Financial transaction tax serious threat

A TAX on all financial transactions through banks and financial institutions, being pushed by France and Germany, will put Ireland in a difficult position politically and could have serious repercussions for the International Financial Services Centre (IFSC).

Finance Minister Michael Noonan has been adamant that any such tax must apply to the entire EU, but a number of countries are saying that if Britain vetoes this proposal, then they will push for it to be applied in the eurozone.

Ireland is a major centre for the fund industry, which at the end of last year had an estimated €1.87 trillionunder administration.

It fears that such a tax would give competitors such as the British Virgin Islands and the Caymans as well as Britain and non-eurozone member states an advantage.

The tax has been shot down several times, mainly because of British opposition, saying that it would force foreign exchange markets to move to other parts of the globe where such a tax is not imposed.

British chancellor George Osborne said, at the EUfinance ministers meeting in Poland, that such a tax would need to be global to work effectively and ensure that financial institutions do not simply flee the EU. Those opposed also argue that the tax would be passed on to consumers rather than be taken from the institutions’ profits.

US Treasury Secretary Tim Geithner also gave it the thumbs down when it was discussed at the EU’s finance ministers meeting which he addressed in Poland at the weekend.

German finance minister Wolfgang Schaeuble in a newspaper interview published yesterday said: “Before the end of the autumn, we are going to create a tax on financial transactions. If necessary, just in the eurozone”.

At Saturday’s meeting in Poland, Belgian finance minister Didier Reynders said that if such a tax was not possible to agree at global or even EU level, they would have to consider it for the eurozone 17.

“I’m sure that if it’s impossible at the worldwide level, we’ll need to organise that in the European Union and at least in the eurozone, but of course with a lower level of taxation in one jurisdiction than on the world-wide level”.

The Irish authorities fear that having the FTT in the eurozone and not in Britain and the other non-euro countries would be to Ireland’s detriment as a financial centre as it could have the effect of pushing such institutions to Britain. Many believe that Britain is hoping that by vetoing the idea, it will be to their advantage.

Ireland has traditionally sided with Britain on this matter but will now find itself under pressure to support the proposal or at least not to vote against such a measure, especially following the decision to cut the interest rate on the €67.5 billion rescue loan saving the country over €1bn a year.

The proposal would require EU unanimity.

Britain has had a tax, in the form of stamp duty, for some time on some types of financial transactions, as has Sweden — which opposes the EU move — and Belgium.

With elections looming in France and Germany, both President Nicolas Sarkozy and Chancellor Angela Merkel are anxious to have such a tax agreed as soon as possible, believing it to be popular with voters who see it as some form of sanction against bankers.

Recently, Mr Sarkozy had a meeting with the EU’s Finance Commissioner Algirdas Semeta about resurrecting plans for the Financial Transaction Tax (FTT). The Commissioner has not been wholeheartedly in support of this tax, but Commission president Jose Manuel Barroso is.

Just where the proceeds from such a tax should go is also a bone of contention between countries. Some argue that it should go into a separate fund as a kind of EU-wide insurance against banks going bust in the future, while others believe it should go into state coffers to compensate for the current bank bailouts.