While some European countries, including Belgium, believe that the new Financial Transaction Tax (FTT) will discourage speculative trading and bolster debt-laden public finances, it could in fact sink the eurozone into deeper economic trouble. Well-judged regulation is important. Ill-judged regulation, as is the case with the EU’s proposed FTT, can do immense economic damage.
The idea of a tax on financial transactions is not new and dates as far back as 1694, when Britain began charging stamp duty on equity purchases. In 1972, James Tobin, a Nobel prize-winning economist, proposed a global tax on foreign exchange transactions. This idea was revived in 2010 when the Gates Report to the G20 Summit signaled that such a tax would be a good way to raise additional resources for development aid, while simultaneously discouraging excessive financial risk-taking.
This proposal failed to win the support of the G20. However, it left a mark on several European leaders, who pursued the idea at home. Popular opinion in both France and Germany pushed the FTT onto the European agenda shortly thereafter as a means to generate direct revenue to fund the European Union. With European governments having committed billions to rescuing one eurozone country after another, they were in serious need of revenue.
In September 2011, President of the European Commission, José Manuel Barroso, officially presented a plan to create a new financial transaction tax “to make the financial sector pay its fair share,” pointing out that the financial sector received €4.6 trillion from EU Member States during the economic crisis. The proposal was quietly accepted, largely due to the fact that the financial meltdown in 2008 instilled the idea that trading was too volatile and that banks were engaged in too many risky transactions. The financial crisis also generated the popular notion that financial institutions and investment firms should help fund future bailouts.
Since the original proposal, the media has continued to portray the FTT in this light that seems almost too good to be true. The idea of shaving an insignificant amount of tax revenue off financial trading has an appealing ring of justice to it, making it hardly surprising that the idea captured public opinion. However, the tax is likely to do more harm than good and has the potential to derail Europe’s fragile economic recovery.
Financial Impact of the FTT
The tax would impact financial transactions between financial institutions charging 0.1% against the exchange of shares and bonds (and alike) and 0.01% across derivative contracts, if just one of the financial institutions is (deemed) established in an EU Member State that has implemented the FTT. While these amounts seem insignificant, they can actually translate into a much larger cost burden for financial institutions, as the tax would be imposed at each point in the transaction chain. A 0.1% rate therefore translates into a much bigger amount as securities move from seller to buyer via financial intermediaries. This would be especially true for transactions which recur regularly, such as in the context of daily treasury management operations. Similarly, a 0.01% tax on a derivative trade sounds small, but is a hefty increase in costs given the large notional amounts involved.
“At European level, the FTT will likely miss its objective.”
-Stéphane Jourdain, Tax Director at Deloitte Belgium
The proposed tax will therefore harm the international aspirations of Europe’s struggling banks, as their competitors abroad will not face these extra charges. Inevitably, due to the sheer size of the tax, most of the financial burden imposed on the banks will be passed onto the client, be it a company or private individual. Most citizens are in favor of the FTT as they do not realize that they would end up footing the bill.
According to Stéphane Jourdain, Tax Director at Deloitte Belgium and member of Deloitte’s cross-border FTT initiative, “at European level, the FTT will likely miss its objective, as a sizeable part of the FTT cost will be passed through the clients (whereas it was supposed to be borne by the financial institutions, especially the banks). In addition, it will have a dramatic impact on the funds industry.”
Indeed, the FTT would have a severe impact on the functioning of debt markets which are essential for governments and companies to raise funds, as it would increase both their borrowing and operational costs. The European Commission has itself suggested that an FTT rate of 0.1% could lead to the sacrifice of 0.2% of annual GDP. Ultimately, the Commission’s proposal is not just a tax on banks, and is not just a tax on speculation, but will impact all areas of business as it will be applied at each stage of a multi-tiered financial transaction. This will have damaging consequences for the overall economy as it will cause a flood of financial activity to move beyond the borders of the FTT zone, if at all possible (see below on the extra-territorial effect of the FTT).
Finally, the FTT will also dramatically increase costs for sectors which legitimately use financial instruments in the normal course of their business to manage risk. The cost of borrowing overnight repos is usually set very low, at approximately 0.15% per year. Citigroup estimates that, when the new FTT is factored in, the cost of borrowing overnight would increase to 0.1% a day or 22% a year!
Taxation without Borders
Plans for an EU-wide FTT were stopped in their tracks in 2012 by resistance from the UK, which rightly feared the consequences of the proposed tax on the financial institutions based in the City of London. Unfortunately, in February 2013, the Commission published a proposal under the ‘enhanced cooperation’ procedure which allows a group of EU Member States to integrate further without the other Member States’ agreement, thereby allowing the 11 countries, including Belgium, to press ahead with the FTT.
However, the story does not end here for the non-participating states, as the FTT will be charged not just on transactions that take place within the 11 countries, but on any transaction that involves shares or bonds issued by them. That could potentially lead to a scenario in which a broker in New York and another in Singapore, trading the stock of a Belgian company listed on an exchange in Hong Kong, would each have to pay a tax to the Belgian treasury. The FTT therefore threatens to give investors an extra reason not to buy Europe’s securities or transact with its institutions at a time when it can ill afford to drive away economic activity.
Non-participating states are concerned about the wider business implications for their national economies. The City of London stands to be the most affected as it trades with branches of the participating states’ banks on a daily basis. The British Government would be obliged to collect the tax, but would be unable to keep it. Due to its concern about the FTT’s extra-territorial reach, the UK launched a legal challenge with the European Court of Justice (ECJ) on April 19, 2013. The EU’s plan for an expansive transaction tax hit another wall in September 2013, when the top legal adviser to European Finance Ministers concluded it exceeded national jurisdiction, infringed on EU treaties and is discriminatory to non-participating states.
Unfortunately, as it is merely a legal opinion, participating countries are able to press ahead, but it is a strong warning that they would risk losing if the proposed tax were to end up in court.
Impact of the FTT in Belgium
A full study of the impact of the FTT in Belgium has yet to be carried out. However, a recent report by New Direction think-tank has found that the FTT could result in the loss of 641,000 jobs across the EU – and 23,000 jobs in Belgium alone. The report also points out that the FTT will effectively translate into the government taxing itself as government bonds would also fall under the scope of the FTT legislation. Through taxing their own public borrowing, they would be increasing the cost of public debt. This demonstrates that the FTT would not only have damaging implications for investment but also for growth and employment.
“For a country like Belgium, there is much more at stake.”
-Peter Verhaeghe, Managing Partner of VVGB Advocaten – Advocats
For businesses, inter-company finance and treasury activities will be hit hardest, and companies situated in these 11 EU Member States will most likely move their treasury operations to other countries. This would result in a significant loss for Belgium, which, thanks to its attractive tax regime for financial investments, is home to many treasury centers. Additionally, companies in other countries will avoid working with FTT-country banks or dealing in FTT-country instruments/institutions.
Peter Verhaeghe, Managing Partner of VVGB Advocaten – Advocats, argues, “For a country like Belgium, there is much more at stake. Belgium has been and endeavors to continue to be at the forefront of creating an attractive environment for multinational companies to deploy their headquarter activities in Belgium. It is very clear that the introduction of the FTT, together with the reduced efficiency of the notional interest deduction, and the recent adoption of the Fairness Tax will make Belgium far less attractive as a suitable location for such high added value activities. The introduction of the FTT would not only result in a dramatic increase of the costs for sectors which legitimately use financial instruments in the normal course of their business to manage risk but also in serious loss of high quality value added employment.”
AmCham Belgium believes that the effect can be minimized be reducing the scope and/or the rate of the tax, but there will still be a significant additional administrative burden for companies and for governments. This should be minimized as Belgium’s administrative landscape already acts as a deterrent for investors.
However, ultimately the Chamber believes it is profoundly counterproductive for European governments to implement a tax which will reduce investments, affect citizens, increase costs for business and increase the cost of the governments’ public debt. In these fragile economic times, governments should be focusing on boosting growth and employment. The FTT will do the opposite.
For more of our policy recommendations, please refer to our Priorities for a Prosperous Belgium.