaction taxes and also discouraging ‘undesirable’ activity such as high frequency trading and finally providing an extra source of revenue for the European Union that would reduce the amount Member States would have to contribute to the central EU budget
Despite the amount of revenue the Commission estimates could be generated – some EUR 57 billion – there is no certainty that the proposal will get the support of all 27 Member States that it needs before it can be adopted. The opposition is partly due the fear that financial sector business will relocate outside the EU, but there are also question marks about whether this kind of tax is the most appropriate way of achieving its economic objectives.
So how would the tax work and who would be affected if it is introduced?
Well, we see that the tax applies to a broad range of transactions, including the obvious ones such as purchase and sale, but also the less obvious ones of securities lending, and derivative transactions. Although broadly drafted, it would not apply to spot currency transactions or primary market transactions such as share or bond issues, or to typical ‘consumer’ transactions such as home mortgages or insurance contracts.
The tax would only apply to transactions in financial instruments. These are also drafted broadly to cover not just traditional capital market and money market instruments, but also derivatives and structured products.
Then, finally, we have to have a transaction in a financial instrument to which an EU based financial institution is a party. Again, not surprisingly, financial institutions are broadly defined to cover typical cases like credit institutions, insurance companies and pension funds, but there is also a catch-all category that would cover companies with significant levels of financial business activity.
The EU connection is an important condition and also a controversial one as the proposal has been drafted so that even non-EU based financial institutions will be subject to the tax where the transaction involves an EU based party. So a US bank selling shares to a German bank would be subject to the tax – as would the German bank, since the intention appears to be that each financial institution would be liable to the tax.
The final part of the picture is of course the rate and in this case the Commission is proposing a dual rate system with .01% applicable to derivatives and .1% applicable to other transactions – with the option for each Member State to impose higher rates if they wish.
Because of the fears of business relocation the EU is pushing for a global introduction and hopes to have this back on the negotiating table when the G-20 reconvenes this coming November. This relocation concern is the main reason for the UK’s strong opposition to the tax, and other Member States, such as the Netherlands, have indicated that they would only support the tax if introduced globally. But it may be questioned whether a global tax is a realistic possibility given the current negative stance of key countries like the United States. So, since the proposal needs the support of all 27 EU Member States in order to go through, its current prospects do not look too good.
Having said that, if consensus can be reached among the Eurozone Member States the tax could probably still be introduced for just those countries. But whether the political will is there to ‘go it alone’ without a commitment for global introduction, remains to be seen.
Thank you for watching this video newsflash brought to you by KPMG’s EU Tax Centre.
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