Pressure to raise €534m from financial services
So far they have said no, arguing they could only change their mind if Britain, with Europe’s biggest financial services centre, the city of London, did the same thing. London has said it won’t.
The Government has been following advice from the hedge fund industry, but can they continue to resist, given that more than 1,000 renowned economists have been joined by more than 50 financiers including some from Rothschild, Goldman Sachs, JP Morgan, banks and stock exchanges who argue it would help stabilise the industry.
The Financial Services industry in Ireland is worth €1bn a year in corporation tax to the country and another €1bn a year in PRSI and tax from the 33,000 people employed in it. They fear much of this would be lost to London. Anyhow, they say, Ireland already has a tax, a stamp duty, on the industry.
None of this, the European Commission argues, is a reason to say no to a minimum half-a-billion euro a year for a country that has had to increase its tax-take from citizens and cut services because of the irresponsibility of its bankers and politicians.
The commissioner responsible for putting together the Financial Transaction Tax (FTT) sproposals, Algirdis Semeta, says they have designed the tax in such a way that none of Ireland’s fears are real.
The only analysis on the effect of an FTT in Ireland the Government has produced so far — following a Freedom of Information search by MEP Nessa Childers — came from AIMA, the world’s biggest hedge fund lobbyist.
The commission proposal has the support of more than half the EU member states, citizens throughout the EU, NGOs, former banking chiefs and more than 1,000 eminent economists from around the globe who signed a letter urging the tax be created.
Many of the top financial services centres in the world have a FTT, from Brazil to Hong Kong. “This business produces high income and countries where they are located would like to get something for their public coffers.”
The fact that the tax will be based on the place that the trade is done means that if a trade happens between London and Dublin, then the tax from both sides will go to Ireland if the UK opts out as they say they will.
However, if Ireland opts out, it will lose the tax to whatever other EU centre is involved in the trade. The only way a trade can avoid the tax is to abandon all its European clients and stop trading in the EU, including on remote access.
Ireland already has a stamp duty, which is similar to that in Britain but double the rate, but only the big institutional traders are covered, such as pension funds. The difference with the FTT is that it would also cover derivatives, trading not on shares related to a company that produces something, but trading on issues related to how the shares perform, such as insurance that pays out if they drop by a certain percentage for instance.
A lucrative form of gambling that the financiers in their letter point out is worth 70 times the size of the real economy. If all the bets were called in, there would not be enough money in the world to pay out.
Much of this type of trading is automated, carried out by computers, usually with little advantage to anyone other than whoever collects the commission.
The financiers pointed out that this is designed to turn very short-term profits that do not contribute the markets’ primary function of raising investment, allocating it efficiently and mitigating risk. They held the FTT would “have negligible effect on long-term investment” and “a modest transaction tax will improve the functioning of markets”.
At 0.1% on shares and bonds and 0.01% on derivatives, it would have little effect on the real economy and he disagrees that the ordinary citizen would end up shouldering the burden. 85%, is between financial institutions, and passing this onto the final consumer or their pension fund would be difficult.
Analysis by the commission of the effect on pension funds showed it would be minimal, he added, and Ireland would drop it’s stamp duty on such funds in exchange for the FTT. It could set the rate itself, provided it was at least the rate agreed at EU level.
If Ireland continues to wait until Britain agrees to join the EU in an FTT, they will wait for a long time. British Chancellor George Osbourne asked recently if they would join with the EU if it were to adopt Britain’s stamp duty, he said no.
So the expected outcome is that the FTT will go ahead but with a limited number of countries involved. Germany has suggested it be broken into two stages: first a stamp duty similar to Ireland’s; and later extend it to a full FTT covering derivatives. Those pushing for a full FTT include France and Germany, Italy, Spain, Portugal and Poland.
Those against it have been Britain and Sweden with Malta, Cyprus and the Czech Republic likely to follow Britain.
But Germany, footing most of the bailout bill for the country, will be asking why Ireland is turning down the possibility of making more than half a billion euro a year from an industry instrumental in halving many of the country’s pension funds and already perceived as being under-taxed since they don’t pay Vat.
