Estonia kicks off haggling over European transaction tax

TALLINN/LONDON Thu Feb 20, 2014 11:51am EST

TALLINN/LONDON Feb 20 (Reuters) - Estonia has called for pension funds to be exempt from a planned tax on transactions in 11 European countries, piling pressure on France and Germany who want a deal on the levy within weeks.

It aims to recoup taxpayer money given to banks during the 2007-09 financial crisis, and is seen by some politicians as a vote winner at a time of public anger over bankers' bonuses and fines on lenders for rigging interest rates.

Attempts at a global tax failed to garner support, leaving 11 euro zone countries to go it alone led by France and Germany.

The two top euro zone countries pledged on Wednesday to push for an agreement on details of the tax by the European Parliament elections in May, a tight deadline given that it has taken years to get this far.

German Finance Minister Wolfgang Schaeuble expects a phased-in approach, starting with shares, and Wednesday's summit agreed to include derivatives at some stage, but gave no detail of other instruments or timeline.

All this is a far cry from the European Commission's original proposal with its "big bang" start in January for stocks, derivatives, bonds, repurchase agreements, securities lending and borrowing, and units in mutual funds.

Even a phase-in is already raising concerns, however, as it would mean a collection system would still have to be in place from day one, while revenues would only build slowly.

"For us, the starting point is still the Commission's proposal, and we would like to adhere to it as much as possible. We would be hesitant on a piecemeal approach, which is not cost-efficient," Estonia's finance minister Jurgen Ligi told Reuters.

Several instruments included in the Commission proposal are likely to be exempt, lowering the potential revenue to a fraction of the 35 billion euros a year originally envisaged.

"An important element for us is that pension funds must not be taxed. I am sure that this will be accommodated by others and it will not become a stumbling block," Ligi said.

SHARES FIRST IN QUEUE

Some countries want government and corporate bonds exempted also to avoid harming the economy or putting strain on sovereign debt.

Although French and German officials agreed on Wednesday to include derivatives, most are traded privately between banks, making it harder to collect revenues.

Any final deal must be backed by all 11 countries, meaning each has an effective veto if they don't get their way.

The tax's geographical reach and therefore the potential revenue may have to be reined in too after lawyers for the EU's member states said it might illegally ensnare countries outside the participating 11.

Britain, which is not taking part, is challenging the tax plan in the EU's top court because it impinges on London, the bloc's biggest financial trading centre.

The string of likely exemptions and a more restricted reach could mean a heavier burden on the asset classes that remain to be taxed.

In countries like Estonia and the other smaller states among the 11, there are few heavily traded, blue-chip companies offering the kind of volume needed to make the tax cost-effective.

In a bid to reassure the smaller countries, France and Germany said in their brief statement on Wednesday that the 11 would jointly examine revenue distribution.

France and Italy already have a tax on shares and Rebecca Healey of TABB Group consultancy said that had already triggered a shift in trading from the two countries to Germany.

"It was always our assessment that a political compromise would emerge at the end of the day that would imply a tax on share trading," Deutsche Boerse Chief Executive Reto Francioni told reporters on Thursday.

"I hope the politicians take a look at Italy and France and see what a financial transaction tax leads to: minus 20 percent on the cash equities market," said Francioni.

A phased approach will also raise the thorny issue of whether each step would be legally binding and automatic on all 11 countries or otherwise risk a patchwork emerging.

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