EU backs down on finance tax

Tim Wallace
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EUROPE is reining in its planned financial transactions tax (FTT), cutting back the level of the tax and limiting its scope dramatically after leaders realised it could do enormous damage to the economy.

The FTT is now likely to affect just share trades at first, rather than bonds and derivatives as originally planned, and at a rate of 0.01 per cent per trade – a tenth of the initial proposal.

The tax will still damage stock prices and make it more expensive for businesses to raise capital, but the damage will be much lower than feared.

The climbdown is a major victory for the finance industry, which has lobbied hard to convince ministers that the tax would hit savers and investors hard, hurting the real economy for very little gain.

Eleven EU countries wanted to implement the charge, arguing it would make banks pay for the financial crisis and raise up to €35bn (£30bn) for cash-strapped governments.

But the tax has raised barely half its expected level in early adoptee Hungary this year as it hit trading volumes and pushed business abroad, leaving officials fearing their tax would have similar consequences.

Governments in Italy and Spain also fear the charge on bonds would increase their own borrowing costs.

With complex extraterritoriality clauses in the original text, lawyers had already warned it would be difficult to enforce overseas.

Analysts say the move shows leaders have realised the FTT is a bad idea, but cannot scrap it as so much time has already been invested.

“This is now a face-saving exercise,” said Raoul Ruparel from OpenEurope.

“Now they have already given in it is hard to see the states ramping up the tax over time.”

Taxing shares alone may make the FTT similar to Britain’s stamp duty, and is easier to collect through domestic exchanges and clearing houses.

It will still harm the economy – Lord Forsyth’s Tax Commission found share prices are depressed by around 10 per cent by stamp duty – but to a lesser extent than initially planned.

Reducing the rate of the tax to 0.01 per cent would cut its revenues to around €3.5bn, officials told Reuters.

“Hopefully this shows the leaders are starting to listen to the industry, to the pension funds and investment funds who warned the FTT will hurt savers and investors,” said MEP Syed Kamal.

But the EC denies it is a climbdown.

“We believe it is a solid proposal, and well-designed tax. Of course we are not naïve enough to believe the proposal will be adopted word and letter as we tabled it – this is rarely the case in EU negotiations,” said a spokesperson for tax commissioner Algirdas Semeta.

“But states need to weigh up very carefully the pros and cons of changes they may want to make, and understand fully the impact this will have.”