December 3, 2010 / 3:28 PM / 7 years ago

European countries clash over taxing banks

BRUSSELS (Reuters) - European countries have all but abandoned introducing a standard levy on banks, according to an internal report seen by Reuters that shows Brussels’ attempts to forge a pan-EU scheme disintegrating.

The executive EU Commission wants to agree a single approach to taxing banks, using the money for emergency funds to pay the cost of winding up a big lender like Fortis, whose demise sparked chaos in Belgium and the Netherlands.

But just as countries scrambled to protect their national interests during the crisis, they are now defending their right to decide how to tax banks and spend the money.

Although there has been failure to reach agreement on a pan-European approach, banks in the region’s financial capitals still face modest levies from January. Nonetheless, experts believe the row will undermine attempts to make banks pay more for future crises.

Yves Leterme, prime minister of acting EU president Belgium and who hosts meetings of European leaders, flagged this cacophony of views at a recent dinner with lobbyists, when he said countries were moving toward a “Sinatra” compromise - “I’ll do it my way.”

Reflecting these divisions in a report for a meeting of finance ministers next week, officials wrote: “Although the working assumption is that all member states should introduce systems of levies or taxes, in the very short term this is rather unlikely.”

One diplomat said next week’s meeting of finance ministers, where they will sign off a 85 billion euro ($112 billion) rescue for Ireland after its banking crisis overwhelmed the country, was unlikely to resolve these long-standing differences.

Sony Kapoor, head of London think tank Re-define, said failure to agree would undermine attempts to charge banks more.

“The possibility of banks moving balance sheets to low tax countries and lobbying by local banks to reduce the competitive disadvantage will ultimately lower the tax rate,” he said.


Though most European countries agree they would like to tax banks more, after a crisis many blame them for, they disagree over how this can happen and what should be done with the money raised.

Germany and Britain have been the first in Europe to introduce a modest levy on bank profits. But while Berlin is using levy revenue for an emergency fund, Paris and London want it for the public purse.

The European Commission will soon publish its blueprint to standardize the ways countries impose banking levies, although disagreement between capitals mean it may have to settle for a loose framework.

So far, bank levies are modest. A bank tax in Germany is designed to raise roughly 1 billion euros each year, while Britain is hoping to draw in more than twice as much.

European officials estimate that a wider bank levy on profits, based on staff pay and company earnings, could cost the industry between 5 billion and 20 billion euros across the EU’s 27 countries.

More could be made, they calculate, by imposing a tax on financial transactions, such as on bond trading. But European Central Bank President Jean-Claude Trichet has warned them against such plans, saying they would drive trading elsewhere.

Despite repeated attempts, the world’s major economic powers in the Group of 20 have failed to reach agreement on imposing bank levies or other banking taxes, which also makes it difficult for Brussels to go it alone.

U.S. President Barack Obama backed down on a bank levy in his package of financial reform as support among lawmakers in Washington dwindled.

Additional reporting by Julien Toyer; Editing by David Cowell

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