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EU: Amended financial transaction tax proposal

EU: Amended financial transaction tax proposal

The German Finance Minister on 9 December 2019 issued a revised proposal for a Council Directive regarding the introduction of a common financial transaction tax to the participating EU Member States in the so-called enhanced cooperation procedure—that is, Germany, Austria, Belgium, France, Greece, Italy, Portugal, Slovakia, Slovenia, and Spain. The revised proposal includes an optional exemption for pension schemes and a new system for “mutualization” (the method for calculating the financial transaction tax revenues to be shared among EU Member States).

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Background

Taxation of the financial sector has been under discussion at the European level since 2011, when the European Commission first proposed implementing a financial transaction tax at the EU level. After initial discussions, it became apparent that there was not unanimous support among the EU Member States.

As noted at the ECOFIN meeting on 5 December 2019, negotiations in relation to the financial transaction tax proposal were reported to be “complicated.” Two main points of debate were a possible exemption for pension schemes and the method of calculation for the financial transaction tax revenue that would guarantee a minimum revenue for all EU Member States that participate in enhanced cooperation (so-called “mutualization”). 

During the December 2019 ECOFIN meeting, it was also noted that agreement among the EU Member States authorized to move forward under the enhanced cooperation procedure would only represent a first step in the legislative process. If a draft directive were to be tabled and agreed by the relevant EU Member States, an inclusive and substantial debate between all EU Member States would need to take place at the EU Council. 

Revised financial transaction tax proposal

The revised proposal refers to a financial transaction tax that would be levied at a minimum standard rate of 0.2% and that would apply to financial transactions that mainly involve the acquisition of shares issued by listed companies located in a participating EU Member State having a market capitalization above €1 billion.

In line with the proposal that was under discussion within the enhanced cooperation group, certain types of financial transactions would not be subject to the financial transaction tax—such as initial public offerings, market making activities, intra-group transactions, repurchase agreements and reverse repurchase agreements, securities lending and securities borrowing buy-sell back and sell-buy back agreements. In addition, there would be an optional tax exemption for pension schemes.

The draft proposal includes a mutualization mechanism that (according to a document accompanying the proposal) represents a compromise reached by Germany, France, and Italy. Under the proposed mechanism, financial transaction tax revenue generated would be allocated among the participating EU Member States so as to allow all participating jurisdictions to reach a guaranteed minimum annual revenue of €20 million. This mechanism is thought to encourage smaller economies (for which the financial transaction tax would only generate limited revenues) to participate in the initiative.

Overall, it is anticipated that the tax would generate approximately €3.5 billion of tax revenue a year across the 10 participating EU Member States. In his letter accompanying the proposal, the German Finance Minister asked the participating EU Member States to back the draft directive. 

KPMG observation

The negotiations on the financial transaction tax have proven to be complicated, and a number of important considerations have to be taken into account in discussions among participating EU Member States. Although the revised proposal addresses some of the outstanding considerations, it remains to be seen whether it can serve as a first step towards reaching agreement on a common approach to taxing financial transactions.

An initial reaction from the Austrian Finance Minister criticizes the narrow scope of the tax base which excludes synthetic investment products, derivatives, and high frequency trading form taxation. Moreover, it has already been clarified that a potential consensus needs to be presented to all EU Member States for an inclusive discussion. Such an inclusive debate among all EU Member States must take place following the required procedural steps.
 

Read a December 2019 report prepared by KPMG’s EU Tax Centre

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