EU Seeks Broad Transaction Tax to Curb Rules ‘Patchwork’

The European Union proposed a tax on financial transactions that could be collected worldwide as soon as the start of next year by the 11 EU nations that have so far signed up to participate.

The proposal, which marks a new stage in the EU’s efforts to raise revenue from the financial industry, came under immediate fire. The EU plan would harm the German economy as a whole, eight lobby groups that represent industries ranging from the country’s commercial banks to skilled tradesmen said in a joint statement today.

The EU plan invokes “residence” and “issuance” ties to firms in participating nations, in a bid to prevent traders from escaping the levy by trading outside the tax’s zone, according to the proposal unveiled by EU Tax Commissioner Algirdas Semeta today in Brussels. To escape the proposed tax entirely, firms in other nations would have to entirely cease financial-services business with the 11 nations involved, according to the EU.

With the proposal, the EU is trying to curb what it sees as a “patchwork” of local levies across the region. Like a prior, failed proposal for all 27 EU countries, today’s plan would set a rate of 0.1 percent for stock and bond trades and 0.01 percent on derivatives trades.

Certain Types

The EU estimates the arrangement could raise 30 billion euros ($40 billion) to 35 billion euros per year. To become law, the proposal has to be approved by the nations that agree to participate. They now comprise Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia. All 27 EU nations can sit in on the talks and have the option to join.

The proposals exclude certain types of trading from the scope of the tax: day-to-day transactions by individuals and non-financial firms; primary offerings of stocks and bonds; and trades with central banks, the European Stability Mechanism and other official institutions. It also excludes primary market trades in units of collective investment funds along with certain restructuring operations.

While primary market government-bond sales would be exempted from the proposed tax, secondary market trading would be covered in order to prevent market distortions among financial products, Semeta said. Repurchase agreements would be included, though they would be taxed differently from trades with an outright buyer and seller.

Growth Concerns

By increasing the cost of raising capital, the proposed tax could become “another brake on economic growth” just as the euro area is struggling to pull itself out of the deepest recession since 2009, the Association for Financial Markets in Europe said. In addition, “an FTT with extra-territorial reach runs counter to that important objective” of cooperation among Group of 20 nations, the AFME, which represents international lenders including Deutsche Bank AG, BNP Paribas SA and Royal Bank of Scotland Group Plc, said in an e-mailed statement.

The plan also includes pension funds. The EU argues that a well-designed tax could make pension funds safer by encouraging them to make untaxed purchases on the primary market and hold securities to maturity. When EU ministers last month allowed the 11 willing nations to proceed with transaction-tax negotiations, the spill-over effects on pension funds were a concern.

The Netherlands, which has cited pension funds as “one of the criteria” in deciding whether to join the tax, is “disappointed with this proposal and will work hard to change it,” Dutch Finance Minister Jeroen Dijsselbloem said today in a statement. “It’s very important that these pension funds are not harmed by a new tax,” he said last month.

U.K. Abstention

A weighted majority of EU finance ministers backed the measure in a Brussels meeting last month. The U.K., home to the Europe’s largest financial center, abstained along with Malta, the Czech Republic and Luxembourg.

The proposed tax “will hit growth for the countries taking part, which is why Britain was right not to participate,” a U.K. government spokesman said today. The U.K. will study the measure’s “impact on non-participating EU member states and the single market,” he said.

The Confederation of British Industry said yesterday that the tax plan’s extended scope will require extensive review.

‘‘The commission’s FTT proposals are now significantly different from its initial plans, so the impact on growth and jobs must be assessed before proceeding,” Matthew Fell, CBI director for competitive markets, said in a statement.

While the U.S. will study the proposal, it doesn’t support the European financial transactions tax, according to a U.S. Treasury Department spokeswoman who asked to not be named. The tax would harm U.S. investors who bought affected securities, a concern that Treasury officials have raised with their European counterparts, the spokeswoman said.

The EU said it will investigate double-taxation issues that might arise from the proposal.

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