Cause and Effect in European Politics and Law

The Commission is considering a tax on profits and salaries in the financial sector

Ralitsa Kovacheva, October 14, 2010

If there would be a tax on financial transactions it should be global, because otherwise it would be more harmful then helpful, the European Commission says. The communication on financial sector taxation, presented by Tax Policy Commissioner Algirdas Semeta on October 7, shows that the Commission is more inclined to study taxation on profit and salaries in the financial institutions.

The Commission's position is that regarding financial transactions tax (FTT) there are some significant controversies. In general the revenues it might generate are heavily dependent on its scale (which transactions would be taxed) and the level of implementation (global, European or national), this is why calculating potential revenues is difficult and non-precise. Besides, the "generated revenues will be collected mainly in a limited number of countries, where financial activity is concentrated", meaning "the tax should be introduced in all countries and only some would receive the revenues".

A serious argument against individual introduction of FTT in the EU is that "financial activity is concentrated in a small number financial centres in and outside the EU which compete on global stage". If such a tax is introduced only in Europe, trade could easily shift towards other countries to avoid paying the tax. The Commission is also afraid of the possibility financial institutions to transfer part of the increased burden onto their clients and to increase the price of credits for companies and governments. All this requires the discussions about the FTT to be hold globally and the EU will continue the debate on the issue on a G20 level.

Regarding Europe, the Commission considers the imposition of a profit tax and a tax on salaries in the financial sector more appropriate (a financial activities tax, FAT), as proposed by the IMF. Unlike the FTT, the FAT will be applied to corporations. With a 5% rate (as the IMF proposes), the approximate revenue from it would be 25 bn euro in the EU.

Unlike the FTT, with this tax geographic imbalances are avoided because the revenues will not be that concentrated in the large financial centres. "Therefore the FAT is more appropriate to be collected as revenues for national consolidation which is an immediate task in many Member States". Last but not least, such a tax could be regarded as a complement to VAT in order to compensate the exception for financial services so far.

As a lot of technical work is still needed, the Commission will continue its research and will come up with more concrete proposals by the summer of next year. Whatever they might be, they will reflect the current leading principles: the financial sector should pay back the states that allocated significant financial assistance during the crisis and now suffer from serious debt and deficit problems; that additional taxation would contribute to greater stability of the financial markets and would diminish the risk behaviour; and that most financial services in the EU are not subjected to VAT which must be compensated with the future tax.

And last but not least, it is necessary a common European approach to be applied on the issue because some Member States have already started the introduction of national bank levies and taxes, and the variations might harm the European financial market by creating double taxation or fragmentation of the financial sector, the Commission notes.

The Commission's proposal caused severe criticism from the European Parliament in the face of the Greens. They expressed dissatisfaction with Commission's refusal to propose directly taxing financial sector on financial transactions, thus depriving Member States of an important source of revenues at a time when taxpayers' money are being used to save banks.

It was even expected the FTT to turn into the first euro-tax to be sued as a source of own revenues in EU's budget. At this stage, however, this seems unlikely. The more realistic possibility is the collection of a stabilisation tax to be collected from banks in special resolution funds, which the European Council has already approved and is expected soon the Commission to present a detailed proposal on the issue.

And regarding FAT, its approval, although far in the future, would probably meet the support of Parliament which in June approved a resolution for regulation of salaries in the financial sector and called on the Commission to make a legislative proposal. Member States' positions however continue to be very different. Bulgaria has already announced that it was against any new taxes on the financial sector. The proposal, though, is too tempting politically because the big profits of financial institutions and the generous bonuses of managers cause social unrest. Taxation on them "for the common good" would bring high ratings and pre-election red points for politicians.