A taxing issue

The introduction of new tax regimes across Europe always sparks widespread debate among governing bodies, politicians and populations. The latest financial transaction tax (FTT) to be implemented under the enhanced cooperation procedure is no different.

Original FTT proposals were put forward by the European Commission in September 2011 as a way of taxing all transactions with an established link to the FTT-zone. Essentially it is planned that trading shares and bonds will be taxed at 0.1 per cent, while derivatives will be taxed at 0.01 per cent with total revenues expected to reach around €30 billion to €50 billion a year. Member states and their citizens want to ensure the financial sector makes a fair and substantial contribution to public finances.

According to the European Commission, the main objectives of the proposal are to harmonise legislation concerning indirect taxation on financial transactions, and create appropriate disincentives for transactions that do not enhance the efficiency of financial markets, thereby complementing regulatory measures to avoid future crises.

“The development of a common system of financial transaction tax in the EU reduces the risk of distortion of markets through a taxation-induced geographical delocalisation of activities,” the commission says.


At first glance, the FTT proposals appear to be relatively straight-forward to comprehend and their aims clear for all to see. However, exploring deeper into the subject, one soon realises the controversies and complications surrounding the tax.

NAPF EU and international policy lead James Walsh says: “It is not easy to say what the impact of the FTT will be yet, as it is still unclear as to what the tax will look like.

“But what I think we can be reasonably confident of is there will be an FTT at some point because there is strong political backing for it, including from the new grand coalition government in Germany.”

It is not quite clear whether there are now 11 or 10 member states involved because the Slovenians are wobbling, he adds.

“Overall the group of member states are having great difficulty in agreeing between themselves what the tax should look like. They are aiming to have the tax in place by the start of 2016 which to be frank sounds highly ambitious,” Walsh explains.

Arguments for and against the implementation of an FTT across Europe are rife and look set to continue as proposals are finalised and cemented into place. Supporters of the FTT say its purpose would be to reduce volatility in the markets, and to tackle some aspects of market behaviour that are not in the interests of investors.

Indeed, the Network for Sustainable Financial Markets argues pension funds should not be exempt. In a recent report entitled No exemption: the Financial Transaction Tax and Pensions Funds, the network of finance professionals argues “the FTT will help secure pensioners’ investments through reducing short-term speculative activity and will encourage funds to invest over longer horizons”.

“Any cost borne by pensioners will be minimal because pension funds are significantly longer-term investors so a micro-tax applied at entry and exit from the market will be negligible. A 0.1 per cent FTT is extremely modest compared to the 2 per cent and upwards of pension fund contributions absorbed by costs, and its impact is likely to be felt high up the investment chain, not by pensioners,” it says.

It is on the other side of the coin however, where there is most activity. PensionsEurope chief executive Matti Leppälä states that pension funds will suffer from the FTT, even with an exemption.

“PensionsEurope is deeply concerned about the rationale behind the FTT proposal,” he says. “The consequent increase of costs will ultimately be borne by the pension beneficiaries in terms of higher contributions or reduced benefits. There is no cause to ask European pension beneficiaries to pay for the crisis. They did not cause it but rather they have suffered a lot from it. We expect that the other sell-side and intermediate financial institutions taxed by the FTT will eventually pass their share of the tax to their customers such as pension funds.”

Leppälä underlines that pension funds, as institutional investors, are customers (buy side) in the financial markets and therefore the industry should be fearful that, as is the case with other taxes, the final customer will end up paying for it.

The Association for Financial Markets in Europe chief executive Simon Lewis agrees people should be fearful of a FTT.

“The intention of the participating member states to introduce an FTT by 2016 is disappointing. This would have a negative impact on growth and jobs, while creating uncertainty for investors by leaving the door open for further taxation through the step-by-step approach that is now envisaged.”


The future direction of the FTT is still up in the air and from the UK’s standpoint it is safe to say that Chancellor George Osborne will launch further challenges against its introduction.

In April this year, The European Court of Justice dismissed the UK’s first challenge to the FTT. The UK asked the ECJ to annul a Council decision authorising 11 member states to use the enhanced cooperation procedure to set up the FTT but the Court declared the challenge as “premature” as the details of the tax have not been finalised.

Walsh emphasises that the UK “is right to challenge the tax’s legality”.

“The ECJ is not saying the UK’s challenge is wrong, only that it is premature because the details of the tax are not yet clear. By challenging the FTT’s legality now, the UK government has protected its right to make a more detailed challenge later, once the full proposal is available”.

Furthermore, in May, Osborne announced the UK is to launch a fresh legal challenge after 10 EU countries reached preliminary agreement to introduce the FTT. Speaking at the Ecofin press conference of EU finance ministers in Brussels, Osborne said the UK would consider further action if the tax affected the UK economy.

“If European nations want to proceed with an FTT that only has an impact in their economy then that is their business,” Osborne said.

The countries agreeing to introduce a financial transactions tax include Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia and Spain.

European Commissioner for taxation and customs union Algirdas Šemeta responded to Osborne stating that “the Court of Justice laid to rest any speculation over enhanced cooperation on the FTT and legally it is 100 per cent sound”.

The UK government has pulled out all the stops recently to encourage pension saving, particularly through the auto-enrolment process, and industry figures have argued that the introduction of an FTT could prove to be a real dampener to this significant progress. The exact cost of an FTT is unknown, and as Walsh concludes, “it is all very well exempting pension schemes but if the asset managers who work for them are not exempted as well, then there is not really much point to such an exemption”.

Adam Cadle is News Editor, European Pensions

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