Plans for a European Union-wide Financial Transaction Tax are taking shape with battle lines drawn between member states ahead of the crunch EU leaders’ summit at the end of the month. The FTT has become the latest chapter in the bitter dispute between London and Brussels with David Cameron expected once again to lock horns with Merkozy. However, it now looks like the British Prime Minister will not be alone in opposing the so-called Tobin Tax.
Denmark, which took over the rotating EU presidency on January 1, has expressed concern. Sweden, Ireland and Poland are among the others also unhappy with the idea of taxing transactions on stocks, shares, bonds and derivatives, if for differing reasons. Even in Germany, Chancellor Merkel is facing opposition from within her own party, not to mention her coalition partner and the German banks.
“The FTT has become David Cameron’s Trojan horse,” one senior EU diplomat has told us. “After the last summit, it was all about Cameron’s and the UK’s isolation, but at least on the issue of the FTT, he seems to have made some new friends over Christmas.”
Cameron’s opposition to the so-called Tobin Tax proposal is such that he has instructed his diplomats preparing the summit to do everything in their power to stop the issue being put on the agenda of the January 29th showdown in Brussels. If it does make it on to the menu Cameron says he will veto any move to impose it on all 27 member states.
Merkel and Sarkozy on the other hand are adamant that a European FTT must be agreed, even if it is only at the level of the 17-nation Eurozone. Sarkozy even went as far as to say Paris would impose such a tax unilaterally if there is no agreement in Brussels.
But Denmark, like Britain, says an FTT will only work if it is agreed globally, while Ireland is among the Eurozone countries arguing that if a tax is agreed in Brussels it must be adopted by all EU27 and not just the Eurozone.
“FTT has become an emotive issue for just about every country and they will all have an opinion on January 29. One thing is for certain, it won’t be easy. Then again, is it ever easy when it comes to getting a deal among the 27?” another EU diplomat said.
One thing that all those supporting the plan agree on is that the current proposal put forward by the executive European Commission will have to be amended and more importantly it needs to be more robust.
That was also the general view expressed in the European Parliament’s economic affairs committee which debated the issue for the first time this week.
“It needs to be water-tight,” said Socialist MEP Anni Podimata who is tasked with writing the assembly’s legal opinion on the matter.
As expected, with the exception of the British Conservatives and their political group, there was general support in the committee for an EU financial transaction tax. Most agreed that the priority should be to aim for an EU-wide tax for 27 and if that is not achievable, then they should aim for the whole Eurozone.
Overall, the main concern of MEPs, like many member states and financial institutions, was over the so-called “Residence Principle” – taxes any trade authorised by a group that is located in the tax area such as its HQ in the EU, even if the actual transaction were executed in London, New York or Hong Kong. Many MEPs said it could lead to evasion or some companies moving jurisdiction. Although some MEPs pointed to the fact that the cost of the tax proposed was so low it would mean that it was more costly to move a company than pay the tax.
However, if France and Germany do press ahead without Britain and others, the initial Commission proposal for a tax across all 27 EU-member states will have to be amended to stop eurozone traders and banks from moving business to London and other potential transaction tax havens.
Officials said any new plan would still use the “residence principle”, but one idea is to require any financial product issued by a government or company in the transaction tax area also be subject to the levy, regardless of where the parties executing the trade are based.
Another proposal under consideration is to collect the tax via the post-trade plumbing of the financial system, through which financial transactions are cleared and settled. This could potentially allow Eurozone governments to tax euro-denominated derivatives trades, which are much harder for the taxman to capture, even when they take place between two British institutions.
However, both ideas are legally contentious and commentators say they will inevitably lead to flare-ups with Britain, particularly over how the tax is collected. So any Eurozone-only tax will certainly raise more serious legal questions than answer concerns.