Next month, the European Parliament will vote on a non-binding report recommending an EU Financial Transaction Tax.
In March, the European Commission will also publish its long-awaited impact assessments on the effect on EU competitiveness of the introduction of an FAT or FTT.
At the end of March, the European Commission's annual Tax Forum will be devoted entirely to taxation of the financial sector. The Commission "envisages policy action by summer 2011" on an FAT and at a global level "supports further exploration and development of an FTT."
Christine Lagarde, the French Economy Minister, will address the Tax Forum on behalf of the G20. Mme Lagarde has recently said that "no matter what, along with other countries that are willing, we (France) plan to put into place financial taxation." She suggested that Germany's Finance Ministry was going in this direction.
Following the Parliament's vote on an FTT and publication of the Commission's impact assessment, the Tax Forum is likely to be a key point in shaping the EU agenda and may have international significance at G20 level.
On the Financial Activities Tax, I thought you would find it useful to see some comments from the European Tax Commissioner Algirdas Šemeta before the European Parliament last month. He told the ECON Committee: "A Financial Activities Tax (FAT) appears to be a promising option within the EU. It could ensure that the financial sector is taxed fairly and generates much-needed revenues. Furthermore, it could ensure greater stability of financial markets by taxing profits and salaries including bonuses, which could deter excessive risk-taking. A FAT is also recommended by the IMF and by the large majority of academics as the most promising tool. The revenue of the FAT would depend on its design and how it interacts with the regulation of the financial sector. Even though revenue estimates should be interpreted with great caution, in its most extensive form and applied at a rate of 5%, the FAT could yield revenues of EUR 25 billion for the EU 27."
"Our analysis also shows that the likelihood of the burden falling on the consumer would be much less with FAT, and that the legal incidence of the tax would fall on the financial sector.
Regarding the risk to the competitiveness of EU financial institutions, the Commission will need to analyse the potential impact of FAT to ensure that the benefits of any tax we may introduce outweigh the costs. Preliminary findings show that the risk for competitiveness would be lower with EU FAT than with an EU FTT as banking activities are harder to relocate than (electronic) transactions".
As far as the FTT is concerned, notwithstanding reservations about the tax and a perceived need for it to be introduced globally, the scale of revenue potentially available is proving very attractive to policy makers.
While the FAT could raise €25 billion for the EU27, the FTT dwarfs this sum. As the Commissioner said: "Given the potentially high revenues that FTT could generate, it appears to be an attractive funding solution at global level. If applied globally and at a rate of 0.1%, tax revenues are predicted to be around EUR 60 billion. Estimates of even ten times this amount are cited by some studies if derivatives are included, although the Commission considers these latter figures to be highly uncertain".
The Parliament's draft report notes that "contrary to any other industry providing goods and services to final consumers, the financial sector is largely untaxed. In the EU there is a basic VAT exemption approach for all basic financial activities. At the same time the financial sector's activities stand for 73.5% of global GDP and therefore their tax exemption is a major market distortion."
This week the European Commission has issued a consultation document calling for evidence on the FAT and the FTT. It suggests that a broad version of the FAT would be designed to compensate for the VAT exemption of the financial sector and tax the sum of wages and profits. Alternative versions would tax only profits above a defined level, or excess returns due to "unduly risky activities." Finally an FAT could be a simple additional tax on corporate income, a measure which the Commission thinks would be comparatively easy to implement.
Turning to the FTT, the Commission suggests that there are two current policy alternatives. A broad based FTT would tax stock (including units in investment or pension funds, bond), currency and derivatives transactions on exchanges, as well as over the counter traded instruments. The tax base for a spot transaction would be the price paid and for derivatives the underlying value. A narrow based FTT would be limited to stocks and bonds.
The Commission believes that it is worth developing this issue with the US. Commissioner Šemeta told the Parliament: "I personally raised the issue with the US Treasury in Washington in December, and found a readiness amongst my US counterparts to discuss further once they have seen the results of our forthcoming impact assessment".
In summary, it is clear that there is real policy dynamism for further taxation of the financial services sector. In part this results from the mouth-wateringly large revenues for the EU which might result from even the more limited options currently on the table. Additionally, there is a strong ideological French dynamic for taxing the financial sector.
The Forum will continue to engage closely with these policy issues and I look forward to keeping in touch with you on them.
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