On May 23, the European Parliament
adopted a controversial financial transaction tax that would impose a 0.1% tax for shares and bonds and a 0.01% tax on derivatives. The language casts a very wide net and would require financial institutions located outside the EU to pay the tax if they traded securities originally issued within the EU, as well as taxing shares issued outside of the EU but subsequently traded by at least one institution established within the EU.
In adopting the tax, the European Parliament took an ambitious approach, casting a wide net that would require financial institutions located outside the EU to pay the tax if they traded securities originally issued within the EU. The final language expands the original proposal adding the "issuance principle" which sweeps in these transactions occurring outside EU member states. For example:
Siemens shares, originally issued in Germany and traded between a Hong Kong institution and one in the US would have to pay the tax. Under the Commission's proposals, such transactions would have escaped the tax, because only financial institutions based within the FTT zone would be subject to it.
The final opinion also maintains what is referred to as the "residence principle," casting the tax's net ever wider. Under this principle, shares issued outside of the EU but subsequently traded by at least one institution established within the EU would be be subject to the transaction tax. The tax also applies the "UK Stamp Duty" model to to combat evasion by making it more expensive to evade the tax than pay it. The final language links payment of the tax to the acquisition of legal ownership rights, meaning that if the buyer of a security failed to pay the tax, he or she would not be legally certain of owning that security. Because the tax rates are low, the risk of faulty ownership is expected to be far greater than the potential financial gain from evading the tax.
Two important exemptions remain in the final language. Transactions by pension funds are exempt, as are transactions made on the primary market (i.e. purchasing of securities from the issuer when such securities are first placed on the market). The tax not intended to penalize investments of benefit to the real economy, but rather is aimed at aggressive and very active investment strategies, such as high frequency trading or very actively-managed pension funds.
As proposed, the opinion sets a December 31, 2013 deadline for Member States to adopt laws implementing the tax, and December 31, 2014 as the effective date for the imposition of the tax. The vote to adopt the tax was far from unanimous. But nine countries strongly support the tax: Austria, Belgium, Finland, France, Germany, Greece, Italy, Portugal and Spain. Proponents of the tax make clear that cooperation amongst member states in implementing the tax is required to make it truly successful; however, its implementation will not be "held hostage by a handfull of member states."
If it is not possible to establish the tax throughout the EU at the outset, enhanced cooperation should be envisaged, the resolution says. However, it also recognises that introducing the tax in a very limited number of Member States could lead to the single market being undermined and that measures should therefore be taken to prevent this. Ms Podimata said "With the EU having the largest financial market, it is up to us to make the first step. We cannot be held hostage by a handfull of Member States".