Monday 26 September 2016

EU transaction tax falters as deadline looms

Political wrangling sees proposed tax negotiations stall ahead of key Brussels meeting

Rebecca Christie

Published 29/11/2015 | 02:30

EU finance ministers are set to gather on December 7-8 in Brussels
EU finance ministers are set to gather on December 7-8 in Brussels

A proposed European financial transactions tax is floundering as 11 participating nations try to meet a December deadline to decide how to charge levies on an array of financial products.

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Nations still haven't decided which trades to tax, how to calculate levies or how to treat pension funds and government bond-related transactions, according to a document prepared for technical talks in Brussels.

The slate of unsettled topics suggests that nations will have trouble meeting the December deadline set earlier this month by Austrian Finance Minister Hans Joerg Schelling, who leads the negotiations.

"The FTT scope of transactions in shares has been subject to higher controversy," according to the document, which was prepared for tax talks among all 28 EU nations and has been obtained by Bloomberg.

The document asks whether the tax could work if it excludes pension funds, clearing houses and market-makers, and whether such a design would raise enough revenue.

The 11 nations need to decide soon if they are going to press ahead or stop trying, Schelling said after the November 10 meetings in Brussels.

Plans for a transaction tax have already failed among all 28 EU nations and the current talks are seeking a compromise among a smaller group that sought to press on under "enhanced co-operation" rules, which require consensus from at least nine nations.

Italy continues to push for the tax to include sovereign-debt derivatives, while most other nations have agreed to exclude those along with government bonds, Schelling added. Meanwhile, Slovenia and Estonia want the tax to have a broader cross-border reach to ensure it would raise sufficient revenue to be worthwhile, he said.

EU finance ministers are set to gather on December 7-8 in Brussels.

One way forward might be to exempt derivatives trades that are directly linked to government debt. The working document asks if this would create "substitution effects" as the market shifted into non-taxable transactions.

"Do you foresee any possibility of significant increase of focus by trades on exempted futures, forwards, options, credit default swaps, etc on sovereign bonds with a potential repercussion on the instability of underlying bond markets?" the document ponders.

Specific questions raised in the document include whether it makes sense to tax gross trades, as initially proposed by the European Commission, and whether the tax would be easier to implement if it exempted shares from outside the participating nations.

It asks what kind of national options would be workable and which methods would work best for derivatives trades.

The tax is aimed at proprietary trading, not market-making, according to the paper. At the same time, it asks whether exclusions should be limited to instruments that don't trade frequently, or whether it is possible to tell the difference.

"Would a market-making exemption be permissible if no objective criteria can be defined to distinguish market-making activities from taxable proprietary trading?" the paper asks.

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