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The Actuary The magazine of the Institute & Faculty of Actuaries

Commission proposes EU financial transaction tax

The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU. The expectation is that the tax would come into effect from 1st January 2014.

Exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts, at a rate of 0.01%, which the commission says could raise approximately €57 billion every year.

The impetus for the proposal is two-fold according to the European Union.

Firstly, it is designed to ensure the financial sector makes a fair contribution at a time of fiscal consolidation in the member states. It would provide recompense for governments and European citizens, after they provided "substantial support" to the financial sector in the wake of 2008's financial crisis.

The financial sector is currently under-taxed compared with other sectors, so the proposed tax is thought to make the system more fair and equitable.

Secondly, it is hoped that creating a coordinated framework at EU level will help to strengthen the EU single market. At the moment ten EU member states have a financial transaction tax of some kind. The proposal would introduce new minimum tax rates and harmonise different existing taxes on financial transactions in the EU.

This will help to reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises, according to the Commission.

The financial transaction tax at EU level would strengthen the EU's position to promote common rules for the introduction of such a tax at global level, notably through the G20, it added.

If the proposals go ahead, the revenue generated by the tax will be shared between the EU and the Member States. Part of the tax would be used as an EU own resource which would reduce national contributions. Member States might decide to increase the part of the revenues by taxing financial transactions at a higher rate.

Algirdas Šemeta, commissioner for taxation, customs, anti-fraud and audit, described the proposal as "sound and workable" and said that with it the European Union had become "a forerunner in the global implementation of a financial transaction tax".

The Commission has explored the idea of taxing the financial sector at EU level for several months. On 29 June 2011, the Commission announced in the context of the multiannual financial framework that it would propose to set up a financial transaction tax as an own resource for the EU budget.

The decision followed an analysis of different tax instruments to make the financial sector contribute to the recovery of the EU economy.

In parallel, the Commission has explored ways to introduce a financial transaction tax at global level since 2009.

Source: Insurance Insight