Europe’s ‘Tobin Tax’ edges closer

A European parliamentary committee voted to implement a financial transaction tax that could hit GPs when buying and selling shares in portfolio companies.

The controversial European Financial Transaction Tax (FTT) moved one step closer to implementation when a European parliamentary committee voted for its introduction on Monday.

The European Parliament's economic and monetary committee voted in favor of the tax that would charge a 0.1 percent tax on stocks and bond trades and a 0.01 percent tax on derivatives in 11 countries within the European Union.

The committee voted to lower the tax on pension funds to 0.05 percent until January 1, 2017. After this period the rate would go back to the normal 0.1 percent.

For private equity firms, the tax would hit when purchasing or selling shares, bonds or options in portfolio companies.

“This has been a long and complicated negotiation”, said Greek MEP Anni Podimata, who is leading the bill through parliament. “Despite intense lobbying from the financial sector, we managed to defend an ambitious proposal covering all financial institutions, all financial products and all financial markets.” 

The tax will go before the full chamber of deputies in early July. If passed it will then move to the European Council.

“We want an FTT in place before the European elections in May 2014,” said Podimata.

The tax proposals’ path to imlementation has been far from smooth. The tax, commonly called the Tobin tax after economist James Tobin who first proposed the idea in the 1970s, faced a difficult passage when it was first proposed in 2011 with some European sovereigns opposing the measure.

Last month the governor of the Bank of France, Christian Noyer, was reported to have said the FTT posed a very real “risk” to the French economy if it isn’t implemented correctly, despite France being one of the 11 nations to sign up to the tax.

Other critics of the tax question its legality. They argue that the tax's application on transactions passing through one of the 11 participating countries is a territorial overreach. “They're not just taxing their own – they're taxing investors and financial institutions across the EU and beyond. There is a serious question whether this kind of extra-territorial taxation is consistent with EU treaties,” said Clifford Chance tax partner, Dan Neidle, in an emailed statement. 

Under EU rulemaking procedures, a pan-EU taxation measure typically requires unanimity to pass. The 11 member states who wish to impose that tax however have forgone that principal through enhanced cooperation 

Enhanced cooperation is permitted when nine or more EU member states decide to move ahead with an initiative proposed by the Commission once it proves too difficult to reach unanimous agreement. The 11 countries are: France, Germany, Belgium, Austria, Slovenia, Portugal, Greece, Slovakia, Italy, Spain and Estonia.