BRUSSELS (MNI) – Taxing the activity of financial companies would
work better at the European Union level than imposing a tax on financial
transactions, according to a European Commission study published
Thursday.

The paper said that a financial activity tax, as proposed by the
International Monetary Fund, would fall on the profits and wages of the
27-nation bloc’s financial institutions and could raise up to E25
billion annually.

A financial activity tax “can be interpreted as a tax on a proxy
for total value-added generated by a financial sector company,” it
explained.

“At this stage the Commission considers that there is greater
potential for a financial activities tax at EU-level” than a financial
transaction tax, the paper said.

A transaction tax is likely to work best if levied worldwide and
could be used to fund “global policy goals,” it said, estimating that it
could raise more than E60 billion in the EU.

However, if such a tax were not applied globally, problems could
arise, including the onpassing of costs to customers and clients and the
movement of funds to other territories, it cautioned.

The long-debated the idea of applying a tax on financial
institutions — either by taxing profits or transactions — has come
back into vogue in the aftermath of the financial crisis, as politicians
search for additional ways to raise revenue.

“The [financial] sector should make a fair and substantial
contribution to public budgets and there is a case for saying that this
contribution should be higher than it currently is,” the Commission
paper said.

“Globally, a financial transaction tax could be an appropriate
option as a revenue-raiser, in particular to provide financing for
global policy goals,” it said.

It said it suggested that policy for transaction taxes because
otherwise some countries with a high concentration of financial
activity would benefit more from such a tax than others.

“For it to work effectively and fairly, participating countries
should try to come to an agreement on global financing tools that can be
acceptable to all,” the paper continued.

The Commission, the executive arm of the EU, said it is
committed to finding a solution in the G20 forum, but that it could
also explore the idea at EU level if that were not possible.

“However, it must be borne in mind that the financial industry is a
global and interconnected one,” the paper said. “Financial activities
are concentrated in a small number of financial centres both inside and
outside the EU which compete on the world stage.”

“Finance is also a complex and evolving area and the main players
have a developed capacity to seek out new and innovative ways of doing
business and of structuring financial transactions,” it reminded.

The Commission estimated global revenues from a
financial transaction tax would have been around E60 billion in 2006
for stocks and bonds transactions assuming a tax rate of 0.1%.

“Some studies find ten times this amount if derivatives are
included,” it said, noting that “experiences have shown a substantial
gap between expected and realised revenues.”

Including only exchange-traded equity and bonds in the tax base
would see such a tax raising E20 billion in the 27 countries that make
up the EU, the paper said. Including derivative products would push up
the estimates, the paper showed, with up to E150 billion raised.

“For a narrow currency transaction levy a tax rate of 0.005% on the
world’s most traded currencies based on data from 2007 could yield E24
billion annually,” the paper estimated.

The financial transaction tax is an issue which divides Europe’s
policy-makers. Some countries like France, Germany and Austria are in
favour, while others, like the UK and Sweden, opposed. European Central
Bank President Jean-Claude Trichet also recently dismissed the idea.

“The financial transaction taxation presents a number of
disadvantages economically, financially, in terms of technical
implementation and there is of course an element, which is extremely
important, it has to be implemented, if decided, absolutely everywhere
in the world,” Trichet told reporters in Brussels last week.

“Otherwise it only translates in displacing transactions out of
those who introduce this, so I insist on that,” he said.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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