Slovak doubts over EC-proposed financial transaction tax

A FINANCIAL transaction tax, also known also as a Tobin tax or Robin Hood tax, is on the table again. In late September the European Commission adopted plans to introduce a financial transaction tax (FTT) from January 2014, which it hopes will be extended worldwide. The proposal has attracted varying responses and is expected to be discussed during the G20 summit of the largest global economies starting November 3. Slovakia’s stance is negative, at least for now.

A FINANCIAL transaction tax, also known also as a Tobin tax or Robin Hood tax, is on the table again. In late September the European Commission adopted plans to introduce a financial transaction tax (FTT) from January 2014, which it hopes will be extended worldwide. The proposal has attracted varying responses and is expected to be discussed during the G20 summit of the largest global economies starting November 3. Slovakia’s stance is negative, at least for now.

“In the last three years, member states have granted aid and provided guarantees of €4.6 trillion to the financial sector,” European Commission President Jose Manuel Barroso said in his State of the Union speech in the European Parliament in Strasbourg on September 28, as quoted by Reuters. “It is time for the financial sector to make a contribution back to society.”

The EU’s executive, the European Commission, formally adopted plans on September 28 for a financial transaction tax to begin in January 2014. The tax would be levied on all transactions involving financial instruments between financial institutions in which at least one party to the transaction is located in the EU, the EC wrote in its press release. The exchange of shares and bonds would be taxed at a rate of 0.1 percent and derivative contracts, at a rate of 0.01 percent. The EU estimates that the tax could raise approximately €57 billion per year.

The EC put forward two reasons for the new tax: to ensure that the financial sector makes a fair contribution at a time of fiscal consolidation in member states, and that a coordinated framework at the EU level would help to strengthen the EU single market.

“The financial sector played a role in the origins of the economic crisis,” the EC wrote in its press release, referring to the first reason. “Governments and European citizens at large have borne the cost of massive taxpayer-funded bailouts to support the financial sector. Furthermore, the sector is currently under-taxed by comparison with other sectors. The proposal would generate significant additional tax revenue from the financial sector to contribute to public finances.”

Referring to the second reason, the EC wrote that 10 member states already have some form of a financial transaction tax in place.

“The proposal would introduce new minimum tax rates and harmonise different existing taxes on financial transactions in the EU,” the EC wrote. “This will help to reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises. The financial transaction tax at the EU level would strengthen the EU’s position to promote common rules for the introduction of such a tax at a global level, notably through the G20.”

The revenues of the tax would be shared between the EU and member states. Part of the tax would be used to fund the EU and reduce national contributions.

While France and Germany may push for an FTT to be introduced in the eurozone, the United Kingdom, the United States and other G20 member states including China, Canada and Russia are opposed.

Slovakia has not decided

While Slovakia has not taken an official position on the proposal, its reaction so far has been relatively negative.

The Slovak Finance Ministry says it is now preparing a response to the EC proposal, which it says is relatively fresh and has thus not been subject to any deeper discussion from either a technical or a political viewpoint.

The Slovak Banking Association (SBA) sees the tax as being motivated by the European Union’s desire to raise revenue.

“Based on its preliminary assessment, the Finance Ministry is leaning towards a negative stance on the introduction of a financial transaction tax,” Patrícia Malecová Šepitková, from the press department of the ministry, told The Slovak Spectator. “We believe that in the discussion about an FTT the need to achieve a global agreement on the introduction of the tax is especially important, but we see that as improbable.”

The Finance Ministry added that it would be necessary for any discussion about an FTT at the European level to deal with negative impacts from the tax on the European as well as national financial systems, and for questions about the cumulative effects of an FTT and other planned regulatory measures applying to the European financial and banking sector to be considered.

The SBA perceives the tax as merely a source of additional finances for EU institutions.

“The main motive for the introduction of this tax is to provide income for the EU budget,” SBA analyst Marcel Laznia told The Slovak Spectator. “Claims that the money would be returned to taxpayers or used to support the stability of the sector are false.”

Laznia stated that banks have already paid back over €27 billion from funds which governments provided to them in 2008 and 2009, and said that the actual amount of aid drawn was about €580 billion.

Laznia pointed to the experience of Sweden in introducing a similar tax, which was later abandoned, and said he expected something similar to happen if a Europe-wide FTT was introduced.

“Sweden introduced a similar tax during the 1980s,” said Laznia. “The result was the movement of capital and deals abroad and a significant decline in the liquidity of the market. After several years the tax was gradually decreased and later cancelled completely. We expect a similar scenario to unfold in the case of the EU tax.”

On the other hand, the Slovak Finance Ministry agrees that the financial sector should participate fairly in the costs of the recent financial crisis, as it also helped to cause it, according to Malecová Šepitková. Simultaneously, the ministry believes that when adopting regulatory measures at the European level related to the financial or banking sector it is necessary to assess their cumulative effects along with their individual impacts.

With regards to the potential introduction of the tax, Laznia said he believes that if the tax is not introduced on a global level, which he regards as improbable, the whole EU will come to grief as all transactions carried out by financial institutions would be taxed.

The Finance Ministry believes that if a global agreement about the introduction of the tax is not achieved, this may decrease the competitiveness of the financial and the tax environment in the EU and afterwards lead to a possible relocation of financial institutions or their transactions subject to taxation into countries with more advantageous tax environments. This might also increase the regulatory burden on the EU’s financial sector with regards to the cumulative effects of several regulatory measures planned at the European level related to banks and financial institutions.

With regards to the Slovak financial sector, Malecová Šepitková said that it already has to pay, in addition to ‘normal taxes’, contributions to the Deposit Protection Fund, the Guarantee Fund of Investments, and the National Bank of Slovakia, to cover supervision costs, and that an additional special bank levy is due to be introduced as of January 1, 2012.

“There is a risk that the costs of the tax would be transferred to the end-client, which in Slovakia’s case might result in negative impacts on the yields of mutual and pension funds and impacts may be expected also on transactions with state bonds on the secondary market,” said Malecová Šepitková. She further pointed out that an FTT might have a negative impact on the GDP of member states, which the EC has calculated at 0.5 percent.

The Finance Ministry also believes that each regulatory intervention reduces the effectiveness of the market, especially in terms of its role in allocating capital, which reduces the relevancy of introducing an FTT as a tool to secure the stability of the financial market.

“The weight and scope of the capital market in Slovakia is significantly lower than in other, more developed countries and thus it may be estimated that the impact on the Slovak capital market would be, compared with the effect on markets in other countries, significantly lower,” said Malecová Šepitková.

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