ABBL

A financial transaction tax (FTT) is a tax applied to financial transactions, usually at a very low rate. A financial transaction applies to the exchange of financial instruments between banks or other financial institutions. The financial instruments in question include securities, bonds, shares and derivatives.
They do not include the transactions typically undertaken by retail banks in their relations with private households or businesses, except when they relate to the sale or purchase of bonds or shares.

What is a financial institution?

The definition of a financial institution in the Commission's proposal covers a wide range of institutions in order to avoid circumvention of the tax and includes essentially investment firms, organised markets, credit institutions, insurance companies, collective investment undertakings and their managers, alternative investment funds (such as hedge funds), financial leasing companies and special purpose entities.

What is the difference between transactions carried out on organised markets or over the counter?

Within the derivatives markets, many products are traded through exchanges on organised markets. Products traded on the exchange must be standardised for the purpose of transparent trading.
Non-standard products are traded in the so-called over-the-counter (OTC) derivatives markets. OTC derivatives have a less standard structure and are traded bilaterally (between two parties).

What is the residence principle?

The financial transaction tax would be based on the principle of tax residence of the financial institution or trader. Taxation would therefore take place in the Member State in which the establishment of the financial institution involved in the transaction was deemed to be located. This would help to reduce the risk of relocation, because a financial transaction would be taxed in each case where an EU resident was involved even if the transaction was carried out outside the EU.

MEMO/11/640 - European Commission, 28 September 2011


 

Eleven Member States, representing 2/3 of EU GDP, have been authorised to establish the common financial transaction tax under enhanced cooperation. These are: Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.

Financial Transaction Tax through Enhanced Cooperation: Questions and Answers
Reference: MEMO/13/98 - 14 February 2013

In line with the requests of the 11 Member States, today's proposal very much reflects the Commission's original FTT proposal in terms of scope and objectives.

When it comes to objectives, they remain exactly the same. These are:

- To tackle fragmentation of the Single Market that an uncoordinated patchwork of national financial transaction taxes would create;

- To ensure that the financial sector makes a fair and substantial contribution to public finances and covering the cost of the crisis, particularly as it is currently under-taxed compared to other sectors;

- To create appropriate disincentives for financial transactions which do not contribute to the efficiency of financial markets or to the real economy

With regard to the scope of the FTT, it again mirrors the 2011 proposal, in that:

- The base of the tax is very wide, covering transactions carried out by financial institutions on all financial instruments and markets, once there is an established economic link to the FTT-zone

- The rates are low, at 0.1% for shares and bonds, units of collective investment funds, money market instruments, repurchase agreements and securities lending agreements, and 0.01% for derivative products. These are proposed minimum rates, and participating Member States would be free to apply higher rates if they wanted to. The tax would have to be paid by each financial institution involved in the transaction;

- Day-to-day financial activities of ordinary citizens and businesses (e.g. insurance contracts, mortgage and business lending, credit card transactions, payment services, deposits, spot currency transactions etc.) are excluded from the FTT, in order to protect the real economy;

- The raising of capital (i.e. primary issuance of shares and bonds, units of collective investment funds) and certain restructuring operations will not be taxed. Also, excluded from the scope of the FTT are financial transactions with the ECB and national central banks, the EFSF and ESM;

- The "residence principle" remains a core element to safeguard against the relocation of financial transactions. Under the residence principle, who is party to the transaction is what counts, not where it takes place. If a financial institution involved in the transaction is established in the FTT zone, or is acting on behalf of a party established in this zone, then the transaction will be taxed, regardless of where it takes place in the world;

To further prevent avoidance of the tax, the Commission has added to this proposal the "issuance principle". This means that a transaction will also be taxed, whenever and wherever it takes place, if it involves financial instruments issued in one of the participating Member States.

Financial Transaction Tax through Enhanced Cooperation: Questions and Answers
Reference: MEMO/13/98 - 14 February 2013