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Taxing financial transactions as an alternative to the regulation of financial markets

Camilla Buzzacchi

Proposal for a
COUNCIL DIRECTIVE
implementing enhanced cooperation in the area
of financial transaction tax
COM(2013) 71
(Extract)

Chapter I

Subject matter and definitions

Article 1

Subject matter

1. This Directive implements the enhanced cooperation authorised by Decision 2013/52/EU by laying down provisions for a harmonised financial transaction tax (FTT).

2. Participating Member States shall charge FTT in accordance with this Directive.

(….)

Chapter II

Scope of the common system of FTT

Article 3

Scope

1. This Directive shall apply to all financial transactions, on the condition that at least one party to the transaction is established in the territory of a participating Member State and that a financial institution established in the territory of a participating Member State is party to the transaction, acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction.

2. This Directive, with the exception of paragraphs 3 and 4 of Article 10 and paragraphs 1 to 4 of Article 11, shall not apply to the following entities:

(a) Central Counter Parties (CCPs) where exercising the function of a CCP;

(b) Central Securities Depositories (CSDs) and International Central Securities Depositories (ICSDs) where exercising the function of a CSD or ICSD;

(c) Member States, including public bodies entrusted with the function of managing the public debt, when exercising that function.

3. Where an entity is not taxable pursuant to paragraph 2, this shall not preclude the taxability of its counterparty.

4. This Directive shall not apply to the following transactions:

(a) primary market transactions referred to in Article 5(c) of Regulation (EC) No 1287/2006, including the activity of underwriting and subsequent allocation of financial instruments in the framework of their issue;

(b) transactions with the central banks of Member States;

(c) transactions with the European Central Bank;

(d) transactions with the European Financial Stability Facility and the European Stability Mechanism, transactions with the European Union related to financial assistance made available under Article 143 of the TFEU and to financial assistance made available under Article 122(2) of the TFEU, as well as transactions with the European Union and the European Atomic Energy Community related to the management of their assets;

(e) without prejudice to point (c) and (d), transactions with the European Union, the European Atomic Energy Community, the European Investment Bank and with bodies set up by the European Union or the European Atomic Energy Community to which the Protocol on the privileges and immunities of the European Union applies, within the limits and under the conditions of that Protocol, the headquarter agreements or any other agreements concluded for the implementation of the Protocol;

(f) transactions with international organisations or bodies, other than those referred to in points (c), (d) and (e), recognised as such by the public authorities of the host State, within the limits and under the conditions laid down by the international conventions establishing the bodies or by headquarters agreements;

(g) transactions carried out as part of restructuring operations referred to in Article 4 of Council Directive 2008/7/EC17.

Article 4

Establishment

1. For the purposes of this Directive, a financial institution shall be deemed to be established in the territory of a participating Member State where any of the following conditions is fulfilled:

(a) it has been authorised by the authorities of that Member State to act as such, in respect of transactions covered by that authorisation;

(b) it is authorised or otherwise entitled to operate, from abroad, as financial institution in regard to the territory of that Member State, in respect of transactions covered by such authorisation or entitlement;

(c) it has its registered seat within that Member State;

(d) its permanent address or, if no permanent address can be ascertained, its usual residence is located in that Member State;

(e) it has a branch within that Member State, in respect of transactions carried out by that branch;

(f) it is party, acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction, to a financial transaction with another financial institution established in that Member State pursuant to points (a), (b), (c), (d) or (e), or with a party established in the territory of that Member State and which is not a financial institution;

(g) it is party, acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction, to a financial transaction in a structured product or one of the financial instruments referred to in Section C of Annex I of Directive 2004/39/EC issued within the territory of that Member State, with the exception of instruments referred to in points (4) to (10) of that Section which are not traded on an organised platform.

2. A person which is not a financial institution shall be deemed to be established within a participating Member State where any of the following conditions is fulfilled:

(a) its registered seat or, in case of a natural person, its permanent address or, if no permanent address can be ascertained, its usual residence is located in that State;

(b) it has a branch in that State, in respect of financial transactions carried out by that branch;

(c) it is party to a financial transaction in a structured product or one of the financial instruments referred to Section C of Annex I to Directive 2004/39/EC issued within the territory of that Member State, with the exception of instruments referred to in points (4) to (10) of that Section which are not traded on an organised platform.

3. Notwithstanding paragraphs 1 and 2, a financial institution or a person which is not a financial institution shall not be deemed to be established within the meaning of those paragraphs, where the person liable for payment of FTT proves that there is no link between the economic substance of the transaction and the territory of any participating Member State.

4. Where more than one of the conditions in the lists set out in paragraphs 1 and 2 respectively is fulfilled, the first condition fulfilled from the start of the list in descending order shall be relevant for determining the participating Member State of establishment.

Chapter III

Chargeability, taxable amount and rates of the common FTT

Article 5

Chargeability of FTT

1. The FTT shall become chargeable for each financial transaction at the moment it occurs.

2. Subsequent cancellation or rectification of a financial transaction shall have no effect on chargeability, except for cases of errors.

Article 6

Taxable amount of the FTT in the case of financial transactions other than those related to derivatives contracts

1. In the case of financial transactions other than those referred to in point 2(c) of Article 2(1) and, in respect of derivative contracts, in points 2(a), 2(b) and 2(d) of Article 2(1), the taxable amount shall be everything which constitutes consideration paid or owed, in return for the transfer, from the counterparty or a third party.

2. Notwithstanding paragraph 1, in the cases referred to in that paragraph the taxable amount shall be the market price determined at the time the FTT becomes chargeable:

(a) where the consideration is lower than the market price;

(b) in the cases referred to in point 2(b) of Article 2(1).

3. For the purposes of paragraph 2, the market price shall be the full amount that would have been paid as consideration for the financial instrument concerned in a transaction at arm's length.

Article 7

Taxable amount in the case of financial transactions related to derivatives contracts

In the case of financial transactions referred to in point 2(c) of Article 2(1) and, in respect of derivative contracts, in points 2(a), 2(b) and 2(d) of Article 2(1), the taxable amount of the FTT shall be the notional amount referred to in the derivatives contract at the time of the financial transaction.

Where more than one notional amount is identified, the highest amount shall be used for the purpose of determining the taxable amount.

Article 8

Common provisions on taxable amount

For the purposes of Articles 6 and 7, where the value relevant for the determination of the taxable amount is expressed, in whole or in part, in a currency other than that of the taxing participating Member State, the applicable exchange rate shall be the latest selling rate recorded, at the time the FTT becomes chargeable, on the most representative exchange market of the participating Member State concerned, or at an exchange rate determined by reference to that market, in accordance with

the rules laid down by that Member State.

Article 9

Application, structure and level of rates

1. The participating Member States shall apply the rates of FTT in force at the time when the tax becomes chargeable.

2. The rates shall be fixed by each participating Member State as a percentage of the taxable amount.

Those rates shall not be lower than:

(a) 0.1% in respect of the financial transactions referred to in Article 6;

(b) 0.01% in respect of financial transactions referred to in Article 7.

3. The participating Member States shall apply the same rate to all financial transactions that fall under the same category pursuant to points (a) and (b) of paragraph 2.

PAROLE CHIAVE: Taxing financial transactions - financial markets

  

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Sommario:

1. The Commission's interest in financial taxation - 2. Financial taxation to correct competition: similarities with the environmental tax - 3. What is the recipe for financial market stability: taxation or regulation? - 4. The option to tax: is it a purely political choice? -


1. The Commission's interest in financial taxation

In recent years European institutions have shown great conviction in taking the road of financial taxation: although – and we must point this out here – the literature has not reached any unequivocal position on the suitability of this form of taxation [1]. The topic is of particular interest as a legal analysis of the intervention of European public institutions in not just economic but also social relations, as it highlights a trend worthy of attention: the European institutions, and in particular the Commission, have a special sensitivity to the objectives of “social justice” which can be pursued through regulatory measures and the rescaling of competition and the market. The purpose of this article is therefore to propose the introduction of a framework for taxation of financial transactions, based on essentially social and distributive grounds; it therefore concerns the willingness of the EU to take charge of economic and social imbalances, which today represent inequalities and prevent people from exercising the rights to which they are entitled. Back in 2010, the first communication from the Commission entitled Financial Sector Taxation [2] set out the reasons for a tax on these particular activities. The first reference document therefore consists of an act of so-called soft law, a non-binding but already very significant statement on the position taken by the European institutions in this area; despite the absence of any legal status, it is of particular interest for the approach adopted to “fiscal policy”. The context is that of the economic and financial crisis within which this new mode of taxation would be an appropriate contribution to achieving a threefold goal. First, it would probably improve the stability of the financial sector, by discouraging certain high-risk activities and at the same time making it a source of tax revenue. Second, the new taxes would affect a sector that has been judged to be largely responsible for the onset and extent of the crisis and its negative effects on public debt across the world. As a result, these taxes could be seen as a contribution which the financial sector, to which some governments have provided massive support during the crisis, makes to the economic systems, as the resources so collected could achieve a fiscal consolidation and create reserve funds. And finally, since the majority of European financial services are exempt from [continua ..]

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2. Financial taxation to correct competition: similarities with the environmental tax

The basic premise of the latest proposal of the Commission, which in 2013 sought to enhance cooperation, is quite unusual when compared with the purposes that have led in the past to the Community harmonisation of indirect taxes. The Commission with the proposed directive takes an unusual position in relation to financial market dynamics, identifying those markets among the causal factors of the recent economic and financial crisis and providing a specific intervention for them which is intended to produce a correction, not to say outright compensation. The financial sector is singled out as a major contributor to the economic crisis, the costs of which were borne by governments and European citizens but not by the financial operators themselves. The Commission therefore embodies the opinion, widespread in Europe as well as internationally [13], that the financial sector should “contribute more fairly given the costs related to management of the crisis and the current insufficient taxation”. In particular, financial taxation is intended to achieve three objectives: first, it should harmonise legislation on indirect taxation of financial transactions, which is necessary to ensure the proper functioning of the internal market of financial instrument taxation and avoid distortions in the competition between instruments, operators and financial markets throughout the European Union. Secondly, taxation in this manner is expected to ensure a fair and reasonable contribution from financial institutions in order to cover the costs of the recent crisis, as well as to ensure a level playing field with other sectors in fiscal terms; and ultimately the aim is to create appropriate mechanisms that would demotivate transactions that do not contribute to the efficiency of financial markets, in order to avoid future crises. This set of objectives is considered achievable only through the initiative of the Union; only this “could in fact prevent financial markets from becoming fragmented across the activities and states and at the level of products and operators, by ensuring equal treatment of EU financial institutions and therefore, ultimately, the proper functioning of the internal market. The development of a system of common financial transaction taxes in the Union reduces the risk of market distortion due to the geographical relocation of the activities induced by the tax system” [14]. The peculiarity of the process started [continua ..]

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3. What is the recipe for financial market stability: taxation or regulation?

The process of adoption of the European legislative framework on tax on financial transactions or the Financial Transaction Tax (FTT) seems incomplete at the moment, and, since this is the indispensable condition for states to deploy it in a coherent and consistent manner, it is not possible to express an opinion on its progress, which has only just started. Although the statistics on effect are not currently available yet, and therefore not measurable, we can still speculate about the motivation and the appropriateness of this choice. The line of argument here is however still broader as it goes beyond the analysis of this single proposal. It is necessary to reflect on the broader theme of the many instruments which could lead to financial stability. The instruments of taxation are in fact different from other instruments, which are already well known and used [23], also intended to achieve the objectives of financial stability. This is primarily in reference to the nature of regulatory approaches, which the European institutions have undertaken since the end of the last century – with the banking directives, then collected and codified in 2000 by Directive 2000/12/EC; and later supplemented by subsequent acts on financial supervision – always remaining the preferred route to achieve financial market conditions that guarantee the freedom of movement of services and establishment, and prevent actions of operators which lead to mistrust and instability. It is clear that this question cannot be answered in a definitive manner: it is only possible to allude to problematic aspects, such as stressing that until now efforts have been made only for the preparation of a framework of regulation and supervision, and highlighting how, in recent years, a profoundly different vision has surfaced, a vision that somehow advocates operating hand in hand with the regulatory setting. With this in mind, it is necessary to reflect on the functionality and convenience of the alternative route – that of taxation as a mechanism for the recovery of stability – which is designed to produce effects and consequences that must be weighed when trying to maintain competition in financial markets. Before proceeding with such an evaluation it is necessary to observe that taxation could be considered also a form of regulation, and not a proper alternative route. This is particularly true if we discuss just about environmental taxes. The literature agrees [continua ..]

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4. The option to tax: is it a purely political choice?

It is now quite clear that the world view that has predominated in the economic and political environment in recent decades has been guided by the principle according to which “the ‘freest’ markets, i.e. the financial markets, cannot produce systematically wrong price signals, the type of signals one would see if trending were the most characteristic property of asset price dynamics”: such a cultural context can only be contrary to any form of taxation on transactions [53]. And yet, despite the lack of predisposition on the part of government institutions, financial institutions and traders in this direction, the most recent literature has highlighted the fact that using this method of taxation “Governments have an additional instrument at hand to influence trading activity” since the levy aims to reduce “regulatory arbitrage, flash trades, overactive portfolio management, excessive leverage and speculative transactions of financial institutions – activities that have contributed to the financial crisis”. In a perspective of Business Ethics, “a Tobin-like tax on stock transactions might be just a means of achieving greater justice in the distribution of the social cost burden. We have noted that such a tax, implemented properly, might also be less costly and more effective in internalising the social costs of doing business than regulation” [54]. And in any case, even if, contrary to expectations, the harmful transactions are not contained, at least the FTT will generate “large tax revenues that can contribute to covering the costs of the financial crisis,” although there is awareness that “attempts at tax avoidance are, of course, inevitable, and therefore the effect of the tax should be monitored closely so that the governments can react quickly if tax loopholes and tax-induced geographical relocation plans of financial institutions come to light” [55]. The scale of the problem seems to be a more than sufficient reason to justify such taxation. It has been observed that supporters of FTTs generally wish to use them to achieve one or both of the following goals: raising revenue from the financial sector to help pay for the costs of the recent financial crisis or for global development; and reducing financial market risk and helping to prevent asset price bubbles. The ease of collecting such a tax on exchange-traded instruments is also frequently [continua ..]

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