Financial Transaction Tax (FTT)

Background & Overview

The European Commission (EC)’s proposal for a Financial Transaction Tax (FTT) was first published in 2011 and caused great political debate. By 2012, finance ministers at the Economic and Financial Affairs Council (ECOFIN) were unable to reach a unanimous decision to adopt the proposal, however 11 Member States (Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia, and Slovakia) wanted to continue towards the path of ‘enhanced cooperation’ and proposed their own version of an FTT to be prescribed into local law. Towards the end of 2012, the Commission proposed to the Council to authorise the request. This was approved and in 2013, the Commission made a revised proposal for a formal Council Directive.

In 2016, Estonia formally withdrew from the initiative, however they were unsuccessful in agreeing a design.

In 2019, Germany released a revised proposal to those participating Member States which included a new method of allocating the revenues generated across Members.

In 2020, political pressure to introduce this regime was increased as a result of COVID-19, with several Member States committing to an EU wide FTT proposal by 2024, as part of negotiations on the EU’s future budget framework and COVID recovery fund (Next Generation EU). In February 2021, the Portuguese presidency of the Council set out a number of new policy considerations, in order to push forward the debate towards adoption..

Aims & Objectives

The proposal for an FTT aims to harmonize uncoordinated EU Member States’ financial tax initiatives, which may lead to fragmentation of the single market for financial services, and to the risk of double taxation.

The objective of an EU wide FTT is as follows:

• To generate revenue and ensure contribution from the financial sector to tax revenue
• To ensure the smooth functioning of the local internal markets and avoid any double taxation and distortion of competition
• Restrict undesirable market behaviour to stabilise markets

Scope

There are many established local FTT regimes across Europe, including Belgium, Cyprus, Finland, France, Ireland, Italy, Malta, Poland, Spain, Switzerland, and the United Kingdom, with many excluding securities lending from the scope (notably France and Italy), which may be used as a baseline for determining the scope of an EU wide FTT proposal.

However, the Europeans Commission’s 2013 legislative proposal stated that ‘securities lending and borrowing agreements are explicitly included into the scope of the tax’.

Impact on Securities Lending

The initial idea of introducing an EU-wide FTT was a repercussion of the financial crisis, and a formal proposal was first put forward by the Commission in 2011 but struggled to get a majority backing by Member States due to conflict in agreement of the design by participating countries. In recent years, tighter rules around securities lending have arisen as a result of the Lehman brothers collapse in 2008, however ISLA continues to advocate that the activity of securities lending is essential to maintaining a healthy and functioning markets. ISLA has always advocated that any EU-wide FTT proposal put forward must carve out-of-scope any SFTs, including securities lending and borrowing, or any transactions that are considered to provide liquidity to markets.