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Tax the world: EU’s controversial ‘Tobin’ tax might take effect in 2014

Tax the world: EU’s controversial ‘Tobin’ tax might take effect in 2014
The controversial ‘Tobin’ tax on financial transactions which could raise over $40 billion a year has been agreed upon by 11 EU member states.

­The European Commission agreed a proposal for a financial transaction tax (FTT) to be introduced in eleven EU member states in 2014 despite wide spread opposition. The countries that supported the initiative are France, Germany, Belgium, Estonia, Greece, Spain, Italy, Austria, Portugal, Slovenia and Slovakia. Together they make up roughly two-thirds of the EU's GDP.

Now the law needs to be unanimously ratified by the governments of the 11 members of the FTT zone.

According to the Commission, the main aim of the tax is to raise public funds and encourage more responsible trading by financial institutions. The tax will affect all financial transactions carried out by financial institutions on all financial instruments and markets, except transactions involving the European Central Bank (ECB), the European Financial Stability Facility (EFSF), and the European Stability Mechanism (ESM).

On the table is an unquestionably fair and technically sound tax, which will strengthen our single market and temper irresponsible trading,” said Algirdas Semeta, EU Commissioner responsible for taxation.

According to the European Commission the FTT “will not apply to day-to-day financial activities of citizens and businesses,” to protect “the real economy.” Also exempt from the tax will be “traditional investment banking activities in the context of the raising of capital or to financial transactions carried out as part-restructuring operations.”

The tax is to levy 0.1 percent on stock and bond trades and 0.01 percent on derivatives transactions involving one financial institution with its headquarters in the FTT zone, or trading on behalf of a client based there.

The tax also includes tough anti-avoidance measures that would apply to trades executed outside Europe when no eurozone entity is buying or selling the product, which is causing the most controversy.

The long arm of the levy has raised the concerns not only in Britain, Luxembourg and other EU states, but also as far away as the US. Wall Street and the US administration joined others warning that the tax overreaches borders, flouts international treaties and “breaks the bonds that bind our global economy.

A US Treasury spokesperson said the tax would “harm US investors in the US and elsewhere who have purchased affected securities.”
The jurisdiction issues raise concern among big financial groups about double- and multiple taxation and trade protectionism.

These novel and unilateral theories of tax jurisdiction are both unprecedented and inconsistent with existing norms of international tax law and long-standing treaty commitments,” the groups argue in a letter to Algirdas Semeta, the EU tax commissioner. “There is a high risk that their adoption could lead to -double and multiple taxation and a deterioration of international tax co-operation and trade -protectionism.”

EU officials argue the tax will not place additional burdens on ordinary citizens, although many are concerned the tax “will hit savers and pensions.” Jorge Morley-Smith, head of tax at Britain’s Investment Management Association, told Reuters.

“The impact could be devastating in reducing activity … and could erode up to six out of every 30 years’ worth of contributions to an actively managed retirement savings plan,” he said. Further, stock lending could become uneconomical because the average fee was less than the planned tax.

According to Insurance Europe, which represents the bulk of the bloc’s insurance sector, “the tax would harm savings products at a time when people should be encouraged to save for retirement,” Reuters reported.

There is a number of problems associated with the Tobin tax, Angel Gurria, secretary general of the Organization for Economic Co-operation and Development (OECD), believes.

“It is very controversial for a very simple reason. Only a few countries will adopt it. And if it’s not adopted by all countries in the world, at least by countries that do an important volume of international financial transactions then it [transactions] can easily move to the next country,” Gurria told RT.

And the other problem is about what do you want the resources for – do you want it to recover losses incurred by the systems or do you want it to create a fund to be able to face any future crisis. Or do you want it just for general purposes and it is just one more tax in order to generate more revenue,” Gurria added.

Anna Bodrova, analyst from Investcafe, believes there should not be any rush in introducing the ‘Tobin’ tax in its current form.

In its present shape the ‘Tobin’ initiative might be harmful for capital markets. For example, introducing a tax on stocks will increase the cost of capital raising for companies, and the situation with bonds will be even more complex,” Bodrova told RT.

“This measure is quite ambiguous, but it can bring good results if it is implemented step by step, in a course of 2-3 years, so that to avoid provoke sharp market reaction,” Bodrova added.

“This tax is actually quite draconian and bad for the eurozone. It will drive a coach and horses through the single market and force banks to relocate outside the FTT zone

,” Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA) told the BBC. 

The ‘Tobin’ tax is named after the US economist James Tobin who proposed a global tax on currency trades in the 1970s. It was proposed by the EC in September 2011 and last January it was adopted by majority of EU’s Council of Finance Ministers in Brussels. However, as 27 member states could not agree, 11 eurozone countries applied to go it alone under “enhanced co-operation” rules.