International opposition to the FTT plans causing rows

Europe rows back on FTT plans

European countries pressing for a financial transaction tax are rowing back on plans in the face of international opposition and concerns about the economic damage it could cause.

Philiip Aldrick By Philip Aldrick, Economics Editor, and agencies1:48PM BST 30 May 2013Comments8 Comments

Introduction of the FTT is expected to be rolled out more slowly than initially proposed, the levy to be reduced, and derivative transactions to be excluded completely. The redesigned tax would raise only about a tenth of the annual Eu35bn hoped, according to a report by Reuters.

The retreat comes just days after France’s central bank governor Chritan Noyer warned that an FTT could “destroy” parts of the country’s banking industry, cost jobs, and damage the public finances. His words were striking because France and Germany have been leading the charge for an FTT, which was eventually agreed late last year by a minority group of 11 European Union members.

Britain has objected fiercely to the plan, and is challenging its “extra-territoriality” clause in the European court to stop the tax being applied in jurisdictions beyond the 11 signatories.

Originally, the FTT was meant to be a 0.1pc levy on equity and debt transactions and a 0.01pc tax on derivatives. It was supposed to be in force by January 2014.

However, under a new proposal, the equity and debt rate could drop to just 0.01pc and introduced more gradually. Rather than levying trades in stocks, bonds and some derivatives from 2014, it may now apply to shares only next year and to bonds up to two years later.

Derivatives may be covered after that, or the roll-out could be halted altogether if problems arise, such as if traders move their deals en masse elsewhere to avoid the charge.

“The whole thing will have to be changed quite a lot,” an officials, who has closely followed negotiations over the levy, told Reuters. “It is not going to survive in its current form.

“You can introduce it on a staggered basis,” said the official. “We start with the lowest rate of tax (0.01 percent) and increase it bit by bit.”

One euro zone ambassador involved in discussions among countries on the proposal told Reuters that early enthusiasm was waning as governments became aware of the potential pitfalls. “If one thing is clear, it’s that the financial transactions tax is not going to fly as far as originally hoped,” he said.

Appearing to confirm that the FTT is back on drawing board and changes are planned, a spokeswoman for Algirdas Semeta, the European commissioner in charge of tax policy, said: “There is a lot of technical work to be done still on the proposal. Depending on the speed of progress from here, it is still feasible that the common FTT could be implemented in 2014, although January 2014 is looking less likely.”

An FTT on shares would hardly be revolutionary. The UK already has a stamp duty on share transactions, of 0.5pc, and 40pc of the £3bn raised annually is estimated to come from overseas. France last year introduced its own share tax, at 0.2pc.

Seven months ago, Germany, France and nine other countries – Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia – agreed to press ahead with the levy, having failed to persuade all 27 EU member states to sign up.

But officials fear that an ill-designed tax would be enormously damaging. Mr Noyer said: “It will be essential to define the base, interest rates and scope of a possible financial transaction tax in order to prevent the risk of destroying entire segments of our financial industry or the offshoring of jobs, as well as the highly counterproductive effects on government borrowing and the financing of the economy.”

Few expect the US to apply the “extra-territoriality” clause, if the courts reject the UK’s objection. That would result in vast amounts of business leaving Europe for the US, or other jurisdictions, such as Hong Kong, Singapore, Dubai, and Tokyo.

As it stands, the tax faces many obstacles, including how it should be collected and whether it should be imposed according to where the buyer or seller is based, or where the traded security is issued. It also remains unclear how the tax could be levied on the trading of complex derivatives – a market that is valued in the trillions of euros.
Earlier this month, Sir Mervyn King, Bank of England Governor, revealed that the FTT did not even have the unqualified backing of the 11 members adopting the levy. He claimed there was “enormous scepticism” among politicians in countries signed up to it, adding that he could “not find anyone within the central banking community who thinks it is a good idea”.

Sir Mervyn hinted that Europe would use delaying tactics to kick the FTT into the long grass. German finance minister Wolfgang Schäuble fuelled the speculation earlier this month by playing down the significance of the tax. “We are just beginning this discussion. It is not a major concern to be very frank,” he said. “This year, next year … it’s not (a) major problem.”

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