Taxation of the Financial Sector

March 28, 2011 4:26 PM
By Sharon Bowles MEP

First I thank you, Commissioner Semeta, for inviting me again this year to the Brussels Tax Forum. This has become an important forum for public and private sector to discuss current and future trends in EU taxation policy.

Before entering the discussion on the Financial Sector Taxation (FST), like you I will make some general remarks on the Commission's ambitious work programme for this year.

In addition to FST you have launched two other public consultations.

First, the Consultation on taxation problems that arise when dividends are distributed across borders to portfolio and individual investors and possible solutions

The European Parliament, welcomes your initiative in this area. We agree that levying and crediting of withholding taxes on dividend payments can sometimes be carried out in a discriminatory way. Withholding taxes can also lead to unrelieved double taxation, distorting the effective functioning of the Internal Market. Since both discrimination and double taxation are undesirable in the Internal Market, we support the Commission in its efforts to tackle these problems and to find practical solutions.

Straying into an area that covers not just dividends but also corporate tax base and financial sector tax, is the issue of double non-taxation, which you have addressed. I have informally mentioned this issue previously and I am writing to you, Commissioner, about this now. I and other ECON members would like to suggest launching a public consultation in the area of corporate double non-taxation. This could include the possibility of anonymous submissions in order to allow active members of industry to contribute.

The second consultation is the Green Paper on the future of VAT- Towards a simpler, more robust and efficient VAT system

When I spoke at last year's Tax Forum, I urged you to launch the much-awaited debate on the future of the VAT system in the internal market. I am happy to see that you have taken this on board and launched the consultation in December. We share the same assessment of the current VAT system, set up 50 years ago: a lot needs to be done as regards making the VAT system easier to apply, with fewer burdens for tax payers. We must reduce exceptions and derogations, simplify, and make the whole system more efficient and more coherent.

The European Parliament has pronounced itself at various occasions on specific aspects of VAT, indeed as I did with my 2008 report on fiscal fraud. Currently we are preparing an own-initiative report on the Future of VAT in response to your consultation, which will feed into your VAT Communication planned for the end of this year.

A third issue I must mention is to congratulate you, Commissioner, for the publication of your proposals for a Common Consolidated Corporate Tax Base. We have not yet fully analysed the content of the report - that is underway - but it is an achievement to have got the proposal on the table after so many years of planning. I know that this has not been easy and as I have said before on many tax matters it is the Parliament that you can look to for support when the going gets tough in other quarters.

In 2004, the Parliament stressed the importance of adopting a common consolidated tax base which would fulfil the requirement of greater integration in the internal market and be the best way of tackling the tax obstacles hampering companies' cross-border activities. This call was repeated in my own 2008 report on fiscal fraud in the context of tax avoidance and evasion, and you will have seen that I am not a fan of attempts elsewhere to introduce a common, non-consolidated, base.

For the avoidance of doubt I will make it clear that I would be completely against enforced rate harmonisation, and that is also the position taken to date in preparation of resolutions in the committee.

Commissioner, Parliament pressed you strongly on this - right from the moment of your Hearing in January last year - when you promised us that upon your conformation you would immediately instruct your services to complete the Impact Assessment in order to be in a position to present a draft proposal to the College within 12 months. I thank you for honouring that. This proposal has the ambition and potential for the most radical reform of international corporate taxation in recent history.

My Fourth mention is the Tax Policy Group (TPG)

I remember your announcement last year at this Forum to launch a High-Level Tax-Policy Group composed of personal representatives of Finance Ministers with a view to giving new political impetus to work at EU level on taxation.

You followed up on your announcement last October, but I am disappointed to note that you seem to have "forgotten" to take the Parliament on board. Parliament represents the voice of the citizens of Europe at the EU level to discuss EU issues. This is all the more true after the entry into force of the Lisbon Treaty. As recalled by President Barroso on several occasions: "We need greater ownership of the EU strategy and, in this respect, the role of the European Parliament is particularly important" - his words. I therefore ask you to associate the Parliament from now on with the work of your Tax Policy Group (TPG). I can also advise you that I am proposing to the ECON Committee that we set up a tax working group with a wide-ranging remit similar to that which we have just done for Competition policy.

So finally I will get around to the main topic of our conference today, Financial Sector Taxation.

Most of you will know the quote attributed to Winston Churchill: "There is no such thing as a good tax." I agree with Sir Winston in the sense that all tax ultimately takes money from the pockets of people. What we seem to be trying to do here is to find taxes which might be "less bad" than others - and in some instances if not attribute the income to specific purposes, then attribute the justification.

The European Parliament has just adopted a report on Innovative Financing, looking at different possibilities for generating new revenues to complement - or indeed replace - traditional sources. The majority of members spoke out in favour of the development of a low-rate financial transactions tax (FTT). Depending on its construction it is suggested that it could raise some €200 billion per year in the EU. Many also suggest it might discourage bad speculative trading by making it more costly - one of the tenets of the original Tobin tax proposal. Thus the Parliament's report argues that the tools proposed might yield a "double dividend" by not only generating more funds, but also making the financial sector safer and more stable, and this latter view tilts opinion towards an FTT rather than other options.

There are at present questions about activities such as high frequency trading and whether these are useful or even damaging. We are all looking at these issues, not least in the context of the MiFID review, and challenging classical assumptions about transaction speed and liquidity. Some see speed as more linked to bad speculation and criticise it for lacking transparency, questioning whether it really has a useful role in price formation and curbing volatility. I think the answer to a lot of these questions is we really do not know or that it might be a mix of both - but in the taxation context the majority view in Parliament has settled around a transaction tax being an appropriate way to raise revenue in a way directly linked to the financial world and that such additional taxation is justified.

The main features for an EU FTT proposed in the Parliament's report are:

My personal view is that there are difficulties, such as equivalent treatment of assets and more deserving exemptions needs, eg for developing countries, that drive towards other options that FTT; and whether we want to discourage market activity which should be done by tailored market regulation. These are issues for any impact assessment.

As I have said, the view is that the financial sector should contribute to a larger extent to public budgets, which have been severely affected by the crisis due to the bail-outs of the financial system and knock-on effects. This is not as a "punishment" or for populism - although there are plenty happy to play it that way - but as an economic necessity and because of the privileged position and cost that the need for a bail out demonstrated. I would add here that despite best intentions of regulatory reform it is far from clear to me that we will or are managing to distance the taxpayer from moral hazard.

The Parliament also wishes for measures to shift the burden of taxation away from the working population. Againt, I must myself also add here that I see this as a wish for moving tax away from a direct levy on working incomes, for we have to recognise that like all taxation a transaction tax will be felt on the expenditure side, and also on investment incomes such as pensions.

Ronald Reagan once said "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Parliament is now saying turn that critical observation around: In the financial crisis we started by subsidizing the financial sector when it stopped moving; when it moved again we started on lots of regulation; now that the sector looks like it is doing well again it might make sense to consider taxing it.

We all prefer the notion of introduction of the FTT at the global level. So far G20 has been unable to promote meaningful joint initiatives on this matter so Parliament calls on all G20 leaders to speed up the negotiations for an agreement on the minimum common elements of a global FTT. And of course, the French government has made this one of the key priorities of its Presidency of the G8 & G20.

However the EP's innovative financing resolution does go a step further: saying that if imposing this tax worldwide proves too difficult, then the EU should impose it at European level - although the report does also state that the introduction of a FTT needs to be preceded by a thorough impact assessment, also looking at alternatives, such as a Financial Activity Tax (FAT). The Parliament has already asked the Commission for such an impact assessment with its resolution of 10 March 2010 on FTT - now over a year ago - and Commissioner, you assured us on several occasions that this long-awaited impact assessment will be issued this summer. I am now hearing that this may be pushed back to November, which I´m sure will make my fellow Members of ECON rather unhappy.

To conclude, and to illustrate that whatever means of 'innovative financing' we choose to go forward with, we have to do so with a sense of proportion, in order to prove Mark Twain wrong who once said: "What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin."

Thank you.

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