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Algirdas ŠEMETA EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud "Setting out the tax agenda for a fairer contribution of the financial sector" Brussels Tax Forum 2011 Brussels, 28 March 2011

European Commission - SPEECH/11/221   28/03/2011

Other available languages: none

SPEECH/11/221

Algirdas ŠEMETA

EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud

"Setting out the tax agenda for a fairer contribution of the financial sector"

Brussels Tax Forum 2011

Brussels, 28 March 2011

Ladies and Gentlemen,

I have the great privilege and pleasure to welcome you to the fifth Brussels Tax Forum. This conference has grown as one of the main European events. Policy-makers, academics, tax practitioners and stakeholders can articulate ideas and proposals and debate about European and international tax issues. I am proud to announce that this year the Brussels Tax Forum is a remarkable success with about 700 participants, the record so far.

The success rests on two key ingredients. First, we seek to have debates of the highest quality by inviting first-class policy-makers, academics and practitioners. I am delighted that they have all immediately accepted our invitation.

Second, the success has also to do with the timeliness of its topics. For this edition, taxation of the financial sector was an obvious one.

Today, our Member States are facing huge challenges in their efforts to consolidate their public finances. The financial crisis has triggered massive public interventions to support an ailing financial sector. When it started impacting on the real economy, evolving into an economic crisis, governments mobilized stimulus packages to support the economy and to avoid dramatic social consequences.

With deficits above 7 % and debt above 80 % of GDP, and with the increased bond yield spreads for several Member States, the economic crisis has led to a sovereign debt crisis.

Public interventions were needed, timely and rather successful given the depth of the crisis. They have however left economic and budgetary consequences that will be felt for many years to come. There is therefore a degree of urgency to see how tax policy can contribute to the comprehensive response to the crisis.

Two approaches should be pursued:

  • First, we can reflect on our current tax systems and see how they can (i) lead to more growth and jobs, (ii) raise needed revenues with lower compliance costs and (iii) contribute to our social, environmental and economic objectives.

  • Second, we need to be proactive and find innovative sources of contributing to the financing of supplementary public revenues. The financial sector is a good candidate in this respect.

EU tax agenda: a contribution to better business environment

I believe that taxation is a key element of our global response to the crisis and can greatly contribute to the development of a competitive environment for our businesses. As our tax agenda is driven by the ambition to make it easier and cheaper to do business in the Single market, financial institutions should have a keen interest as well. Let me give three examples.

The Commission just proposed a major initiative in the field of corporate taxation: the Common Consolidated Corporate Tax Base, the CCCTB. The tax-related costs that businesses bear when they operate cross border in Europe, dealing with up to 27 different corporate tax systems, are too high.

The CCCTB is expected to improve the business environment in Europe in three key ways. First, a CCCTB would ensure that companies opting into the system would follow the same rules for calculating their tax bases in every Member State.

Second, a group of companies would no longer have to comply with the burdensome transfer pricing requirements. Third, cross-border loss relief would be allowed within the group. This would eliminate the current over-taxation that arises from the inability to set off losses against profits. Taking into account the cross border nature of the financial sector in the Single Market, this proposal should be an attractive new scheme for banks, insurance companies and other financial institutions.

We are also closely following the new Foreign Accounts Tax Compliance Act (known as FATCA) which was enacted by the US in March of last year. This initiative puts costly obligations on financial institutions. We have engaged in a dialogue with the US treasury to seek more proportionate conditions for the EU financial industry, building on the synergies between FATCA and the EU Savings Directive.

As a last point, let me draw your attention to the Green Paper on the Future of VAT, which we presented last year. Its objective is to launch a broad consultation with stakeholders on the functioning of the current VAT system and how it should be shaped in the future. I would welcome your views on this issue, which is particularly important for the financial sector.

In this context, I regret that our proposal to amend the VAT treatment of insurance and financial services is still on the table of the Council. With this proposal, our intentions were to increase legal certainty and to provide a level playing field in the internal market as well as to allow businesses to manage better the impact of non-deductible VAT on their activities. In light of the discussions on financial sector taxation, it is somehow incoherent to see that this file does not progress.

Innovative financing: a fair contribution of the Financial Sector

Let me now turn to the identification of new, innovative tax bases to better contribute to revenue generation and market efficiency. Why targeting the financial sector in this debate?

The financial sector has benefited from a financial support during the crisis. This support has been provided with strict conditions and prevented the whole financial system from collapsing.

This said, the financial sector is perceived as bearing responsibility in the occurrence and extent of the crisis. Short-term profit too often prevails over long-term industrial projects. Remuneration structures and levels in the sector have recently been very much out of line with the norms in other sectors.

Let me also add that the financial sector has grown over the last decades allowing economies of scale and enhancing efficiency. One positive consequence has been cheaper and easier access to credit.The presence of financial institutions willing to take the risk to invest in young innovative companies has also fostered long-term growth. This trend, however, may also have led to a situation in which the sector enjoyed an implicit or explicit bailout guarantee, which could have led to moral hazard and a neglect of the social cost of too-much risk.

Today, the contribution of the financial sector to public revenues is a real debate.

The European Council and the Heads of State or Government of the Euro Area have invited the Commission to examine innovative financing at global level and to explore and develop further the introduction of a financial transaction tax. The European Parliament is also very committed and adopted a report urging for progress in this field. The European Economic and Social Committee is currently preparing a contribution on the issue which we are looking forward to read.

And the discussion on financial sector taxation also emerged in the debate on own resources for the EU budget as some of the tax proposals have been discussed in this context.

This debate is going beyond the EU. As we know, the International Monetary Fund has been working to identify options for a fairer contribution of the financial sector to the costs of the crisis and the current French Presidency of the G20 is promoting the FTT at global level.

We are working on a highly-debated and moving file. Therefore, we need to have the analysis right and to base our decision on solid grounds.

However, time is pressing and I want to define the best option to meet our objectives: more revenues, better market efficiency and preservation of the competitiveness of our financial sector.

I have no prejudice on the instrument. I want the best option to serve our purpose, and the one which will best mitigate the main risks identified: relocation of activity, risk of double taxation through uncoordinated tax schemes and excessive administrative or cost burden due to the cumulative impact with regulation. Your debate today will contribute to finding this delicate balance.

You know that we have two candidates at stake:

First, the Financial Transactions Tax. It originates from the Tobin Tax, initially based on currency exchanges and aimed at ‘putting sand in the wheels’ of financial markets.

More recent proposals target stocks, bonds and possibly derivatives. Some questions are still open. The attractiveness of the tax lies in its high estimates for revenues. What is their degree of certainty? The effects of the tax on financial market stability are debatable. Do they increase or decrease market volatility? Finally, would speculators really bear the incidence of the tax?

I am looking forward to tomorrow morning’s session that will look at these issues.

Second, the Financial Activities Tax, which is a tax on the sum of profit and remunerations of the sector. Here also some questions are to be debated. Is the FAT an adequate substitute for the absence of VAT? Could it raise sufficient revenues and correct for externalities? There are various ways of designing a FAT: some countries apply forms of cash-flow taxes. What are their experiences? Do such taxes suffer from strong relocation effects or are they able to impact on economic rents without distorting the economy?

The sessions dedicated to FAT tomorrow afternoon as well as the Danish experience will be of great interest in this respect.

Conclusions

Ladies and Gentlemen,

Many policy-makers in the EU – and I am one of them – firmly believe that there is a political and economic case for taxing the financial sector. The jury is still out, however, on the best way to do this.

I am confident that this year's Tax Forum will result in a wealth of supplementary knowledge. Your contributions are important as our policymaking shall be built on sound evidence and shall take into account empirical and country experiences. It is on this basis that the Commission will come forward with policy orientations by this summer.

I thank you very much for your attention and I wish you a fruitful and successful conference.


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