A financial transaction tax is unworkable, would push firms to relocate outside the EU and could undermine economic growth, according to a report from a House of Lords committee.
The European Commission’s proposal, announced in September, would see a 0.1 per cent charge on stock and bond trading and 0.01 per cent on derivatives contracts.
The House of Lords European scrutiny committee has been running an inquiry into the FTT. Its report, published today, says: “We have been disappointed with what we have discovered. We have found the Commission’s proposed model wanting in many respects.”
It says objectives for the tax put forward by the Commission are unlikely to be achieved. Introducing the tax in the EU is unlikely to lead to it being implemented globally and political difficulties mean using the revenue to fund EU coffers is “contentious to say the least”.
The UK refuses to back an EU wide FTT, but negotiations in Europe over how to increase taxation on financial services are ongoing. Talks could see only some countries adopt the FTT or a new approach put forward in its place. The committee says any such tax would have considerable implications for the UK and calls on the Government to “redouble its efforts” in ensuring the UK influences the debate.
The FTT’s charges would be levied in the country in which the institution is based regardless of where the actual transaction takes place, this is known as the ’residency principle’. But, the committee says defining residency would be difficult and brands the measure “wholly impractical and unworkable”.
European Commissioner for taxation Agirdas Semeta argued in a committee hearing in February that the residency principle would reduce the likelihood of firms relocating. The report says: “Should the Commission implement its FTT proposal in the EU alone, financial institutions would relocate outside of the EU.
The report adds that the Commission’s estimate that the tax could hit growth in the long-term by 0.53 per year is “concerning”. It says: “At a time of ongoing financial crisis and at best fragile economic growth across the entire EU, we consider a new tax which could have substantial detrimental impact on EU GDP should be resisted.”