EU Transaction Tax Bid Falters on Revenue Disagreement

The European Union must figure out how to handle revenues from a proposed financial-transaction tax to meet a year-end deadline for moving ahead with the levy in participating nations.

Ten nations pledged in May to seek agreement on a “progressive” tax on equities and “some derivatives” by the end of 2014, with implementation planned for a year later. As that deadline approaches, nations have found broad agreement on how to handle equities, according to an Oct. 27 planning document obtained by Bloomberg News.

Derivatives and revenues are the biggest obstacles to moving forward with a proposed tax by year end, according to Italy, one of the participating nations and also current holder of the EU’s rotating presidency. National officials are due to discuss the tax plan this week, ahead of a Nov. 7 finance ministers’ meeting in Brussels.

Italy proposed three possible models for shifting revenue from countries where transactions take place to nations where the trading firms are based, so that countries with smaller financial sectors wouldn’t be at a disadvantage. This would allow the tax to be collected in the country of issuance, then allocated to take account of other parameters like residence.

“Delegations could not agree on the solution of revenue distribution that would be acceptable to all of them,” according to the planning document. Willing nations are considering how to build the first phase of a trading tax, with an eye toward expanding it in future years.

Speculative Trading

EU policy makers have considered a transactions tax to raise money and discourage speculative trading, goals that have gained urgency since the financial crisis and the euro-area budget rules adopted in its wake. Efforts to build a common tax for all 28 member nations fell apart, followed by a scaled back proposal for a joint tax among 11 willing nations.

The plans have been criticized by banks and trading firms, which have warned that could curtail investment at a time when the EU is seeking to boost anemic economic growth.

“The FTT is about the worst idea of the last three centuries,” Wim Mijs, chief executive of the European Banking Federation, a Brussels-based industry group, told reporters yesterday. In some countries, the “cost of implementing it is higher than the possible gain,” he said.

After talks among all 28 EU nations collapsed, Germany, France, Spain, Italy, Belgium, Austria, Portugal, Greece, Estonia, Slovakia and Slovenia continued negotiations as part of a smaller potential FTT alliance. All except Slovenia signed the May 6 declaration, and the issues have not changed much in meetings since then.

‘Measurable Progress’

The Italian presidency said “measurable progress has been made towards convergence of views,” such as agreeing on what kind of equities to include. Participating nations are considering exemptions for small and non-listed companies, and possible compromises are in sight on both categories.

On derivatives, the European Central Bank has been invited to offer technical advice on “the potential issues arising from taxation of various categories of derivatives in terms of effects on monetary policy and financial markets,” according to the document.

Most participating nations are in favor of including equity derivatives, so that trading in equities doesn’t immediately jump to a non-taxed transaction. Still, some nations want to exclude equity derivatives, the document showed.

Monetary Policy

Some nations want to tax credit default swaps. Other nations have concerns about interest-rate derivatives because these trades have ties to monetary policy and government bonds.

“Divergent interests” continue to pre-occupy euro-area finance ministers in the bid to introduce financial transaction tax in 11 states, German Finance Ministry spokesman Martin Jaeger said on Oct. 20 at a press conference in Berlin.

Smaller nations have maintained that the tax needs to collect enough revenue to justify its expenses. Austria won’t participate unless the revenue generated outweighs the cost to the industry, Finance Minister Hans Joerg Schelling said in a September interview.

“I won’t be part of a fig-leaf tax announced for political reasons to counter evil speculators,” Schelling said. “If the overhead for banks, companies and stock buyers is bigger than the outcome,” the tax “doesn’t make sense,” he said.

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