Confusion Mounts for European Traders as Transaction Tax Clears Final Hurdle

Terry Flanagan

With plans for a financial transaction tax to be imposed across 11 European Union nations receiving the final blessing of approval in Brussels from the Council of Ministers earlier this week, there is still confusion as to who will be forced to pay the levy and also how effective it will actually be.

Of the 11 nations involved, the four biggest eurozone nations—Germany, France, Italy and Spain—have all committed to a project that is likely to see the finer points of the tax now agreed upon by the end of this year and implementation most probably coming some time at the end of 2014.

The European Commission is expected to propose details of the new tax in the coming weeks, before the 11 member states involved agree upon the final wording. The Commission’s original proposal last year—which would have encompassed all 27 EU member states before it was vetoed by the U.K., Sweden and others—was for a 0.1% tax on all share and bond transactions and a 0.01% levy on derivatives trades, but with a potential exemption for pension funds.

A recent study in Germany estimated that the 11-nation scheme could raise around €37 billion a year in trading taxes, but the question of who is liable remains.

The U.K. abstained from the Council of Ministers vote on the 11-nation tax, alongside the Czech Republic, Malta and Luxembourg. But this so-called ‘enhanced co-operation’ agreement now also means that EU member states outside of the scheme—including the U.K. and the City of London—will not now be able to influence the final shaping of the levy.

The European Commission has said that the tax, which is aimed at making the financial services sector pay for the global financial crisis, will be imposed on any trade involving a buyer or seller based in the 11 nations.

“This is a step backwards,” said Tom Miers, director of New Direction, a Brussels-based free market think tank. “These taxes will do nothing to reduce trading risk and will simply drive business elsewhere. We can only hope that the countries that have signed up to this see sense and refrain from imposing them. At least only a minority of EU countries have gone down this route.”

Major banks headquartered in the new tax area, such as Germany’s Deutsche Bank and France’s BNP Paribas, are likely to be hit by the full force of the new scheme, including any trades undertaken by these banks in places outside the levy’s remit such as London.

Banks based outside the area will be exempt from the tax but could become embroiled in the tax even if their counterparty is stationed in the transaction tax bloc, although the seller may be forced to pay the full levy in this case.

“It seems that this approach is full of potential loopholes and get-arounds and will certainly keep the consulting firms and accountants busy as they try to iron out these inconsistencies,” said Steve Grob, director of group strategy at Fidessa, a trading and technology company, in his latest blog.

The rules are all likely to add another level of complexity at a time when trading volumes in Europe are still subdued. The tax is also likely to hit high-frequency traders hard and may see more derivatives trades undertaken, especially outside of the 11-nation tax area.

A two-speed Europe is also set to be created in which many of Europe’s biggest stock markets—including Frankfurt, Paris, Milan and Madrid—will be affected by the tax, while others, such as London, Amsterdam and Warsaw, will not.

The other nations to support the financial transaction tax are Austria, Belgium, Greece, Portugal, Slovenia, Slovakia and Estonia. Netherlands, too, could also join up as it may be in favor of the tax under certain conditions. While France, Italy and possibly others either have, or are about to, introduce their own separate versions of the levy before the 11-nation EU scheme supersedes national law.

Eurocrats, though, were obviously delighted by the Council of Ministers’ decision.

“It is for milestone for EU tax policy, as it paves the way for more ambitious member states to progress on a tax file, even when unanimity could not be achieved,” said Algirdas Semeta, the European commissioner for taxation, after agreement was reached by the Council of Ministers on Tuesday.

“We are ready to react swiftly to today’s green light for enhanced cooperation. I will present the substantive proposal on the financial transaction tax within the next few weeks—drawing largely on our original proposal, as has been requested of us.

“It will then be for these 11 member states to take the reins, and discuss and agree this financial transaction tax they want to implement.”

While politicians in Brussels were also happy with the outcome.

“[The tax] will discourage the most speculative and risky transactions and bring the financial sector back to its original role, the financing of the real economy,” said Anni Podimata, a Greek socialist MEP who was charged with driving the financial transaction tax proposals through the European parliament.

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