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The European Commission has announced details of a financial transaction tax (FTT) that will be implemented under enhanced cooperation. It will mirror the scope and objectives of the original proposal put forward in September 2011.
All transactions with an established link to the FTT zone – currently comprising the European Union member states of Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia – will be taxed at 0.1% for shares and bonds, and 0.01% for derivatives.
The residence principle will apply: tax will be due if any party to the transaction is established in a participating member state, regardless of where the transaction takes place. This will be the case both if a financial institution engaged in the transaction is itself established in the FTT-zone, or if it is acting on behalf of a party established in the jurisdiction.
As a further safeguard against avoidance, an “issuance principle” will be included, meaning financial instruments issued in the 11 participating member states will be taxed when traded, even if those trading them are not established within the FTT-zone.
The new tax will not apply to day-to-day financial activities of citizens and businesses, such as loans, payments, insurance, and deposits. Nor will it affect the traditional investment banking activities in the context of the raising of capital or to financial transactions carried out as part restructuring operations.
The plans also ring-fence refinancing activities, monetary policy and public debt management.
The proposed directive is set to be discussed by all 27 members of the EU, although only the participants in enhanced cooperation will have a vote. The European parliament will also be consulted.
“There is clearly going to be a lot of discussion about the final basis of taxation,” said David Newton, global financial services tax leader at PricewaterhouseCoopers. “Institutions within the financial services industry should be evaluating the impact on their businesses so they can identify key areas of concern and develop a strategy.”
Newton advised the financial services industry to take the opportunity to “get its point across”.
He added, “We shouldn’t underestimate the geographical reach of the proposed EU FTT. It will affect financial and non-financial institutions outside the EU, and not just those in the 11 countries who have already signed up for the enhanced cooperation procedure.”
