The European Commission’s proposal for an EU wide tax on financial transactions (FTT) has generated much public and political discussion since it was published on 28 September 2011. The issue has been particularly high on the agenda of many EU Member States’ governments and even led to a British veto of recent proposals for fundamental EU reforms addressing the ongoing economic crisis.
Notwithstanding the economic benefits that the Commission believes the FTT could lead to, there has been significant criticism of the proposal, in particular as to whether it would in fact achieve its economic objectives and as regards its potential negative impact on EU Member States financial sectors and GDP as a whole.
In view of the importance of EU Member State government support for the proposal, KPMG’s EU Tax Centre, with the help of KPMG member firms and their EU Tax and Financial Services Tax networks, has prepared an informal ‘snap-shot’ view or ´FTT Thermometer´ which displays KPMG member firms’ understanding of the overall position of their respective governments to the FTT proposal. The FTT Thermometer is available at www.kpmg.com/ftt.
Of the 27 Member States that are – at least in principle – needed to get the proposal adopted, our review shows just three that are clearly in favour and three clearly against. That leaves another 21 in varying degrees of support or opposition, or in some cases, indecision.
KPMG Comment
“With only three countries clearly in favor, the Commission’s proposal obviously has a long way to go” says Hugh von Bergen, head of KPMG’s Global Financial Services Tax Group. “Although some Member States are nominally in favor of the proposal, this is subject to an FTT being introduced globally, and the reality is that global introduction is not going to happen, at least not in the foreseeable future. So seen from this angle its prospects seem even bleaker” cautions von Bergen.
Economic background to EU FTT proposal
A tax on financial sector transactions would be an answer to a number of problems largely associated with the financial sector crisis, according to the explanatory memorandum to the European Commission’s draft directive. In particular it would:
- avoid fragmentation of the internal market by coordinating national FTTs
- ensure a fair contribution by the financial sector to the costs of the recent crisis
- ensure a level playing field between the financial sector and other sectors
- remove certain distortions from the financial markets
- provide a source of own revenue for the EU
The European Commission’s original indications were that the directive could generate revenues of around 57 billion euros annually at EU level. Notwithstanding these assumed benefits, the European Commission estimated a negative impact on GDP of between 0.53 percent and 1.76 percent. Since then the European Commission is understood to have amended this estimate down to between 0.2 percent and 0.3 percent.
Scope of the FTT proposal
The FTT would be imposed on transactions involving financial instruments carried out by at least one EU based financial institution. The FTT has been designed to cover a wide range of financial transactions, including the purchase and sale of financial instruments such as shares and bonds but also the conclusion of derivatives agreements such as options and futures relating to securities or commodities.
The draft directive provides for a minimum level of FTT of 0.1 percent for financial transactions other than those related to derivatives agreements and 0.01 percent in the case of derivative agreements.
It is only aimed at taxing transactions involving financial institutions and not transactions carried out by ordinary individuals or businesses, such as the conclusion of insurance contracts, nor should it affect most primary market operations. Financial institutions are broadly defined under the draft directive to include traditional financial institutions such as banks and investment entities, but could also cover holding companies, and special purpose vehicles, such as securitization vehicles. Financial institutions can be subject to the FTT even if they act in the name or for the account of another person.
In order for the directive to apply, at least one of the parties to the transaction would need to be established in a Member State. Non EU-based financial institutions may, in certain circumstances, also become subject to the FTT if the transaction involves an EU counter-party. The FTT is chargeable for each financial institution, i.e. the overall rates applicable to a transaction involving two EU counterparties would be 0.2 percent and 0.02 percent for non-derivative and derivative transactions respectively.
Reactions to the FTT proposal
There has been considerable public and political discussion since the proposal was issued. A clear concern that has been raised is the risk that financial sector business will relocate outside the EU to jurisdictions that do not impose such a tax. For this reason a number of governments are understood to only be willing to support the proposal if the FTT is introduced globally. Notwithstanding this concern, both Germany and France have indicated that, if agreement could not be reached across the whole EU (27 Member States), the tax could be introduced by a smaller group, such as the Eurozone members. Some Member States are understood to take the position that introduction in the EU would be sufficient to address this issue. Questions have also been raised as to whether the FTT is actually the most appropriate instrument to address the economic objectives put forward by the European Commission.
Notes to editor: The FTT thermometer is based on a snap-shot survey carried out between 18 January 2012 and 20 January 2012 within KPMG Member Firms of their understanding of their respective governments’ positions, for example as expressed in public reactions from relevant public figures or in informal discussions. The FTT thermometer contains an element of subjectivity and does not necessarily reflect positions expressed in official publications. Moreover taking into account the politically sensitive nature of the FTT initiative, positions within the EU could suffer significant changes in a relatively short timeframe.
For more information, please visit www.kpmg.com/ftt or contact:
Carolyn Forest
Head of External Communications, Global Tax, KPMG International
+ 1 416 777 3857
About KPMG International
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 152 countries and have 145,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.