Q+A-Can Europe tax financial transactions without UK?

BRUSSELS Tue Jan 24, 2012 8:21am EST

BRUSSELS Jan 24 (Reuters) - France outlined a blueprint for introducing its own tax on financial transactions on Tuesday, in a fresh attempt to win backing from other EU members for a scheme that Britain has pledged to block across the 27-member European Union.

Germany and France have revived a concept similar to that of U.S. Nobel laureate James Tobin, who proposed a tax on currency transactions in the early 1970s to discourage speculation. His idea was largely ignored until recently.

In the run-up to presidential elections this year in France, and German elections in 2013, and amid widespread mistrust of banks after the financial crisis, the debate has gathered momentum. But introducing a tax on trading faces hurdles.

Below are some questions and answers on the possible tax.

HOW MIGHT A TAX ON FINANCIAL TRANSACTIONS WORK IN PRACTICE?

Last year, the European Commission proposed a scheme to tax stock, bond and derivatives trades from 2014, potentially raising 57 billion euros ($74 billion) with much of it from Britain, the region's biggest trading centre.

It would be similar to Britain's current stamp duty of 0.5 percent on trading shares, which raised almost 3 billion pounds in the financial year to April 2011.

Under the proposal, which needs the backing of all 27 member states to become law, stock and bond trades would be taxed at the rate of 0.1 percent, with derivatives deals at 0.01 percent.

The EU's executive has said the tax would be imposed on all financial transactions between financial firms where one or both are based in the European Union.

But it may prove difficult to realise such a tax, plans for which have drawn criticism from the European Central Bank and others, who say it may drive trading out of countries where it is introduced.

WHAT ARE THE HURDLES TO IMPOSING THE TAX?

Critics say such a tax drives away traders. Sweden, one of the most outspoken opponents of the idea, saw trading migrate from Stockholm to London when it introduced its own levy in the mid-1980s.

European Commission officials are trying to develop a formula to spread the impact of the tax by taking into account factors other than the location of the trade. A German bank doing a deal in London with a Spanish bank, for example, would generate tax bills not in London, but in Spain and Germany. The banks' headquarters and not their UK branches would pay.

Should the EU press ahead with its own transaction tax within the 27-country bloc, the same problem of migrating trades could happen at a global level, as there is little hope the United States or others would follow suit with a similar levy.

The Group of 20 top global economies (G20) has abandoned attempts to agree a transaction tax in the face of opposition from the United States, China, Britain and others.

The prospect of an EU-wide tax has alarmed British Prime Minister David Cameron, who said he would block any such plan amid fears it would hurt the City of London, one of the world's top trading centres.

Without Britain's support, an EU-wide tax is impossible. But this would not necessarily stop a smaller group of nations within the bloc advancing with their own tax.

IF BRITAIN BLOCKS EU-WIDE TAX, CAN EURO ZONE GO IT ALONE?

German Chancellor Angela Merkel has said the euro zone could introduce its own transaction tax if all EU countries cannot agree.

But even within the euro zone, there is disagreement, and countries such as Ireland want the tax to apply either to all 27 states or to be dropped.

Dublin has carved out a niche in London's shadow as a major centre for fund administration in Europe, and promoting the industry is a top government priority after the Irish banking crash.

Experts are divided as to whether a tax for the euro zone or a smaller group within the 27-state bloc can work.

Sony Kapoor, founder of think tank Re-Define, said a tax among some EU countries was workable if collected properly.

"The best way would be ... where you change the basis of the taxation from the location of the trade or financial institution to the origin of the asset," Kapoor said.

"It could apply to euro zone registered financial assets such as company shares and bonds and derivatives transactions on those. So trading in German and French assets would be taxable."

But Karel Lannoo, a finance expert with the Brussels-based think tank the Centre for European Policy Studies, dismissed such a scheme as short-sighted.

"I just don't know how it could work for the euro zone. It wouldn't make any sense. We would be penalising ourselves and letting the benefit go to others through loss of business. It would leave the euro zone relying on manufacturing for growth."