EC: initiative for the taxation of the financial sector

Comments from ACCA to the European Commission, April 2011.

Q1: Do you consider it justifiable that the revenue side of fiscal consolidation efforts of Member States are targeting the financial sector?

4. Other. ACCA does not believe that taxes should be used to "punish" any given sector for perceived past failings. However, imposition of a FAT or similar measures can be justified where the design principle focuses on resolution of issues such as the perceived emphasis on distortionary short term factors in the remuneration structures of many actors in the financial sector. In the same way, although a FTT cannot directly prevent the recurrence of the broader failings in financial markets, it can nevertheless contribute to the funding of research into the issues, and creation of reserves to deal with potential future failures.

Q2: Do you find it problematic that Member States introduce patch-work national measures without coordination?

Yes, because. The differences in regulation have a twofold effect, on investment from within the EU and from outside the EU. Compliance with regulation initially involves understanding that regulation, which in turn imposes a cost on the business subject to that regulation. Every change in, or addition to, the regulatory regime(s) to which a business is subject will impose a further cost on the business. Whether these costs act as a disincentive or not, where there is no external justification for cross border differences they will anyway be a pure administrative burden and as such a waste of productivity. In the case of businesses operating solely within the EU, inconsistencies in the pan European regime are at best a waste of resources and at worst will act as a fetter on the single market.

From the perspective of an external investor into the EU, there is a further dimension to the assessment of costs and burdens, as the investor will need first to decide on which of the available jurisdictions it will commence European operations from. Where there are significant differences between the taxation of the profits arising in different jurisdictions, this will form an increasingly important part of the decision making process. In addition to the well identified risks to economic efficiency posed by the existence of such tax competition, there is a further negative impact on businesses in terms of the uncertainty engendered by the knowledge that they are investing into a regulatory regime which may be subject to unilateral change with adverse effects upon the business. ACCA cautions small business the world over against choosing its legal form for tax, rather than business reasons, and the same warnings would currently have to hold true for businesses seeking to invest in the EU and choosing the home seat for their operations; however attractive a particular tax regime may look, they can be subject to radical revision significantly increasing the costs on the business. A uniform and stable tax and regulatory regime across the EU would promote transparency and encourage external investors to base their decisions on economic rather than regulatory factors.

Q3: Do you consider that shortcomings in the governance or behaviour of financial markets or financial institutions were one of the major reasons for the financial and economic crisis?

6. Other. ACCA believes that shortcomings in corporate governance at major banks were a contributory factor in the financial crisis. Excessive short-termism, coupled with a lack of accountability both within financial institutions and between management and shareholders, was at the heart of the problem. This led to:

(i) failure in institutions to appreciate and manage the inter-connection between the risks inherent in their business activities and management and remuneration incentives

(ii) remuneration structures/bonuses of banks that were characterised by excessive short-termism; this neither supports prudent risk management nor works in owners’ long term interests

(iii) over-complexity of financial products and lack of management understanding of the associated risks. 

Q5: Do you consider those shortcomings in the governance or behaviour of financial markets or financial institutions to be an EU-wide problem?

6. Other. It affected all EU Member states, but in different ways. The problems were inevitably more apparent in those Member states with significant banking sectors, but nonetheless the perceived rewards were pursued by actors within every financial market.

Q6: Do you consider the financial sector in the EU to be under-taxed (e.g. because of VAT exemption, exemption from thin capitalization rules, higher economic rent i.e. excess profits) or overtaxed (e.g. because of special additional taxes already implemented) with respect to other sectors of economic activity?

6. Other. The levels of reward enjoyed by significant sectors of the financial services industry seem to be a prima facie indicator of significant rent taking by those involved. However, the question of whether these activities are "over-taxed" or "under-taxed" in comparison with other sectors of economic activity presupposes a "correct" level of taxation, which may or may not be the same for all types of activity.

Q8: What do you think of tax measures, versus regulatory measures and levies (connected to the financing of funds to ensure the proper resolution of financial institutions)?

8. Other. At its most basic, a tax exists to raise revenue - that is to say, to generate sufficient funds for a government to carry out its essential functions. By convention, two further objectives of taxes are commonly recognised - wealth redistribution and "other policy objectives", both of which are policy driven beyond the pure expediency aspect of raising sufficient revenue to cover essential government expenditure. Wealth redistribution is primarily a function of global income taxes and not directly in point in the context of taxing a discrete economic sector. Use of tax a policy weapon is seen in some quarters as potentially controversial. While ACCA believes that in some circumstances the use of tax explicitly to influence behaviour can be justified, such measures must be transparent, simple and effective.

A regulatory measure or levy on the other hand has as its primary purpose the control of the subjects’ behaviour. Any revenue raised from the activity is (or should be) treated as incidental; it should not be relied upon as a revenue raising measure on its own merit. If this model is followed closely, then taxes should strive for optimum efficiency; regulatory measures and levies need not do so to the same extent, as the costs of implementation are simply deducted from the "profit" made by the regulator. Indeed, it could be argued that the more expensive and burdensome a regulatory measure, the more effective it will be at controlling discretionary behaviour by rational economic actors. Equally, an "ultimately effective" regulatory levy runs the risk of raising no revenue at all, as the actors involved will have changed their behaviours so as to avoid the apparently undesirable behaviour.

Conversely, a tax, with its aim of increasing funds available to finance other expenditure, should strive for efficiency. It should also aim to be consistent and not self defeating. That is to say, the level of revenue generated by the tax should be predictable year on year, and it should not distort other economic activity by incentivising changes in economic behaviour. A poorly designed tax runs the risk of itself causing negative externalities itself.

Q10: At what level do you think that the FTT will be most effective?

2. A FTT needs to be imposed at a global level, as the transactions will otherwise simply migrate to jurisdictions where costs are lower. Within the EU, Member states which do not currently play host to established financial centres would raise little in the way of revenue, whilst countries hosting major financial markets would lose the employment and revenue (direct and indirect) generated by the relocated business. It seems likely that the net result to the EU of unilateral action would be a significant loss of both economic activity and tax.

Q11: Do you think that a broad based financial transaction tax is a viable instrument?

4. Extending the FTT to include retail transactions would have little impact on its effect on European competitiveness.

Q12: What do you consider as an appropriate connecting factor for the place of levying of the tax?

3. The FTT should learn from the VAT; the destination principle offers the most consistent level of impact upon consumers, thereby reducing the distortive effects of the tax.

Q14: Do you consider that there would be a risk of financial engineering around the broad-based or narrow-based FTT that would undermine the objectives of the measure?

5. Other (including a combination of the above). Whatever the definition of the base far a FTT (or any other tax) there is always a risk of regulatory arbitrage at the margins of activity. Given the subject matter of these proposals, the risk is likely to be higher than in some other sectors of the economy.

Q15: What do you think of the FTT designed as a cumulative tax, i.e. every subsequent sale is taxed at the full amount of the transaction without any deduction of previously paid FTT?

6. Other. Not all short term trading is speculative, so cumulation of taxation cannot be justified on the grounds that it "targets" short term speculation. Indeed, focussing on short term trading with a view to discouraging it would be self defeating from a revenue raising perspective, which is contrary to the expressed role of a FTT to fund long term policy objectives. On general principles, the broader the base of the tax and the lower its rate, the more simple, effective and transparent it can be.

Q16: Would there be a need for specific exemption of certain transactions from the FTT or an exemption threshold?

5. Other. Notwithstanding the risks of avoidance activity, there should be an exemption for low value transactions with a view to protecting retail consumers from the impact of the regulations. Exemption would further reduce the costs of operating the tax, given the proposed low rate of tax. Even at a floor of €50,000 the tax income would be just half of one Euro per transaction minimum, well below the costs of collecting it.

Q17: Do you think FTT rates should be differentiated depending on the type of product traded?

4. Other. Notwithstanding the fact that different rates will lead to complexity and shifts in transaction types, differential taxation may be essential if the tax is to avoid having negative impacts which outweigh the positive. If the tax were to be uniform, but set at a rate low enough not to harm some "beneficial" transactions, it would be too low to have any behavioural effect on "harmful" transactions, while compromising the revenue raising capacity.

Q18: Do you think that the tax incidence of the tax will fall on the financial sector, or will it be shifted to the customers?

5. Other. Unless the tax is global, its incidence will to a large extent fall on no-one. However, assuming that a workable tax can be agreed upon, the incidence is most likely to fall upon those least able to avoid it. The financial sector will recoup the costs from lower value and less sophisticated customers, as these are the population least likely or able to be able to resist or avoid increased fees.

Q22: At what level do you think that the FAT will be most effective?

5. Other. In pure theory, an FAT would be most effective at global level. It will be less sensitive to regimes in other jurisdictions than a FTT, but will nevertheless run the risk of incentivising financial sector businesses to relocate to other jurisdictions if imposed only on an EU basis.

Q24: Which form of FAT do you consider most appropriate?

5. Other. From a transparency and simplicity perspective, an addition method FAT would be most desirable. If the aim is to change specific behaviours, rather than simply raise revenue, then the identified behaviours (rent taking and risk taking) must be addressed. However, the design of any taxes of this type must be tailored carefully to the target markets, and should be subject to regular review and if necessary revision to retain effectiveness while ensuring that the tax does not simply come to be perceived as a punishment for past behaviours.

Q25: What are the major difficulties with the three forms of FAT?

5. Other. Any FAT that relies for its efficacy upon taxing remuneration will face the same problem as the income tax regimes of the territories in which the banks operate; namely that banks and their advisers have become increasingly skilled at maximising net reward for employees by structuring remuneration packages so as to avoid the incidence of taxation which operates by reference to defined forms of "income". Increasing the incidence of tax upon wages will increase the incentive for banks to reward their employees other than by way of "wages". Anecdotal evidence indicates that bonus-dependent structures previously encouraged by preferential tax treatments for performance based incentives are now being replaced by higher base salaries with lower performance related elements, directly in response to changing tax patterns.

Q38: At what level do you think that the levy will be most effective?

5. Other. As with any tax on the financial sector, a levy should operate at the highest possible level to avoid the risk of displacing activity to non-taxing jurisdictions. Moreover, the application of any levy on too narrow a base of the banking system will simply encourage reliance on the secondary, or shadow, banking system. In the absence of any FTT type mechanism the result would be a loss of revenue to governments with no corresponding benefits.

Q39: What is your opinion of the industry scope of the levy?

7. Other. As suggested above, a levy should be based on the widest possible range of institutions in order to reduce the incentive or scope for revision of financial activities in order to reduce reliance on actors whose costs (and prices) have risen in order to fund the levy.


The application of any of the three measures discussed in this paper is controversial, as global markets evolve and develop in response to changing economic conditions and technological advances. In this fast moving environment, any taxation regime which seeks to introduce new economic burdens must be designed initially to avoid negative impacts, and then be able to adapt to the responses of the financial sector to ensure that the desired positive outcomes remain achievable.

With this in mind, the detailed design and application of any new taxes should be devolved to national governments, with scope for national governments to introduce appropriate counter measures to discourage migration. While certainty, transparency and stability are all fundamental principles to which any tax system should aspire, any attempt to apply a single unified regime across all 27 Member states would be at grave risk of failing to achieve its ends and even of causing significant damage to the competitiveness of the EU as a single marketplace within a global environment. The complexities of the existing tax regimes, and the sophistication of the taxpayers within those regimes, is such that only carefully tailored and specific measures will be able to raise revenue or change behaviour without resulting in significant negative impacts elsewhere in the relevant economies, or failing to have any useful impact at all.