Keywords: Regulation & Taxation;
Support from the EU delegation and the German and Polish embassies in New Zealand plus a travel grant from Air New Zealand enabled me to visit Europe on a study tour in June and July 2014.
Much of what I learned will appear (first) as columns, the material I gathered on the Financial Transactions Tax (FTT) in the EU is not quite column material. (But see http://www.eastonbh.ac.nz/2012/03/new-zealand-should-tax-financial-transactions/) This note lists my main learnings.
The Case for and against FTT
The case for an FTT rests on two major pillars. Financial transactions are usually not otherwise taxed and therefore do not make a contribution to the public purse while, second, the tax avoidance itself amounts to a subsidy to the sector in a comprehensive tax system and is likely to generate inefficiencies. (In New Zealand most financial activities are not covered by GST.)
The case against an FTT usually amounts to a case against all taxation or a special pleading for a particular sector (in this case the financial sector). Even so, a badly designed FTT (or any other tax for that matter) could result in major inefficiencies; for instance, an orderly monetary system requires a ‘repro’ market which an FTT might discourage.
There are also the usual bureaucratic grumbles that the administration of the system will be too complicated. That is true for every tax, especially at the time of introduction. (It may take some time to adapt IT systems for a new tax.)
FTT in the EU
A number of EU countries, including Britain, have what amounts to an FTT on some of their financial transactions – but not all transactions and not all countries. The original EU proposal was to have a comprehensive FTT across all member states with the revenue going to the EU (rather than individual countries). However politics has stalled this option. Instead a group of 11 members (but others may join) are proposing to have one under the ‘enhanced cooperation’ provisions in the EU treaties (more below). They represent about 65 percent of EU GDP and 60 percent of the population.[1]
The biggest exception is the United Kingdom. Because London is a major financial centre its views carry more weight than Britain’s economic size would normally justify.
The Form of the EU FTT
It seems generally agreed that any FTT will be administered via a ‘stamp duty’ system, that is, a tax levied on the documents involved in the financial transaction.
Initially discussions (for a comprehensive EU FTT) were based on a tax levied on financial transactions between financial institutions at a rate of 0.1% for the exchange of shares and bonds and 0.01% for derivative contracts if just one of the financial institutions resided in a member state of the EU.[2] Proposed exemptions included:
Day-to-day financial activities of citizens and businesses (e.g. loans, payments, insurance, deposits etc.).
Investment banking activities in the context of raising capital.
Transactions carried out as part of restructuring operations.
Refinancing transactions with central banks and related institutions.
(In my discussions there was no specific mention of an FTT on foreign exchange transactions, except where they involve derivatives.)
However, given that the FTT is unlikely to be EU wide, there may be different coverage.
There appears to be some disagreement over whether the levy should be on a residence status (where the transaction occurs) or an issuance status (where the document is issued). A German expert told me that the issuance principle could well be ruled out by the German constitution. Clearly it is important there is as much alignment as possible between jurisdictions.
I had a sense there was a conflict between the French approach and the British one. Britain is not a member of the EU11 group (France is) but some see a strong case for as much alignment as possible between Britain (with its London capital market) and the EU11 group approach.
Until we have a clearer idea about what is being proposed, it is difficult to discuss avoidance. It is a major issue with the danger that a badly designed tax could shift activity to where there is no FTT at a cost of local jobs with no significant revenue gains nor any efficiency ones either.
Note that some options would generate little gain for those members of the EU11 group with simple financial sectors and that is likely to affect the final choice of the scheme.
Where is the EU11 Group at?
In discussion. They hope to have a position paper by the end of this year (2014) and to implement the tax in January 2016. The introduction date has already been delayed.
A complication is that Britain has said it would veto the EU11 proposal. The tax would operate under the ‘enhanced cooperation’ provisions of an EU treaty and Britain has a strict policy that there should be no increases in EU taxes.[3] It would not, however, object to an individual country implementing an FTT. (I am guessing Britain would hardly object to a group of countries simultaneously implementing similar regimes.)
Polls suggest that over 60 percent (perhaps 80 percent) of the population supports a FTT (although they may have only a general notion of what it entails). There is less political support. For instance, Germany supports it because the SPD made the investigation of a FTT a part of the coalition agreement; Its coalition partners, the CPU/CSU, are less enthusiastic.
What should New Zealand do?
There are two main reasons why in the right circumstances New Zealand might support a FTT.
First, it would eliminate the implicit subsidy to the financial sector which does not pay GST on its net outputs.[4]
Second, it would increase government revenue in an environment where there are strong pressures for further income tax cuts and increases in government spending. The EU wide proposal was projected to generate tax revenue of about 0.4 percent of GDP. The equivalent amount in New Zealand would be about $1 billion p.a., although the New Zealand revenue is likely to be less given its less sophisticated financial sector. Any realistic FTT will be unable to generate enough revenue to replace GST, as some have hoped, but it would be a useful addition to the fiscal revenue. .
The downside might be the effect of even a well-designed FTT driving too much financial activity offshore.
I see no merit in New Zealand introducing an FTT unilaterally. Not only would it be easily avoided by moving transactions off shore, but New Zealand has hardly the policy capacity to develop the details on its own.
This suggests the following strategy for New Zealand.
1. It should closely monitor the EU11 group discussion and proposals.
2. It should seek out other like-minded countries outside the EU who would be interested in simultaneously implementing an FTT parallel to any EU one.
3. As soon as the EU11 group has a reasonably detailed proposal New Zealand should establish an expert group to consider its implication here. Membership should include experts who are mildly sympathetic to an FTT.
4. The NZ expert group may have to pay particular attention to foreign exchange transactions.
4. If an NZFTT goes ahead (a key condition should be the EU11 group or some other largish block introducing one) I would not expect it to be introduced before, say, March 2018.
Brian Easton (August 2014)
Endnotes
[1] Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, Spain.
[2] This is markedly lower rate than the Swedish FTT in operation between 1984 and 1991.
[3] Existing ‘enhanced cooperation’ cover patents and divorce; very few member states are not included.
[4] There is a more sophisticated argument, proposed by James Tobin, that the real economy would benefit by the slowing down of high turnover financial activity which induces volatility. I have some sympathy with his analysis, but it is not a necessary reason for introducing the FTT.