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FTT debate poses more questions than provides answers
Tax proposals at an EU level always generate much sound and fury. So it is with the financial transactions tax (FTT), which is daily news in European capitals, where governments face electorates angry at austerity, ratings downgrades and nursing an almighty hangover from the credit binge.
Monsieur Sarkozy continues to champion the FTT and the new Spanish government is reasonably enthusiastic about it. While Paris drives forward, Berlin appears to be somewhat more equivocal as to the timing of the FTT, but appears, largely, to be in favour of doing something, sometime.
The UK, USA and China are against the FTT, as is the Irish government, where Enda Kenny is reported to support an FTT only if it were to be adopted on an EU-wide basis. This is really code for never, as it can safely be said that unanimity among member states on an FTT is unlikely.
While political brinkmanship is the order of the day, it is clear that the Irish Government must view as a priority the protection of jobs within the IFSC and the financial services industry. For Ireland, or indeed much of Europe, the worst case scenario would involve the City of London operating outside the FTT, hoovering up financial transactions currently booked in Dublin, or Paris, or Frankfurt.
So, what is the FTT? In outline, the FTT would impose a levy of 0.1% on the value of transactions involving stocks and bonds, and a levy of 0.01% on derivative transactions. This, the European Commission estimates, could raise €57 billion per annum, if introduced on an EU basis.
An FTT is also viewed in some quarters as a way to enhance the efficiency and stability of financial markets and reduce their volatility. Proponents also see it as delivering a significant contribution to the public purse by financial institutions. Unsurprisingly, the frequency of calls for such a tax have increased in direct proportion to the amount of financial support received by financial institutions during the current economic crisis.
Opponents argue that the imposition of an FTT by the EU, or the Eurozone, or even by a few member states, would drive these transactions elsewhere. No money would be raised in the EU, because the paperless transaction would take place in New York, Hong Kong or Shanghai or some other less expensive location.
Furthermore, the anti-FTT argument suggests that, even if any tax were to be collected, it would be borne by the consumer, in the form of pension funds owned by hard-pressed taxpayers.
So what would the cost be? While no estimates exist for Ireland, the Dutch pensions, insurance and asset management sectors have warned that the tax would cost the country’s investment industry €4 billion a year, and cut the value of pensions by as much as 10%. For these reasons, the City of London and the UK government is firmly against a European Union FTT.
On this front, the interaction of politics with international tax is always fascinating. No doubt aware that the FTT would generate substantial sums only if introduced throughout the EU, but that this is totally unacceptable to the UK, Monsieur Sarkozy has changed tack, and is now seeking to reduce the UK’s freedom to manoeuvre.
He has done this by voicing the possibility of a unilateral introduction of the FTT by France, and perhaps some other member states. He has hinted that France would seek to impose the FTT on euro denominated transactions, irrespective of where they were traded.
As extreme as this sounds, there is form here in a related area. The UK is currently taking the European Central Bank to the European Court of Justice, to argue against a proposed requirement that euro denominated transactions be dealt with by clearing houses located in the euro zone only.
Leaving the political aspects aside, the proposal for a Sarkozy FTT raises interesting legal points.
Firstly, does EU law permit France, together with some other member states, or even the Eurozone, to unilaterally to impose an FTT? Put another way: can one member state or a number of member states potentially impede the free movement of capital by imposing a cross-border tax?
While the answers to these questions are unclear, it is plausible to suggest that this would depend upon whether the tax is designed to raise funds for the EU itself, or for each individual member state. It would also seem more plausible, politically and logistically, for each member state to impose its own tax rather than an EU-wide tax.
There are many more questions left to be answered, however.
On the France/UK spat, what is the strength of M Sarkozy's threat to David Cameron, that France or the Eurozone would seek to impose the tax on euro denominated transactions, irrespective of where they were traded? And extending this argument further, would this apply only to London and other EU financial centres, or would it extend to New York, Hong Kong or Shanghai?
Finally, the extra-territorial application of an FTT, like any tax, raises immense problems of collection and enforcement. How would these issues be dealt with?
The key point here is that there are no definitive answers to so many of these questions, a conundrum which is no doubt exercising the minds of the civil servants in Paris and Berlin.
Furthermore, when viewed against these thorny legal issues, it is not surprising that, however politically important the proposed FTT may be in Paris, its design will prove to be very difficult.
The key for Ireland and the European Union, however, is to remain cognisant of the impact of such a radical change.
Certainly, the idea of a unified, stable and FTT-funded Fortress Europe, which could withstand the pressures of global markets, may seem appealing in some quarters, particularly when one considers the volume of transactions which take place within Europe, and the potential revenue that could be gained by taxing these.
However, in such a globalised world, it could appear naïve for the European Union to create too strong a fortress, as to do so may merely drive much of this business outside of Europe itself.
This article was first published in the Sunday Business Post on Sunday 22 January 2012.