Proposals for EU Financial Transaction Tax

On 28 September 2011, the European Commission presented a proposal for a financial transaction tax (FTT) in the European Union to take effect on 1 January 2014. The scope of the proposed FTT is broad and would catch most secondary market transactions involving financial institutions established in the EU. However, various uncertainties remain, including whether the FTT will ultimately reach implementation, although political momentum behind it continues to gather pace.

Under the Commission’s draft directive:

• The FTT would be levied on a range of financial transactions where a financial institution established in the EU is a party to the transaction.
• The financial transactions which would be caught are, broadly, (1) the transfer of financial instruments, including shares, bonds, and other securities, and units in collective investment undertakings and alternative investment funds, and (2) the conclusion or modification of derivatives. Primary market transactions, such as the issuance of shares or debt, would be excluded, however the subscription and redemption of units or shares in collective investment funds would be financial transactions for the purposes of the directive.
• The definition of financial institution is wide and would include investment firms, credit institutions, insurance companies, collective investment undertakings and their managers, alternative investment funds and their managers and pension funds.
• A financial institution will be established in a Member State of the EU for the purposes of the directive where, broadly, it has been authorised by that Member State to carry on business, or it is resident or has a registered seat or branch in that Member State. A non-EU financial institution would also be deemed to be established in the EU, and subject to tax, where its counterparty to the transaction is established in the EU.
• The rate of tax on a financial transaction, such as the transfer of shares or securities, would be at least 0.1 per cent of the consideration for the transfer. In respect of derivatives, the FTT would be at least 0.01 per cent of the notional amount of the derivative. Member States would, however, be free to impose higher rates.
• The FTT would be payable by each financial institution which is party to a financial transaction. Each party to a transaction (including a party which is not a financial institution) would also be jointly and severally liable for payment of the tax.

The French and German governments have led the support for an EU FTT as a prelude to an international FTT. There remains, however, UK government opposition to a FTT which is not introduced globally. The Commission’s papers accompanying its proposals recognise that “a co-ordinated approach is needed both at EU level to avoid fragmentation of the Single Market and at international level, in line with the ambitions for G-20 co-operation”.

The draft directive is to be considered by Member States in the EU's Council of Ministers, where it must obtain unanimous approval if it is to be introduced. The Commission is expected to present the proposals at the G20 Summit in November 2011.