EU FTT plan is a historic opportunity

Today, European Commission President José Manuel Barroso announced before the European Parliament that the Commission has adopted a proposal to set up a Financial Transaction Tax (FTT) in the European Union. Civil society organisation such as the international alliance of Catholic development agencies CIDSE call on the Finance Ministers of all EU member states to endorse the plan when they meet on 5 October 2011, making sure sufficient money is earmarked for the fight against poverty and climate change. Bernd Nilles, Secretary General of CIDSE, qualified the initiative as “an important victory for justice and solidarity” being in sight.

The Directive would establish an EU-wide tax applied on a broad range of financial transactions ranging from stocks and shares to futures and derivatives in organised markets and over-the-counter trading. Unfortunately, the Directive remains vague about what FTT revenues should be spent on. CIDSE reckons it is inconceivable that they would simply go to replenish the EU budget or national coffers.

A closer look to the draft version of the Directive reveals a mixed picture. Positive elements are:

* Establishment of an EU-wide tax applied on a broad range of financial transactions ranging from stocks and shares to futures and derivatives in organised markets and over-the-counter trading.
* It will be difficult to evade the tax, as the FTT will be applied on the basis of residence. This means that one of the parties to the transaction should be authorised to act, or be registered, or reside, or have a branch, in a member state for it to be taxable.
* The Directive could also contribute to fiscal transparency by taxing transfers even between daughter concerns within the same mother company. Such transactions are notorious for being non-transparent and under-valued. Taxes on such transactions will be calculated on the basis of the market price, making it more difficult for parties to ‘fix’ the value of a transaction to suit their own purpose.
* EU member states must implement an FTT by 2014, rather than the earlier mentioned implementation by 2018 at the latest.

Negative aspects include:

* There is no clear stipulation that the revenues of the FTT should be used to tackle poverty and climate change. While the Directive does acknowledge that the call for the FTT also stems from the desire to generate additional revenue among others for ‘specific policy purposes,’ it merely states that the tax would create a new revenue stream for the EU and its Member States.
* Trading in currency and commodities are exempt from the FTT which could reduce its revenue raising potential and have unforeseen implications on these markets.
* The Directive also recommends a low tax rate for derivatives to reduce the risk of tax avoidance, evasion and abuse. Yet, many other measures could be put in place to prevent tax evasion, especially with regards to the issue of where a party to the transaction is established.