Brussels, 20/10/2014 (Agence Europe) - EU28 finance ministers are supposed to be discussing the financial transactions tax (FTT) on 7 November. The eleven countries involved will have little to report, however, if anything at all, to the member states that have decided not to be involved. An EU source explains that no agreement has been reached on any of the outstanding issues, although the eleven countries decided in May 2014 to get all the technical issues settled by the end of 2014 so the FTT can come into force on 1 January 2016 on shares and certain derivatives (it has yet to be decided which derivatives). After the COREPER meeting on Wednesday, people will have a clearer idea of the agenda of the 11 November Ecofin Council.
Scope of application. An initial document produced by the Italian Presidency of the Council of the EU and dated 7 October was submitted to the member states at a meeting on 8 October, laying down ideas of how to define the shares that are to be covered by the FTT. The document says that it should be possible to reach agreement on the definition of shares.
The question of which derivatives are to be taxed in the first round of the FTT is more uncertain and the document makes no mention of it. France says the FTT should act as a disincentive for 'bad finance' and the riskiest derivatives should therefore be taxed. Austria is not happy about countries wanting to exempt non-speculative derivatives, asking how banks could distinguish between the two. France is a leader in derivatives on shares and would prefer them not to be taxed, whereas other countries are reported to want the tax to be levied on them.
Taxation logic. A second Presidency document is entirely devoted to the implications of the 'principle of residence' that the European Commission wants to see introduced. In its proposal of February 2013, the Commission suggests that the country of residence should be the deciding factor for the FTT. It would be levied on transactions carried out by an institution that has its headquarters in one of the six countries involved in the enhanced cooperation mechanism for the FTT. The 'counterparty' principle is supposed to support the residence principle (a partipatory country taxing transactions carried out with financial institutions registered in non-participary countries or non-EU countries that are considered to be registered on its territory). As a last resort, the 'emission principle' would apply whereby financial instruments issued in the eleven FTT countries would be taxed when they are negotiated, even if the parties involved are not registered in the FTT area.
According to the Presidency, this could give rise to a relocation of activities by financial institutions to countries outside the FTT area. 'Which rules could prevent such a relocation effect?' asks the Presidency in a questionnaire, urging the European Commission and member states to exchange views in order to reach conclusions that could be used by the Presidency to finalise a compromise deal. Other questions asked include: 'How can the liability of each financial institution be determined, considering that counterparties are not known to each other?'
The Presidency explains that under the Commission's proposal, (residence+counterparty +emission), a joint fund established in the FTT area should pay the FTT for any operation involving shares, but funds registered outside the FTT area would not be taxed on share transactions carried out outside the FTT area. 'This may imply that, ceteris paribus, the EU 11 funds will have a lower yield on their investments than that obtained by other funds.' The Presidency asks the member states and the Commission how this problem could be solved, if they consider it a problem, that is. In April 2014, industry asked to be exempted from the FTT.
Revenue allocation. Three big countries, France, Italy and Spain, want only the emission principle to apply, but smaller countries fear this would penalise them when it comes to revenue allocation. At an Ecofin Council meeting in Milan in September, Spanish finance minister Luis De Guindos said that the fundamental principle would be the state in which the security was issued, along with consideration of the country of residency principle in order to compensate for the problems that would be faced by small countries.
In a third document, the Presidency says that the option of adjusting implementation of the emission principle could be studied to meet the needs of some member states when it comes to revenue allocation. The Presidency proposes three ways of dividing up revenue among countries if the FTT is levied purely according to the residence principle. The first is to calculate revenue allocation transaction by transaction. The Presidency's analysis shows that this would result in the same amount of FTT revenue being due to each country whether the tax were collected by the issuer's country of residence or an intermediary. Likewise, if the tax is collected by a central body or paid directly to the country where the income is destined.
Under an alternative Presidency proposal, products would be taxed according to the emission principle and then revenue would be allocated according to the residence prinicple. If intermediaries are outside the FTT area, then the FTT would go to the issuer's country of residence. The Presidency says that the result would be the same as that obtained using the Commission's initial proposal.
Aggregated revenue allocation. Under this proposal, each country would collect the FTT at the end of the tax year. Half of the income would be allocated according to the residence of the intermediaries, and the other half according to the issuer's residence country, both of them in the FTT area. This type of allocation would be calculated on the taxable basis of each transaction. The results vary according to the collection method.
The Presidency also proposes an alternative whereby revenue from intermediaries located outside the FTT area would go to the issuer's country of residence.
Revenue allocation referring to an economic driver (GDP, population etc). This would have the same result for each country, irrespective of how the FTT is collected.
Pierre Moscovici of France is expected to be the new Commissioner who would have responsibility for the FTT because he will cover taxation in the Juncker Commission. During his hearing at the EP, Moscovici hoped that the enhanced cooperation on the FTT would pave the way for enhanced cooperation on other tax issues. People not predicting the failure of the FTT venture expect the end result to be highly watered down. (EL)