Attempts at better regulation of the financial sector in the US and EU involve laws applying beyond state boundaries to prevent risky financial activity that has historically contributed to the financial crisis. This year, eleven EU countries agreed to a Financial Transaction Tax (FTT) on investments, potentially bringing an additional $45 billion in revenue, which some say could go towards offsetting debt or even social and environmental programs. Furthermore, through extraterritorial enforcement, FTTs tax financial investments from trading partners like the US and dissuades tax evasion by European companies. The US Foreign Account Tax Compliance Act similarly limits the use of tax havens by requiring foreign banks to report all US holdings. While some countries are already looking at adopting this regulation, the FTT faces opposition from the UK and US. Although stronger financial regulation is needed, the global nature of the issue highlights the complexity of implementing reforms.
By Howard Schneider
A new European tax on financial transactions will hit investors worldwide — including in the United States — who buy stocks and bonds of European companies, do business with European banks or engage in any of a broad array of financial activities.
The levy is due to take effect next year and will be a significant money-raiser for the 11 nations that have signed on, bringing in an estimated $45 billion annually. The 11-nation group, whose members are mostly from the economically ailing euro currency union, includes major U.S. trading partners such as Germany and France. Britain is not participating.
Supporters say the tax is a matter of fairness — a way to make the financial sector pay its share to offset the bailouts received during the financial crisis and to curb speculation. But it is also emblematic of a broadening debate about how far countries can reach across borders in their drive to regulate the financial industry.
Banks worldwide are drawing up plans to adapt to the U.S. Foreign Account Tax Compliance Act, which requires foreign financial institutions to report the holdings of Americans to the Internal Revenue Service and to withhold tax on some transactions. And many nations have complained that a new U.S. law limiting speculative trading will force their local banks to dramatically change how they do business if they have even a small presence in the United States.
U.S. officials are pushing Europe to curb the application of the transactions tax outside the nations directly involved, and business officials argue that the trend toward “extraterritorial” regulation could have damaging consequences.
“There is a potential for regulatory overreach that could harm the global economy,” said Tom Quaadman, vice president for capital markets at the U.S. Chamber of Commerce. “These taxes create different types of behavior. . . . It is like water trying to find its level. The activity will go other places.”
There was no estimate, he said, of how much Europe might collect from U.S. companies or investors under the new tax.
He noted that the United States repealed a similar levy in the early 1960s to encourage companies to raise capital for investment, and Sweden in the 1980s abandoned a tax on stock trades after trading activity migrated elsewhere. More recently, the Obama administration opposed the idea of a financial transactions tax in favor of a direct levy on banks based on the size of their balance sheets. That has not been enacted.
The decision by U.S. and British officials to split from major European powers over the financial transactions tax marks one of the more important divergences in the discussion of how to bolster financial regulation in the wake of the crisis that followed the 2008 failure of Lehman Brothers.
Many consumer-oriented groups argue that the money raised through a transaction-based tax could be used to offset the risks posed by the financial system or funneled into other social issues such as climate change. The International Monetary Fund has endorsed the concept of a financial transactions tax — sometimes called a Tobin tax for the economist who initially advocated it, or a Robin Hood tax for its potential redistributional effects — and European officials say they hope some version of it is adopted throughout the world.
“The first and best solution is an FTT globally,” European tax commissioner Algirdas Semeta said this week in Washington, where he met with Treasury Department and business officials.
But Semeta said the 11 European nations are prepared to “lead by example” and think they have created a law that avoids some of the worst potential pitfalls.
European Commission studies concluded that the tax — of $1,000 on a $1 million stock trade, or $100 on a $1 million contract in derivatives, repurchase agreements and a host of other financial products — will have a modest impact on economic growth. But consumer financial products, such as insurance policies, have been excluded to mute that impact, as have the initial sales of stock and bonds used by companies to raise money for projects and expansion.
European officials say one reason they drafted a law with global reach was to avoid creating incentives for companies to shift their business elsewhere — and to try to ensure that wherever covered transactions take place, the fee will be collected. That may, for example, force markets such as the New York Stock Exchange to vet their listings for North American subsidiaries of European companies and collect the tax when shares in those firms are bought or sold. Other collection efforts will rely on existing tax treaties and arrangements among financial companies and exchanges.
“I don’t foresee any negative effects,” Semeta said. “The objective remains the same — a fair and substantial contribution towards public finances” by the financial industry.