Implementingenhanced cooperation

in the area ofFinancial Transaction Tax

Features, impacts, illustrations

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Brussels, 14 February 2013

Part I:The requests for

enhanced cooperation

EU27 EU11

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The requests

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1. Objective and scope to be based on the Commission's initial proposal of September 2011

2. Evasive actions, distortions and transfer to other jurisdictions are to be avoided

• [Possible economic consequences associated with the introduction of FTT by way of enhanced cooperation should be analysed]

Two main objectives:

"Harmonisation of indirect tax legislation!"

"Fair and substantial contributionof the financial sector!"

One secondary objective:

"Create appropriate disincentivesfor certain transactions"

p.m. objective:

"First tangible step for a global approach"4

The scope of the original proposal

• Transactions on regulated/organised markets as well as over-the-counter transactions

• Transactions (such as sale/purchase, lending/borrowing, transfer of ownership, conclusion or modification of derivative contracts) in financial instruments

• Financial institutions (banking and "shadow-banking" sector) from the EU that are party to the transaction acting either for their own account, or for the account of another person, or are acting in the name of a party to the transaction

In a nutshell: All markets! All instruments! All actors!

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Out of scope of the original proposal

Ring-fencing Private Households and SMEs: Enterprise borrowing/lending Mortgage loans, consumer credits Insurance contracts Payment transactions, etc.

Ring-fencing large and international business, and public borrowing, but also “conservative” pension funds: Primary market transactions for raising capital through the issuing of shares and bonds – this also ring-fences “conservative” pension funds

Spot currency transactions Issuing of government bonds

Ring-fencing monetary policy, central clearing houses etc.: Transactions with ECB, Central Banks of Member States, EFSF (ESM) Central Counter Parties and alike

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As a rule “the place of establishment of a financial institution” determines which MS has to tax.

A financial institution is deemed to be established in• MS of authorisation (in respect of transactions covered by that

authorisation)• MS of registered seat• MS of permanent address or usual residence• MS of branch (in respect of transactions carried out by that branch)• MS of (counter) party to a transaction, in case a non EU

financial institution is party to transaction (or acts in the name of a party) with at least one party established in the EU

Powerful anti-relocation provisionsin the original proposal

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Taxable amount and tax ratesin the original proposal

Financial transactions other than those related to derivatives agreements

Consideration paid or owed for the transfer Market price (=at arm’s length price) in case :

• consideration is lower than market price• Or transfers of financial instruments between entities of a group in case

they do not constitute a « purchase or a sale » Tax rate: 0.1% (for each party to the transaction)

Derivatives agreements Notional amount of the derivatives agreement (underlying notional

or face amount that is used to calculate payments made on a given derivatives agreement)

Tax rate: 0.01% (for each party to the agreement)8

Part II:What will change?

EU27 EU11

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"FTT jurisdiction" now limited to "participating" Member States

Capital duty Directive (2008/7/EU) to be fully respected:• No changes of capital duty directive possible!• All primary market transactions in shares and bonds and

alike must remain tax free!• Restructuring operations referred to in the capital duty

directive must remain out of scope of FTT!

p.m.:• FTT directive does not bind non-participating Member

States! It does not form part of the acquis!

Changes necessaryunder enhanced cooperation

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The "residence principle", as defined in Article 3.1 of the original proposal has been complemented with elements of the "issuance principle" for certain financial instruments

A "condition of last resort" has been introduced in the new Article 4 (Establishment)

This condition stipulates that a financial institution or other party can also be deemed to be established in the territory of a participating Member State when the product in question has been issued in that Member State.

This rule is applicable to transactions in financial instruments such as shares, bonds, structured products, money market instruments, units of collective investment funds and derivatives traded on organised trade venues or platforms.

Strengthening anti-relocation provisions

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1. Transactions with the ECB, EFSF, ESM and the EU are out of scope.

2. Member States when managing their public debt are out of scope.

3. The underwriting including the subsequent allocation is defined as "primary market transaction" as well.

4. An exchange of financial instruments is included as "purchase and sale" (but = two transactions).

5. Repo agreements are considered as one single transaction. So are lending and borrowing agreements.

Main changes for the sake of clarity

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1. A technical clarification has been introduced in Article 2 (definition of financial institutions) in the context of the "residual" provision on "any other undertaking, institution, body or person …"

2. A comprehensive general "anti-abuse" provision has been introduced (Article 13).

3. A specific "anti-abuse" provision has been introduced with respect to "depository receipts and similar securities"(Article 14).

Other changes:References to "delegated acts"

have been replaced by specific provisions

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1. Possibility for Commission to adopt delegated acts on

registration, accounting, reporting and other obligations to

ensure payment.

2. Possibility for the Commission to adopt implementing acts on

uniform methods of collection.

Other changes:References to "delegated acts" and "implementing acts"

for better harmonisation

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Illustrations (1)

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• A bank established in Germany carries out a financial transaction with an insurance company established in Spain, e.g. sale of share:• FTT is due both in Germany and Spain at national rates.

• A bank established in France enters into a Swap-agreement with a bank established in Switzerland:• FTT is due twice in France at national rate, by the Swiss bank deemed

to be established in France and the FR bank.

Illustrations (2)

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• A bank established the US (with no branches in the FTT jurisdiction) purchases on the London Stock Exchange shares issued in Germany from a bank (with no branches in the FTT jurisdiction) headquartered in Singapore. • FTT due at German rate by both banks as the shares were issued in DE.

 • The French branch of a US financial institution sells in Zurich (SUI)

US shares to the French branch of another US financial institution for the sake of their US operations.• The US institutions (branches) might be able to prove that that there is

no link between the economic substance of the transaction and France.

Part III:Analysis of policy options and impacts

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"Analysis of policy options and impacts" - Macroeconomic effects -

On participating Member States √

On non-participating Member States √

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"Analysis of policy options and impacts" - Occurrences of double taxation -

Within FTT jurisdiction: NO!

Between FTT and non-FTT jurisdiction: Possible, but …

… only for as long as not all Member States have joined the FTT jurisdiction

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Expected market reaction- change in turnover -

"Market reactions" should not be confused with "geographical relocation"

Instead they are in most cases the result of Less frequent trading (e.g. less HFT) Less risk exposure ("go for the net-risk only") More passive and conservative risk hedging Declining demand

Modelling assumptions / results Shares and bonds: minus 15% Derivatives: minus 75%

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1. Should one (fully or partly) but permanently exempt certain products from the scope of the FTT? Repurchase agreements?

Secondary markets for public debt?

Derivatives?

2. Should one (fully or partly) but permanently exempt certain actors from the scope of the FTT? Regional and multilateral development banks?

"Internalisers" such as market makers, broker-dealers, proprietary traders etc.?

Pillar II and pillar III pension funds?

3. Should one (fully or partly) but only temporarily exempt certain products, actors and/or market places (step-by-step approach)?

"Analysis of policy options and impacts"

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National shares inGross Domestic Product in EU 11

- 2011, in PPP -

-

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Delocalisation:A real threat

despite powerful anti-relocation provisions?

Those who want to avoid the tax will no longer be able to serve the EU11 market! 23

Also the EU11 economy is"too big"

for being neglected as a market by

financial institutions

Thank you for your attention!

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More information available at the following web address:

http://ec.europa.eu/taxation_customs