A tax on financial activities (a “FAT”) relates to the total sum of profits and remunerations of financial institutions. It would therefore tax corporations, rather than the individual participants involved in a financial transaction. A tax on financial transaction (an “FTT”) would hit all kinds of capital movements, including equity, bonds and derivatives. The first discussions at EU level on the two options were carried out at the ECOFIN Council at the beginning of September 2010 on the basis of a European Commission informal document. In October 2010, the EU Commission published a Communication on taxation of the financial sector, weighing up the viability and potential revenue gains to be made from an FTT and a FAT. At the end of February 2011, the Commission launched a consultation on financial sector taxation, seeking views on the impact and feasibility of various policy options in this area, the potential design of the tax and possible problems. In particular, the policy measures that are analysed in the Commission’s consultation paper include an FTT and a FAT. Any debate on how the revenue raised is to be spent will be held at a later stage, however!

The Commission set out its reasons for additional taxation of the financial sector in a paper published in October 2010. It is now seeking views on policy options to address:  

  • substantial public financing support during the financial crisis, the need for fiscal consolidation and possible under-taxation of the financial sector;  
  • ‘undesirable behaviours’ for the society as a whole (i.e., systemic risks); and  
  • ‘the unco-ordinated patchwork of national measures which may (i) create incentives for tax-driven relocation either within the EU or outside the EU and distortion of competition; and (ii) create situations of either unrelieved double taxation or non-taxation.’  

According to the Commission’s consultation, the proposals cannot be separated from potential changes to the regulatory framework, especially the possible introduction of a bank levy (recognising that several Member States have proposed or already operate national systems of bank levies).

This consultation period ends on 19 April 2011. The Commission intends to publish proposals on the taxation of the financial sector by the summer of 2011.