In September 2011, the European Commission presented a plan for a financial transaction tax (FTT) that would apply to all member states of the European Union. However, in October 2012, when discussions failed to establish clear unanimous support for an EU-wide FTT, the 11 proponent countries asked the EC to prepare a revised proposal to be implemented using the Enhanced Cooperation Procedure (ECP). The revised proposal took shape as the draft Directive, published by the EC on 14 February 2013. As stated in the draft Directive, the main objectives of the FTT are to:
- ensure that financial institutions make a fair and substantial contribution to covering the costs of the recent crisis;
- create appropriate disincentives for transactions that do not enhance the efficiency of financial markets;
- harmonise legislation to ensure the proper functioning of the internal market; and
- avoid distortion of competition between financial instruments, actors and market places across the EU.
The draft Directive is the most ambitious attempt ever made to implement an indirect taxation on monetary transactions between financial institutions. Given that at least some of the FTT’s proponents actively hope that it will dramatically shrink the financial services sector. Opinions on the FTT’s merits vary even within the group of 11 member states (EU-11) that are committed to its implementation and genuine questions exist over the legality of the tax as it is proposed. These relate largely to its extraterritorial impact, which some believe could lead to discrimination against non-participating states, distort competition within the EU and impede the free movement of capital.
BDI calls on European Finance Ministers to scrap the project to introduce a FTT
Until today in 2016 none of the models discussed hitherto has managed to avoid the negative consequences for growth, employment and occupational retirement provision or the threat of fragmenting Europe as a location for finance and investment. If the European Commission’s stated goal consists in strengthening growth and jobs in Europe, the idea of a financial transaction tax must now be abandoned.
BDI expects negative consequences for the real economy inter alia from the tax treatment of hedging transactions, for instance in the area of foreign trade. This would weaken the competitiveness of companies in Europe. The tax would also have a negative effect on tax receipts since banks’ refinancing costs would increase markedly.
Yet BDI has ascertained that it is not only companies which would suffer under the tax, private and occupational retirement provision would also face unjustified burdens. Even though insurance companies, pension funds and other institutions of private and occupational retirement provision almost exclusively pursue long-term and prudent investment strategies, they would still be hit by the tax. Returns on investment and hence also the amount available to pay workers’ pensions would be considerably reduced.
Overall, the costs of the financial transaction tax would add up to several billions of Euros and would therefore lead to a massive additional burden on business and citizens alike. Even after nearly three years of work on the Commission’s current draft, no solutions to the numerous problems highlighted by the business community have yet been found. In the interest of a necessary stabilisation of the European economic area, the best idea would therefore be to abandon the project.