ECB sounds note of caution on financial transaction tax

Lobbying against the EU’s Robin Hood-style financial transaction tax has been ramped up following the apparent intervention of the European Central Bank.

Eleven countries have signed up to the taxbut others who have not, including Ireland, are becoming concerned as it will affect trades in bonds, shares and derivatives that have any connection with the European Union.

While Ireland, and many of the big global trading centres, including the City of London, tax share sales with a stamp duty, it is confined to one part of the sale and derivatives are not taxed.

ECB executive board member Benoît Cœuré, told the Financial Times that they could advise on the design of the tax, suggesting they had concerns: “We’re willing to engage constructively with governments and the European Commission to ensure that the tax has no negative impact on financial stability.”

It is understood that the ECB fears that it could affect the market for repurchase agreements that also involves government bonds, providing liquidity in the financial system.

The president of Germany’s Bundesbank, Jens Weidmann, said it could leave central banks having to provide liquidity for longer than should be necessary.

The Government and the Irish Funds Industry Association has said that the tax could affect the 12,000 professional jobs they claim are supported by the sector. By opting out Ireland has passed up on raising an additional €75m a year, according to the European Commission, which sought to raise €35bn annually from the tax.

The British Bankers’ Association and the Confederation of British Industry wrote to European Council president Herman Van Rompuy saying that the tax was an attack on family savings as it would affect pension funds.

They claimed that the tax could cost pensioners around €18,000 over 20 years. However such claims are dismissed by the European Commission that says traders would need to buy and sell shares very frequently to run up such costs.

The European Parliament overwhelmingly supported the financial transaction tax in a vote last week but said they wanted pension funds exempted and other changes to capture more traders and make evasion more difficult.

The MEPs recommend adopting the payment system used by the British to collect their stamp duty which links the payment to ownership of the security. Since the tax is very small — 0.1% for shares and bonds and 0.01% for derivatives — the MEPs argue that it would be less risky for them to pay it.

They urged that it enter into force at the end of Dec 2014, but if the ECB becomes involved in redesigning it or there are further attempts to water it down, this deadline is like to slip.

They also added proposals to ensure more trades are captured. Under the current draft, financial institutions based in the countries opting in would be taxed, as would those shares traded by an institution established within the EU. The commission suggests that securities originally issued within the EU would also be included.

The MEP who prepared the report for parliament, Anni Podimata said: “The financial transaction tax is an integral part of an exit from crisis. It will bring a fairer distribution of the weight of the crisis. This financial transaction tax will not lead to relocation outside the EU because the cost of this is higher than paying the tax”.


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