In a slightly surprising move, eleven member states agreed on 9 October, 2012 to adopt a financial transactions tax (FTT). As always, it is possible that agreement in principle may collapse before the rigours of agreeing an actual text, but this note addresses what this development might mean for Ireland.
The first point to note is that the Irish Minister for Finance, Michael Noonan, commented that Ireland would not support an FTT, so long as the United Kingdom did not adopt it. This is a restatement of a long-standing position, and allies Ireland closely with the United Kingdom. Other member states also oppose the FTT (Sweden, the Netherlands and Finland) – a smaller number than the eleven who have committed to proceed (Germany, France, Greece, Spain, Italy, Estonia, Portugal, Austria, Slovakia, Slovenia and Belgium).
Why does Ireland oppose the FTT?
Ireland’s opposition to the FTT is really quite pragmatic and simply expressed. Ireland is located beside one of the largest financial centres in the world and, if Ireland were to impose an FTT, financial transactions would swiftly leak across the border to London. This would not be good for employment in the financial services industry in Dublin. Sweden has a similar rationale for its refusal; during the 1980s it imposed a financial transactions tax, only to see activity relocate to more hospitable jurisdictions.
The United Kingdom shares Ireland’s concerns about relocation to transactional activity, merely writ large. As a global player, the UK is in favour of an FTT only if it were to be adopted on a global basis. Again, this is unlikely as neither the US nor China is in favour.
On an ideological level, the United Kingdom views the imposition of an FTT by all or some member states as a gamble: based on an implicit belief that Europe is so important that taxpayers’ behaviour will remain unchanged and financial transactions will not move offshore. Naysayers point to the history of the relocation of international capital markets from New York to London during the 1960s as a result, partially at least, of the imposition of an Interest Equalization Tax (IET) by the USA in an effort to alleviate its balance of trade problems. While the IET was repealed, the damage was done to New York, which never recovered its prominence in debt capital markets. It is obviously difficult, in advance, to quantify the cost of likely behavioural change by taxpayers, but however this cost is calculated, it must be acknowledged that, like Humpty Dumpty, it may not be possible to put the pieces back together in the event that financial activity has moved outside the EU as a result of the introduction of the FTT.
Finally, in answer to the point that the FTT is designed to ensure that the financial services industry pays a fair contribution to the costs of clearing up after unbridled financial speculation, the UK points out that it already imposes stamp duty on transactions in equities, which raises a substantial annual sum.
Does the agreement of the eleven pose problems for Ireland?
Article 327 Treaty of the Functioning of the European Union states that “Any enhanced cooperation shall respect the competences, rights and obligations of those Member States which do not participate in it. Those Member States shall not impede its implementation by the participating Member States.” This commits Ireland not to impede the implementation of an FTT but, equally, commits the eleven co-operating member states to respect Ireland’s rights not to adopt an FTT.
While this is clear in principle, it is possible that, depending upon the enforcement or settlement mechanism, and the territoriality of the FTT, the non-co-operating member states may have to become involved quite closely in the collection and enforcement of the tax. The United Kingdom, for instance, would not wish to act as a tax collector for transactions that are booked through London but which are caught by the FTT by virtue of the fact that the underlying transaction relates to a UK-listed company.
In summary, the agreement to form an enhanced co-operation bloc of member states does not solve the difficult issues as to design, collection and enforcement of the FTT.