ECB opinion on the financial transaction tax for the Hungarian authorities

24 July 2012

The European Central Bank (ECB) received a request from the Hungarian Ministry for the National Economy for an opinion on a new draft law introducing a financial transaction tax (the 'FTT Law'). ECB provides its opinion on the financial transaction tax.

Breach of the consultation obligation

According to Article 4 of Decision 98/415/EC, the ECB must be consulted ‘at an appropriate stage’ in the legislative process. This implies that the consultation should take place at a point in the legislative process which affords the ECB sufficient time to examine the draft legislative provisions and adopt its opinion (what was not case in this situation), and also enables the relevant national authorities to take the ECB’s opinion into consideration before the provisions are adopted. In this respect, the ECB once again stresses its position that even cases of particular urgency do not relieve national authorities from their duty to consult the ECB and to allow sufficient time to take into account its views in accordance with Decision 98/415/EC.

Effects of the FTT on the Magyar Nemzeti Bank (MNB)

The new FTT Law impairs MNB’s functional and institutional independence:

• First, it disrupts the monetary policy transmission mechanism by affecting the attractiveness of overnight deposits and MNB bills to the MNB and commercial banks, depending on the final burden-sharing of the tax.
• Second, the FTT affects the ability of the MNB to select freely the monetary policy tools that best serve the primary objective of price stability, as it introduces cost considerations that are unrelated to the original design of such tools. Thus, monetary policy instruments best suited for transmitting the MNB policy decisions to the wider economy in the absence of the FTT could be severely disabled by subjecting them to the FTT.
• In addition, the imposition of the FTT on the MNB’s operations, which is not justified for the reasons specified above, may interfere with the MNB’s financial independence. The MNB would need to pay the FTT from its own resources leading to de facto limiting the financial resources available to the MNB to carry out its ESCB-related tasks.

The general impact of an unharmonised introduction of the FTT

The ECB has drawn attention to the potential negative side effects of the Hungarian Government’s previous policy of temporarily raising the financial sector’s tax burden on the financial sector’s capital accumulation ability and credit availability. The FTT Law’s introduction of a permanent FTT, particularly in a manner which is not harmonised with other Member States, may produce distortions in financial markets and the real economy through:

• increasing the cost of capital as the tax burden is likely to be shared with users of financial services,
• reducing financial market liquidity and access to finance, by increasing the costs of transactions, and
• producing incentives for tax evasion and/or avoidance that may, inter alia, divert economic and financial activity to other Member States.

The ECB draws the attention of the Hungarian authorities to the advanced legislative process for harmonisation of the FTT at Union level through the proposal for a Council Directive on a common system of financial transaction tax and amending Directive 2008/7/EC.

Full opinion

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