Oxford University Centre for Business Taxation
Taxes and the financial sector
The EU Commission’s proposal for a Financial Transaction Tax
The European Commission’s proposal for a Financial Transaction Tax (FTT) has been one of the most controversial political issues in the EU over the past year. The proposal has the full backing of the EU Parliament, and is the subject of vocal and widespread campaigns by interest groups, although EU Member States are divided on the issue.
The CBT issued a policy briefing on the proposal just after it was published in September 2011, which was extended into a longer article in the British Tax Review. Our work questions each of the proposal’s four objectives as set out by the European Commission. The first objective is to raise revenue from the financial sector to recover the costs of the financial crisis, to compensate for the 'under-taxation' of the financial sector due to the VAT exemption for financial services, and to create a new revenue stream for the EU. All of these reasons are unconvincing; the link with the costs of the financial crisis is tenuous; the extent of under-taxation due to the VAT exemption is controversial, with mixed evidence, and there is no apparent reason why the EU should be financed by a financial sector tax. In any case, if the aim is simply to raise more revenue, then other, more efficient, taxes would be preferable.
The second objective is to create disincentives for transactions that do not enhance the efficiency of financial markets. The Commission’s target is short-term trading, particularly high-frequency trading (HFT). However, as the Commission itself has explained, the 'existing evidence is inconclusive about the impact of HFT on market efficiency'. In any event, targeted regulation appears to be a better option to address such concerns.
The third objective is to avoid a fragmentation of the internal market given the increasing number of national financial taxes being introduced. But these new taxes are not FTTs, and so this objective is not well grounded. The final objective is to pave the way towards a global introduction of the tax. But there is little evidence that the unilateral introduction of the tax in the EU will induce other countries to follow suit.
Will the bank levy meet its objectives?
This research analyses the new Bank Levy introduced in UK Finance Bill 2011. The Levy appears to have two clear objectives, and the research indicates that neither is likely to be fully met. The first is that banks should make a 'full and fair contribution in respect of the potential risks they pose to the wider economy'. This suggests that the levy should fall more heavily on banks that are larger, more fragile, and more systemically connected to the rest of the financial sector. The levy is related to fragility but makes no adjustment for the risk of the bank’s assets. The second objective is to encourage less risky funding and to complement the wider agenda to improve regulatory standards and enhance financial stability. While the levy may induce a higher capital-asset ratio, it may also induce banks to increase the average risk of their assets. This may result in a lower probability of default, but the reverse may also happen.
Bank bailouts, international linkages and cooperation
Banking crises are a frequent phenomenon and their fiscal burden can be substantial. Due to deepened international financial linkages, a crisis can spread rapidly from one country's financial sector to another. At the same time, with increased cross-border banking, domestic (non-bank) creditors are more often directly affected when a foreign bank gets into distress. Banking crises have therefore become a more international issue. This research formally studies problems that arise when banks operate across borders while government intervention is still limited by national borders. How should governments deal with banks in distress when their potential bankruptcy concerns depositors from different countries and international balance sheet connections can lead to cross-border contagion? The optimal bailout decision requires striking the right balance between distortions to the real economy from taxation, the losses that arise when banks are forced to sell long-run projects below their value and limiting income inequality within and between countries. When governments do not cooperate with each other, there are non-optimal outcomes. This research contributes to the debate on the advantages and disadvantages of different cooperation regimes.
The FTT Proposal under the Enhanced Cooperation Procedure
This research examines the controversial proposal in February 2014 by the European Commission for a Council Directive to implement a financial transaction tax (FTT) through the enhanced co-operation procedure. This procedure allows a sub-group of Member States, subject to the fulfillment of some conditions, to introduce measures that only bind the participating Member States and has been pursued following the Commission’s inability to garner the necessary support of all Member States for its original proposal for an FTT of September 2011.
The research analyses the proposal and the accompanying impact assessment, focusing on the newly-added features of the proposed tax and its potential impact on both participating and non-participating Member States. It concludes, amongst other things, that there will be both positive and negative impacts on non-participating Member States, such as the UK, but that the evidence provided in support of the proposal is unsatisfactory in a number of respects.
The research also examines the proposal from the perspective of public international law. It discusses the controversial extraterritorial reach of the proposed tax as a result of the “contagion effect” (following which an entity established outside participating Member States is subject to the tax if its counterparty is established in a participating Member State) and the 'issuance principle' (following which transactions between entities established outside participating Member States are subject to the tax if they involve instruments issued in participating Member States). It argues that doubts exist with respect to the compatibility of the 'contagion effect' and the 'issuance principle' with internationally-recognised legal principles.
The research also considers the legal requirements imposed by the EU Treaties on the use of the enhanced co-operation procedure. Whilst raising some concerns in relation to the proposal’s compliance with these requirements, the research concludes that the outcomes of any potential political or judicial challenge are uncertain.
Joachim Englisch, John Vella, and Anzhela Yevgenyeva, 2013, The Financial Transaction Tax proposal under the enhanced co-operation procedure: legal and practical considerations British Tax Review, 2, 223-259