January 9, 2012 / 2:45 PM / in 6 years

Q+A - Will Europe tax financial transactions without Britain?

BRUSSELS, Jan 9 (Reuters) - European finance ministers should map out plans on a financial transaction tax by March, German Chancellor Angela Merkel said on Monday, after Britain pledged to block any such tax across the 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 numerous hurdles.


Last year, the European Commission proposed a scheme to tax stock, bond and derivatives trades from 2014, potentially raising 57 billion euros 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 EU plan, 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. The money raised would be used for the EU’s central budget and member states.

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


Critics warn that such a tax simply scares off 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.

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 in applying a similar levy.

The Group of 20 top global economies 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.


Germany’s Merkel said on Monday that 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 be dropped. Dublin has carved out a niche in London’s shadow as a major centre for funds administration in Europe, and promoting the industry is a top government priority after the Irish banking crash.

A senior French official has even suggested that France could table its own tax as soon as next month, a move that may sway voters ahead of French presidential elections.

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

Karel Lannoo, a financial markets expert with Brussels think tank the Centre for European Policy Studies, said such a scheme was unlikely to win sufficient political backing.

“To introduce a tax on financial transactions in the euro zone only doesn’t make any sense because it would create huge distortions among countries,” he said.

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

“The best way would be to adopt a UK stamp-duty like approach where you change the basis of the taxation from the location of the trade or financial institution to the origin of the asset,” said Kapoor.

“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.”

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