Financial Transaction Tax


The application of a financial transaction tax on bond, equity and derivatives transactions in Europe continues to be intensely debated. As noted in a previous alert,[1] several months ago the European Commission proposed the introduction of a plan to tax derivatives and other financial transactions each time at least one of the parties to a transaction is located within the 27 member-state European Union (the “EU”). Equity and bond transactions would be assessed a 10 basis point tax and derivatives transactions would be assessed a 1 basis point tax. The tax under this plan would become effective in 2014 and was expected to raise approximately €57 billion per year.

Since that time, Germany and France have continued to promote the adoption of a European financial transaction tax. The United Kingdom has vocally opposed the tax, arguing that such an initiative should be adopted globally to avoid a loss of local competitiveness and a potential flight of capital and jobs. Nevertheless, on January 29th, French President Nicolas Sarkozy announced plans to impose a financial transaction tax in France, irrespective of whether the EU or any of its other member-states imposed their own tax. On February 8th, the French government released details on its proposed tax. The proposal includes a 10 basis point tax on purchases of shares in listed companies headquartered in France that have a market capitalization of at least €1 billion and a 1 basis point tax on the notional amount of naked credit default swaps purchased on EU sovereign bonds that are entered into by French companies. No tax would be assessed on bond transactions or other derivatives transactions. The proposal also includes a 1 basis point tax on high frequency traders located in France, generally based on the value of cancelled orders above a specified threshold. If approved by the French parliament, the tax would be effective on transactions executed beginning August 1, 2012. French authorities expect approximately €1 billion per year in revenues to be raised by the tax after 2012. German governmental authorities seem unwilling to introduce their own national financial transaction tax, continuing to hold out hope for the institution of an EU-wide tax or, alternatively, a tax similar to the existing UK stamp duty on transactions.

There continues to be opposition to a financial transaction tax, both in Europe and in the United States. Among other things, opponents claim that the tax could lead to a decline in economic activity and, therefore, a decline in overall taxable revenues. In the United States, proposals for a financial transaction tax continue to struggle for traction due to opposition by key governmental authorities.

[1] To review this client alert, please click here.