Watered-down Tobin tax could enter into force in 2021

EU finance ministers will discuss on Friday (14 June) a new draft proposal for a financial transaction tax (FTT), which will significantly lower expected revenues once participating member states adopt it, according to details of the text seen by EURACTIV.

The draft directive is based on a Franco-German proposal made last December and should be adopted no later than January 2021.

This will be the first time that all 28 governments will discuss the so-called ‘Tobin tax’, after years of closed-door negotiations and a “messy process”, as one European official described it.

Since the European Commission tabled the FTT proposal in 2013 for the enhanced cooperation, some governments abandoned the plan, others joined and a tentative agreement was announced before it was rescheduled. Reflecting the divisive nature of the talks, the Commission made its proposal using the so-called “enhanced cooperation” procedure which allows a smaller group of countries to move forward without the others.

The countries currently included are Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain. Estonia has also expressed willingness to join.

The draft directive is largely based on the model imposed by the French government on its territory.

As it stands, the text calls for imposing a tax rate that will “not be lower than 0.2%”, without exceeding 0.3%, although the latter percentage appears in brackets, subject to discussion.

It would affect shares issued by companies whose market capitalisation exceeds €1 billion and whose registered offices are established in at least one participating member state.

Limited scope

The latest proposal reduces the scope of the original plan put forward ​​by the Commission. The EU executive proposed to include all financial instruments, not only shares, although the rate applied to derivatives was lower (0.01%).

However, the participating member states gradually limited its impact to protect their financial interests.

Back in 2013, the Commission had projected yearly revenues in the magnitude of €30-35 billion for the participating countries.

Under the new draft directive, projected revenues were slashed to an estimated €3.5 billion. This estimate is based on the income raised by France and was included in a document that formed the basis for preparing the draft directive, which EURACTIV published in March.

In 2011, when the first proposal was shared with the then-27 member states, before Croatia’s accession to the EU, the Commission expected to raise approximately €57 billion every year. This figure included the City of London, the EU’s largest financial hub.

At that time, the Commission said the tax should come into effect on 1 January 2014.

No deal yet

Sources close to the negotiation say the existence of the draft directive does not mean that an agreement is within reach. The Franco-German proposal was received with lukewarm support when it was discussed earlier this year.

But the ten participating countries decided to task Austria, who is leading the discussions, and the Commission with drafting a legislative proposal based on Paris and Berlin’s idea, in order to overcome the stalemate.

National governments still have to work out some issues, particularly how to allocate the revenues and the methodology used to distribute the amount.

But scepticism remains among some countries and the EU executive, sources explained.

Despite the outstanding differences and doubts, the draft text reads that participating member states shall adopt and publish by 1 January 2021, at the latest, the national laws necessary to comply with the directive, although that date also appears in brackets and is therefore subject to change.

EU discussion ongoing

European officials explained that the discussion during EU finance ministers on Friday will serve to inform non-participating member states about the progress made with the FTT.

The goal is to ”restart the work with the 28 member states” in the Council working groups.

Although it is not expected that new member states would join once a new proposal is on the table, European officials explained that it is necessary to open the discussion to the rest of the capitals to take into account their concerns, in particular with regards to the impact of the FTT on the internal market.

The draft directive includes a clause to review the application of the FTT every five years.

By 31 December 2023 (in brackets), the Commission should submit the first report, and if necessary a proposal, examining “the impact of the FTT on the proper functioning of the internal market, the financial markets and the real economy and it shall take into account the progress on taxation of the financial sector in the international context.”

The proposal must be formally adopted by all the member states to have legal validity, although the political blessing is only required by the unanimity of the participating countries.

Sharing revenues

One of the sticking points blocking the agreement is how to use the funds raised.

The main proposal, supported by half of the participating countries, is to mutualise the income and ensure there is a fair distribution of resources regardless of how developed the national capital markets are.

As a result, all the funds collected would be distributed according to a given country’s gross national income.

But Spain was against this idea because it would disproportionately favour small countries.

According to the estimates included in the discussion documents, Spain would be the main loser, since its revenues would fall by 18.5% to €406 million, compared with estimated revenues of €498 million coming from applying an FTT on its territory.

Meanwhile, Greece (an increase of 528.7%), Austria (289.2%) and Portugal (100.8%) would be the big beneficiaries.

The funds would be allocated either to the EU budget, so each participating member state will see its national contribution reduced in the same amount, or to the budgetary instrument for the euro area.

Special arrangements would be made for non-eurozone countries involved in the enhanced cooperation.

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