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Financial transaction tax
In the context of the economic and financial crisis, it is more and more commonly accepted that the financial sector should make a fairer contribution, this sector having been under-taxed to date given the exemption from VAT of most financial services. This Proposal for a Directive is therefore aimed at developing a common tax reserved for financial transactions, the main objectives of which are to ensure that financial institutions make a fair contribution to covering the costs of the crisis and to avoid fragmentation in the internal market for financial transactions.
Proposal for a Council Directive of 28 September 2011 on a common system of financial transaction tax and amending Directive 2008/7/EC [COM(2011) 594 final - Not published in the Official Journal].
This Proposal is aimed at establishing a common system of financial transaction tax * (FTT).
It concerns all financial transactions, namely the purchase and sale of a financial instrument, such as company shares, bonds, money-market instruments, units of undertakings for collective investment, structured products and derivatives and the conclusion or modification of derivatives agreements, on condition that at least one party to the transaction is established in a Member State and that a financial institution (such as investment firms, organised markets, credit institutions, insurance and reinsurance undertakings, collective investment undertakings and their managers, pension funds and their managers, and certain other undertakings where transactions constitute a significant part of their activity) established in a Member State is party to the transaction, acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction.
In general, a financial institution shall be deemed to be established in the Member State of authorisation in order to act as such but it should be noted that, under certain conditions, a financial institution not established in a Member State, for example where it is a party to a financial transaction with a party established in the territory of a Member State, shall also be deemed to be established in the territory of a Member State (of the latter mentioned in this case).
The following entities shall be excluded from the scope of the Directive:
- the European Financial Stability Facility;
- any international financial institution established by two or more Member States, which has the purpose to mobilise funding and provide financial assistance to the benefit of its members that are experiencing or threatened by severe financing problems;
- Central Counter Parties, i.e. legal entities that interpose themselves between the counterparties to a financial transaction;
- national or international Central Securities Depositories.
The following transactions shall be excluded from the scope of the Directive:
- primary market transactions in principle as regards the issue of company shares or bonds;
- under certain conditions, transactions with the European Union, the European Atomic Energy Community, the European Central Bank, the European Investment Bank, bodies set up by the European Union or the European Atomic Energy Community and other international organisations and bodies;
- transactions with the central banks of Member States.
Chargeability, taxable amount and rates of FTT
The FTT shall become chargeable from the moment the transaction occurs. Subsequent cancellation or rectification of a financial transaction shall have no effect on chargeability, except for cases of errors.
In the case of transactions other than those concerning derivatives agreements, the taxable amount of the FTT shall be, in principle, everything which constitutes consideration paid or owed, in return for the transfer, from the counterparty or a third party.
In the case of transactions concerning derivatives agreements, the taxable amount of the FTT shall be the notional amount (i.e. the underlying nominal or face amount that is used to calculate payments made on a given derivatives agreement) of the derivatives agreement at the time of the financial transaction.
Where appropriate, the exchange rate applicable shall be the latest selling rate recorded, at the time the FTT becomes chargeable, on the most representative exchange market of the Member State concerned, or an exchange rate determined by reference to that market.
The rates of FTT to be applied by Member States may not be lower than (minimum rates):
- 0.1 % for all financial transactions other than those concerning derivatives agreements;
- 0.01 % for all financial transactions concerning derivatives agreements.
Payment of FTT, related obligations and prevention of evasion, avoidance and abuse
FTT shall be payable by each financial institution (deemed to be established in a Member State) which fulfils any of the following conditions:
- it is party to the transaction, acting either for its own account or for the account of another person;
- it is acting in the name of a party to the transaction;
- the transaction has been carried out on its account.
It should be noted, therefore, that any financial institution which is party to a transaction or is involved in a transaction shall be liable for the tax. A single financial transaction may therefore result in payment of the tax on both sides of the transaction, at the rate applicable in the Member State of establishment of the financial institution concerned.
However, where a financial institution acts in the name of or for the account of another financial institution, only the latter shall be required to pay FTT.
Moreover, each party to a transaction shall become jointly and severally liable for the payment of the tax due by a financial institution on account of that transaction.
FTT shall be paid to the financial authorities of the Member States at the following points in time:
- at the moment when the tax becomes chargeable in case the transaction is carried out electronically;
- within three working days from the moment the tax becomes chargeable in all other cases.
Member States shall establish other obligations intended to ensure payment and to verify payment of the tax.
Member States may not introduce or maintain taxes on financial transactions other than FTT or value added tax (VAT) provided for by the VAT Directive.
On 7 October 2010, the European Commission examined the importance of developing a financial transaction tax (FTT) in its Communication on taxation of the financial sector. This Proposal for a Directive puts that development into practice and therefore represents a first step towards a more global system of taxation.
- Directorate General Taxation and Customs Union – Taxation of the financial sector