CITY firms face paying billions of pounds in taxes to foreign governments if a proposed financial transaction tax is implemented, according to a damning report released yesterday by interdealer broker Icap.
It warns that taxes levied on the activities of City firms will end up bankrolling the EU membership costs of other countries, while the British taxman misses out completely.
The research also finds that the policy will have a “negative effect on the real economy” and increase the cost of government borrowing.
“It is particularly ironic that London, as one of world’s leading financial centres, will generate the lion’s share of this revenue and act as collection agent despite the UK being outside the financial transaction tax zone and our government being vehemently opposed to the introduction of this tax,” said Icap chief executive Michael Spencer.
The proposed scheme – which will charge a levy on most equity, debt, and derivatives transactions – has the backing of 11 EU member states including Germany, France, and Spain. Even though the UK has refused to sign up, City businesses face paying the tax if they do deals with firms in compliant countries.
Countries that sign up to the tax will split cross-border receipts equally, so a deal between a German and a Spanish firm would see both nations take half of the money raised. But because Britain has refused to take part, Icap warns that the full tax payment on any deal involving a City firm and a member state will go to the foreign country. Two-thirds of the total raised will go directly to the EU, with participating countries enjoying reductions in their contributions to the bloc.
Mark Field, Conservative MP for the Cities of London and Westminster, told City A.M. that applying the tax to City firms could amount to Britain “subsidising Eurozone countries via the back door”.
“Over the last two years the coalition government has hinted at support for banking and fiscal union within the Eurozone,” he added. “But if you build up institutions that only affect Eurozone countries then they can still impact the City of London.”
Separate research from Barclays suggests the tax will halve derivatives trading volumes, push business overseas and cut EU GDP by 0.28 per cent. Last night a Treasury source insisted that the “opportunity to influence this hasn’t passed” and discussions with other EU nations are ongoing.