EC transaction tax to cost €57 billion a year

The European Commission is proposing a Europe-wide financial transaction tax which could cost the industry about €57 billion a year.
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The European Commission (EC) is proposing a Europe-wide financial transaction tax which could cost the industry about €57 billion a year.

The tax would be levied on all transactions of financial instruments between financial institutions when at least one party was located in the European Union (EU). The exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts at a rate of 0.01%.

The resulting revenues, which the EC estimated at €57 billion annually, would be shared between the EU and member states.

The tax originates from an amendment, passed in June, which the European Parliament enacted as a means of circumventing member states that had proposed freezing the EU's long-term budget between 2014 and 2020.

Member states would also be allowed to increase their share of the new revenue stream by taxing financial transactions at a higher rate.

“With this proposal, the European Union becomes a forerunner in the global implementation of a financial transaction tax,” said Algirdas Å emeta, commissioner for taxation, customs, anti-fraud and audit. “I have no doubt this tax can deliver what EU citizens expect; a fair contribution from the financial sector. I am confident that our partners in the G20 will see their interest in following this path.”

The transaction tax proposal will now be passed on to the European Council and European Parliament, where the EC hopes it will be processed by the end of 2012. The tax is expected to take the form of a regulation to ensure consistent application across all EU member states and will cover equities, derivatives, structured products and bonds. Following an implementation period to allow Europe's financial firms to adjust, David Boublil, EC spokesman for the EC's Directorate-General for Taxation and Customs Union, told that the tax would likely take effect in 2014.

The prospect of a financial transaction tax in Europe increased in the past few months. The European Parliament argued such a tax would “help to tackle the highly damaging trading patterns in financial markets, such as some short-term and automated high-frequency trading transactions, and curb speculation”.

At a meeting held in Paris on 16 August to discuss the ongoing European government debt crisis, French prime minister Nicolas Sarkozy and German chancellor Angela Merkel committed to drafting a proposal by the end of September.

However, market participants have expressed strong objections to such a tax on the basis that it would increase costs for long-term investors and decrease market efficiency by acting as a disincentive for market makers to provide liquidity. The Association for Financial Markets in Europe warned of risks to European economic growth, suggesting the tax would increase costs for a large section of the industry at a time of constrained budgets.

The idea of a financial transaction tax was first introduced by economist James Tobin, a former Nobel prize laureate who suggested that a tax be applied to foreign exchange markets to penalise short-term speculative behaviour. The idea was thrust back into the spotlight following the financial crisis by the UK-based Robin Hood Tax campaign, which now has over 82,000 members.