COMMISSION STAFF WORKING DOCUMENT Financial Sector Taxation    accompanying the  COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS  Taxation of the Financial Sector   {COM(2010) 549 final}
Date: 2010-10-07
Institutions: European Commission
Subjects: anti-crisis plan, bank, credit institution, economic recession, economic reform, economic stabilisation, financial institution, financial market, monetary crisis, reflation

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EUROPEAN COMMISSION 

Brussels, 7.10.2010 
SEC(2010) 1166 

COMMISSION STAFF WORKING DOCUMENT 

Financial Sector Taxation 

accompanying the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

Taxation of the Financial Sector 

{COM(2010) 549 final} 

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Table of Contents 

Executive summary .................................................................................................................... 3 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

3. 

3.1. 

3.2. 

4. 

4.1. 

4.2. 

4.3. 

5. 

5.1. 

5.2. 

5.3. 

Current Policy Objectives ............................................................................................ 4 

Current taxation of the Financial Sector in Member States ......................................... 5 

Importance of the Sector .............................................................................................. 5 

Share in Corporate Income Taxation ........................................................................... 7 

Value-Added Taxation ................................................................................................. 8 

Overall assessment of financial sector taxation ........................................................... 9 

Policy Instruments........................................................................................................ 9 

The Financial Transaction Tax................................................................................... 10 

The Financial Activities Tax...................................................................................... 12 

Financial Transactions Tax ........................................................................................ 13 

Policy debate and options for an FTT ........................................................................ 13 

The economics of FTT ............................................................................................... 13 

Potential for unilateral introduction ........................................................................... 18 

Financial Activities Tax ............................................................................................. 20 

Policy debate and options for a FAT.......................................................................... 20 

The economics of FAT............................................................................................... 20 

Potential for unilateral introduction ........................................................................... 26 

Annex A: Taxation of financial transactions in the EU ........................................................... 27 

Annex B: Country Experience ................................................................................................. 37 

B.1 Transfer taxes and Stamp Duties ....................................................................................... 37 

B.2 Member States' experiences with FAT elements............................................................... 42 

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EXECUTIVE SUMMARY 

The global economic and financial crisis has created important needs for fiscal consolidation. 
This  document  analyses  potential  instruments  to  raise  additional  tax  revenues  from  the 
financial  sector.  It  is  organised  as  follows.  The  first  section  reviews  the  current  policy 
objectives  related  to  the  taxation  of  the  financial  sector.  The  main  goals  driving  this  debate 
are: the use of taxation as (1) a complement to regulation to correct for negative externalities 
stemming  from  the  activities  of  the  financial  sector,  which  include  the  effects  of  excessive 
risk-taking;  (2)  to  ensure  that  the  financial  sector  pays  a  fair  and  substantial  contribution  to 
public  finances,  in  particular  with  regard  to  the  economic  and  financial  crisis;  (3)  to  raise 
funds  in  the  context  of  the  exit-strategy.  Section  1  also  briefly  discusses  the  link  between 
taxation and regulation. 

The second section sheds some light on the current tax treatment of the financial sector. The 
third  section  discusses  potential  tax  instruments  to  reach  the  goals  outlined  above.  The 
Financial Transaction Tax (FTT) and the Financial Activities Tax (FAT) are tax instruments 
which recently received considerable attention. Both will therefore be within the focus of this 
document. 

The fourth and fifth section respectively assess the advantages and drawbacks of a Financial 
Transaction  Tax  and  a  Financial  Activities  Tax,  including  the  issues  raised  by  a  possible 
introduction at the EU level only if no agreement is reached at G-20 level. The analysis shows 
that  both  instruments  could  be  candidates  for  a  tax  on  the  financial  sector  (FAT)  or  on 
financial markets (FTT). An important difference between the two instruments is that the FAT 
seeks  to  target  the  value-added  by  the  financial  sector,  while  the  FTT  is  directed  at  the 
transactions executed on financial markets. 

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1.  CURRENT POLICY OBJECTIVES 

The European Council stated in its conclusions of its meeting on 17th June 2010 with regard to 
the  G-20  Toronto  Summit  that  "[t]he  EU  should  lead  efforts  to  set  a  global  approach  for 
introducing systems for levies and taxes on financial institutions with a view to maintaining a 
world-wide level playing field and will strongly defend this position with its G-20 partners. 
The  introduction  of  a  global  financial  transaction  tax  should  be  explored  and  developed 
further in that context." This Staff Working Document (SWD) is based on an issues note that 
responded  to  this  request.  It  outlines  key  issues  relating  to  two  distinct  proposals  for  new 
forms  of  taxation  of  the  financial  sector.  The  SWD  is  a  technical  paper  prepared  by  the 
Commission Services and does not prejudge future policy orientations. 

In  addition  to  the  debate  on  further  taxes  on  the  financial  sector,  there  is  an  ongoing 
discussion on how to avoid that the taxpayer would finance the resolution of failing banks in 
the future. With regard to the latter debate, the Commission has proposed the establishment of 
national resolution funds which would be financed by bank levies. The Commission has set 
out its main thoughts on this issue, which is distinct from financial sector taxation, in a recent 
Communication (COM(2010) 254)1. It is not covered in this document. 

The question as to whether new taxes should be levied on the financial sector to complement 
regulation and bank levies has been a topic since the beginning of the economic crisis. In this 
debate, three main policy goals can be identified2: 

1.  Taxes could enhance the efficiency and stability of financial markets and reduce 
their  volatility  and  the  harmful  effects  of  excessive  risk-taking  which  can  create 
negative  externalities  for  the  rest  of  the  economy.  In  particular,  the  financial  sector 
might  be  too  large  and  take  too  much  risk  due  to  actual  or  expected  state  support 
(resulting  in  moral  hazard),  information  asymmetries  and  remuneration  structures 
which together with macroeconomic developments contributed to the recent crisis.  

2.  The financial sector has been particularly profitable in the last two decades and there 
is  a  desire  to  ensure  that  the  financial  sector  makes  a  fair  and  substantial 
contribution to public finances.  

3.  The financial sector is seen to bear a major responsibility in the occurrence and extent 
of the crisis. The financial sector could therefore contribute via increased or new 
taxes  to  fiscal  consolidation  in  the  aftermath  of  the  crisis.  These  additional  taxes 
could  also  be  justified  by  the  fact  that  the  sector  received  substantial  government 
support during the recent crisis and not all of it might be recouped. 

In  recent  months,  various  tax  measures  have  been  debated  in  several  international  fora, 
including the EU and the G-20, with a view to pursuing these objectives. In this context, the 
European  Commission  services  have  published  a  Staff  Working  Document  on  innovative 

1  

2  

The Commission Communication on "Bank Resolution Funds" of 26 May 2010 suggests the setting up 
of 27 harmonised Member States' funds to finance the orderly and financially non-disruptive resolution 
of  EU  banks.  It  suggests  that  these  funds  should  be  pre-funded  by  financial  sector  contributions, 
referring to bank's' liabilities as one potential reference value. 
There is also an ongoing debate about the use of potential revenue. This paper will not contribute to this 
debate. 

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financing at global level that dealt inter alia with financial sector taxation3. Furthermore, the 
IMF has presented a report to the G-20 ministerial meeting in June 2010 on possibilities for 
taxing the financial sector4. At this stage, there is not yet a consensus on an internationally co-
ordinated tax at the G-20 level, partly reflecting the differential impact of the crisis across its 
members.  The  question  therefore  arises  whether  the  unilateral  introduction  in  the  European 
Union  of  some  of  the  instruments  that  have  been  subject  of  debate  would  be  feasible  and 
reasonable. 

This  debate  on  a  unilateral  introduction  takes  place  in  an  environment  where  the  European 
economy is gradually recovering from the crisis. The financial sector can play an important 
role  in  this  recovery  by  providing  credit  to  companies  and  households5.  The  debate  about 
additional tax measures must therefore also take into account the impact of these measures on 
the supply of credit by the financial sector in both the short- as well as in the long-run and in 
particular the exit from extraordinary public support measures directed at the financial sector. 
They should also be considered in conjunction with other public policy, especially regulatory 
reforms that have been or are likely to be introduced so that decisions makers are appraised of 
their  cumulative  impact,  including  consumers  (notably  households  and  SMEs).  New  taxes 
will  also  have  transitional  and  longer  term  effects  on  the  overall  business  of  the  financial 
sector and thus the EU economy6. In particular, the design of tax instruments would have to 
be  fine-tuned  to  minimize  effects  on  interbank  lending  and  the  costs  of  financing  for  EU 
Member States, businesses and households in the future. 

2.  CURRENT TAXATION OF THE FINANCIAL SECTOR IN MEMBER STATES 

2.1.  Importance of the Sector 

In most if not all Member States, one element of the financial sector, the banking sector7, is 
both  of  high  economic  importance  and  relatively  concentrated.  For  the  EU27,  the  assets  of 
banks and the amount of private credit represent about 140% and 130% of GDP respectively, 
while the amount of bank deposits and the stock market capitalisation of the banking sector 
are about as high as GDP. The average combined share of assets of the three largest banks in 
each  Member  State  is  about  70%8.  However,  national  shares  range  widely  across  Member 
States.9. 

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5 

6 

7 

8  
9  

See European Commission (2010), Innovative financing at a global level - Commission Staff Working 
Document SEC(2010) 409, 1.4.2010. 
IMF  (2010),  A  Fair  and  Substantial  Contribution  be  the  Financial  Sector,  Final  Report  for  the  G-20, 
June 2010.  
The  OECD  defines  the  Financial  Sector  as  the  set  of  institutions,  instruments,  and  the  regulatory 
framework  that  permit  transactions  to  be  made  by  incurring  and  settling  debts;  that  is,  by  extending 
credit. See http://stats.oecd.org/glossary/detail.asp?ID=6815. For the purpose of this document the term 
financial sector is used along those lines. 
See  COM(2010)  301  for  a  complete  set  of  regulatory  measures  already  taken  or  currently  under 
consideration. 
The  banking  sector  is  only  a  part  of  the  whole  financial  sector  which  also  includes  credit  card 
companies, insurance companies, consumer finance companies, stock brokerages, investment funds and 
some government sponsored enterprises. 
Assets of three largest banks as a share of assets of all commercial banks. 
2008  Data  from  Thorsten  Beck  and  Asli  Demirgüç-Kunt,  Financial  Institutions  and  Markets  Across 
Countries and over Time: Data and Analysis, World Bank Policy Research Working Paper No. 4943, 
May 2009. 

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Table (1a): Share of the financial sector in total value-added 

1980 
1990 
1995 
2000 
2005 
2006 
2007 
2008 
2009 

Australia 
3.74 
5.73 
6.06 
7.14 
7.79 
7.85 
8.99 
8.71 
8.53 

United States 
4.91 
5.86 
6.64 
7.54 
7.97 
8.05 
7.90 
8.02 
8.08 

Canada 
4.84 
6.00 
6.62 
7.06 
7.37 
7.64 
7.78 
7.93 
8.15 

Source: BIS (2010), 80th annual Report, page 77. 

Japan 
5.17 
5.95 
6.18 
5.82 
6.69 
6.71 
6.43 
5.59 

Euro area 
4.74 
5.52 
5.46 
4.99 
6.32 
6.16 
5.89 
5.84 

In  terms  of  relative  size,  the  sector  has  generally  grown  both  in  terms  of  value-added  and 
market capitalisation.  Here  again,  there are country-specific developments and an impact of 
the financial crisis. 

Table (1b): Share of the financial sector in total value-added (EU27, NO and CH) 

EU27 
BE 
BG 
CZ 
DK 
DE 
EE 
IE 
EL 
ES 
FR 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
OE 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 
NO 
CH 

1980 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
4.5 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
4.9 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
2.5 
n.a. 
n.a. 
3.5 
n.a. 

1990 
n.a. 
6.0 
n.a. 
n.a. 
4.7 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
5.4 
4.7 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
4.9 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
4.1 
n.a. 
6.1 
5.2 
n.a. 

1995 
n.a. 
6.3 
n.a. 
3.1 
5.2 
4.4 
2.2 
n.a. 
n.a. 
n.a. 
4.8 
4.4 
5.3 
5.0 
2.1 
21.8 
3.0 
n.a. 
6.2 
5.7 
2.6 
6.1 
n.a. 
5.7 
6.2 
4.4 
4.5 
5.8 
4.4 
8.5 

2000 
4.7 
5.9 
n.a. 
2.7 
4.7 
3.9 
4.1 
n.a. 
5.4 
4.5 
5.1 
4.4 
6.5 
4.9 
2.2 
24.8 
2.9 
5.9 
5.9 
5.6 
4.9 
6.0 
4.4 
4.7 
2.2 
4.5 
4.5 
5.1 
3.0 
13.2 

2005 
5.2 
5.7 
5.5 
2.9 
5.4 
4.3 
3.6 
10.3 
4.6 
4.5 
4.8 
4.4 
6.8 
5.9 
2.3 
25.6 
4.2 
4.9 
7.4 
5.3 
4.3 
6.4 
2.3 
4.3 
4.3 
2.5 
4.7 
7.0 
3.9 
12.0 

2006 
5.3 
5.6 
5.6 
2.9 
5.4 
4.1 
3.8 
10.5 
4.7 
4.6 
4.9 
4.4 
7.5 
6.8 
2.9 
29.5 
4.1 
5.0 
6.5 
5.5 
4.5 
7.3 
2.0 
4.8 
3.6 
2.9 
4.1 
7.6 
3.7 
12.8 

2007 
5.3 
5.4 
6.9 
3.6 
5.6 
3.6 
4.0 
10.9 
4.6 
5.2 
4.7 
4.8 
7.8 
6.2 
3.3 
28.1 
4.0 
4.4 
5.6 
5.6 
5.2 
8.2 
2.1 
4.4 
3.3 
3.2 
3.9 
8.2 
3.9 
13.7 

2008 
5.3 
5.0 
n.a. 
3.5 
5.8 
3.4 
4.0 
10.3 
4.4 
5.2 
4.5 
5.0 
8.0 
6.0 
3.5 
28.9 
3.9 
4.6 
5.9 
5.2 
5.2 
9.0 
n.a. 
4.3 
3.4 
2.8 
3.8 
9.6 
n.a. 
n.a. 

2009 
5.8 
n.a. 
n.a. 
n.a. 
7.1 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
5.0 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
9.0 
n.a. 
n.a. 
n.a. 
3.2 
4.5 
n.a. 
n.a. 
n.a. 

Source: Eurostat Annual Sectoral Accounts. 

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Table (2): Share of the financial sector in total market capitalisation 

CA 
DE 
UK 
JP 
US 
Source: BIS (2010), 80th annual Report, page 77. 

1970s 
13.77 
20.81 
23.33 
20.72 
5.61 

1980s 
17.16 
29.89 
18.75 
24.21 
8.35 

2.2.  Share in Corporate Income Taxation 

1990s 
21.40 
31.73 
19.99 
26.42 
14.02 

2000s 
29.98 
24.31 
26.20 
17.90 
19.96 

The debate on a fair contribution of the financial sector to corporate tax collection cannot be 
disconnected from the issue of profitability of the sector. There is evidence that the financial 
sector has been more profitable than the non-financial sector over the last two decades10. This 
is not problematic as such if higher profit is related to high productivity. However, the high 
profitability  of  the  sector  could  result  from  certain  sector  specific  characteristics.  For 
example, the financial sector is different from other sectors in respect of the existence of an 
(implicit  or  explicit)  safety  net  which,  combined  with  banking  regulation  may  enable  some 
institutions to enjoy economic rents; and in the relative ability of certain financial institutions 
to use leverage to increase returns. 

Table (3): Return on equity in BIS reporting countries 

95-09 

95-00 

01-07 

08-09 

Banks 
Non-bank financials 
Non-financials 

12.2 
11.2 
11.7 

13.3 
12.3 
10.9 

12.8 
11.4 
12.8 

3.2 
5.4 
9.8 

Source:  BIS  (2010),  80th  annual  Report,  page  75.  Return  on  equity  is  defined  as  net  income  over  total  shareholder  funds. 
Median values across years and institutions. 

High  profitability  can  possibly  point  to  the  existence  of  economic  rents  that  are  captured 
either  by  managers  in  the  form  of  higher  remuneration  or  by  shareholders  in  the  form  of 
higher returns. Current available data is unfortunately scarce and patchy. Table (3) seems to 
indicate that return on equity in the financial sector has broadly been at par with that of the 
non-financial  sector.  However,  these  median  values  hide  large variations across institutions, 
years and countries. For example, the Bank for International Settlements reveals that German 
financial  companies  have  posted  higher  return  on  their  stocks  than  German  non-financial 
companies since the 1970s up to the financial crisis, but the same cannot be said for e.g. UK 
companies  except  in  the  1990s  (see  Table  4)11.  Turning  to  remuneration,  there  is  some 
piecemeal  evidence  which  would  suggest  that  remuneration  in  the  financial  sector  is  or  has 
been higher than in other sectors12. 

In  terms  of  their  contribution  to  corporate  tax  receipts,  the  financial  sector  accounted  for  a 
substantial share of such revenues before the crisis. The EU-27 GDP-weighted average share 

10  

11  
12  

See  Devereux,  M.;  Griffith,  R;  and  A.  Klemm  (2004),  Why  has  the  UK  Corporation  Tax  Raised  so 
Much Revenue?, Fiscal Studies, 25(4): 367-388. 
Higher performance of stocks also partly reflects higher risk (measured by volatility). 
See  for  example  Philippon,  Thomas,  and  Ariell  Reshef  (2009),  Wages  and  Human  Capital  in  the  US 
Financial Industry: 1909 – 2006. CEPR Discussion Paper No. 7282. They found for the US that starting 
in the 1990s 30% to 50% of the wage differential between the financial and non-financial sectors is due 
to rents. 

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of the contribution by the financial sector to total corporate tax collection was around 20% in 
both 2006 and 2007. It decreased to 17% in 2008 as a result of the crisis and this share will 
most probably decrease further in the coming years due to the fact that the accumulated losses 
during  the  crisis  will  reduce  future  tax  payments  via  loss  carry-forward.  The  values  for  the 
EU27 are similar to those for many non-EU G-20 countries, as collected by the IMF for its 
report to the G-20. For example, between 2006 and 2008, the share of the financial sector in 
total  corporate  tax  collection  was  around  18%  for  the  United  States,  23.5%  for  Canada  and 
around 15% in Brazil and Australia.  

Table (4): Relative return of financial stocks 

Canada 
Germany 
United Kingdom 
Japan  
United States 

1970s 
2.25 
1.82 
-1.10 
-7.17 
-1.58 

1980s 
-0.39 
3.29 
-4.03 
2.80 
-1.33 

1990s 
2.48 
4.10 
2.66 
-5.06 
4.42 

2000s 
5.70 
-6.65 
-6.34 
-0.25 
0.07 

Source:  BIS  (2010),  80th  annual  Report,  page  76.  Average  return  on  financial  stocks  minus  that  on  non-financial  stocks, 
annualised in percent. 

For  the  EU27,  the  share  of  the  financial  sector  employment  in  total  employment  is  3%.  Its 
share  in  total  value-added  is  5%.  Despite  this,  its  share  in  total  Corporate  Income  Taxation 
(CIT) is around 20%. This is however no evidence that the financial sector is over-taxed as 
higher profitability – whether it stems from rents or not – inevitably leads to higher taxes. It is 
indeed difficult to determine a benchmark against which to assess whether the financial sector 
is over- or under-taxed. 

2.3.  Value-Added Taxation 

If  statutory  provisions  of  corporate  tax  systems  do  not  seem  to  differentiate  between  the 
financial  sector  and  the  non-financial  activities,  the  same  is  not  true  for  Value-Added 
Taxation (VAT). Since the adoption of the Sixth VAT Directive in 1977, the EU's common 
value  added  tax  system  has  generally  exempted  mainstream  financial  services  including 
insurances and investment funds. Article 135(1) of the VAT Directive provides an exemption 
from VAT for most financial and insurance services13. To some extent the Directive reflects 
an  uncertain  approach  in  that  it  also  allows EU  Member  States  to  grant  taxable  persons  the 
option  of  taxing  financial  services  –  to  the  extent  that  this  is  technically  possible.  The 
difficulty is, however, to technically define the price for specific financial operations. Around 

13  

In  this  respect  it  should  be  noted  that  the  relatively  recent  Commission  proposals  for  a  Directive  - 
COM(2007) 747 - and a Regulation - COM(2007) 746 - as regards the VAT treatment of insurance and 
financial services aim at modernising and simplifying the current complex VAT rules for financial and 
insurance services and securing a level playing field in the pan-EU market for these services as far as 
VAT  is  concerned.  The  proposals  will  create  more  certainty  and  security  for  Member  States  and  for 
financial and insurance institutions by setting clear modern definitions of exempt services. It will also 
allow  these  institutions  to  manage  the  costs  of  non-deductible  VAT  by  allowing  them,  where 
technically  possible,  to  opt  for  taxation  and  by  clarifying  and  extending  the  tax  exemption  for  cost 
sharing arrangements. 

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2/3 of all financial services are margin based which makes the implementation of the invoice-
credit VAT system very difficult in this respect14. 

The extent to which applying VAT to the financial sector would raise additional tax revenues 
and – consequently – the extent to which the exemption constitutes an under-taxation case for 
the financial sector is an unsettled empirical question. Whereas the exemption means that the 
financial sector does not charge VAT on most of its output, it cannot deduct the VAT charged 
on  its  inputs.  This  is  known  as  the  'irrecoverable  VAT  problem'.  Based  on  case  studies, 
PricewaterhouseCoopers (2006) found that VAT recovery rates in the financial sector varied 
from 0% to 74%15. The variations in recovery rates could be explained by differences in the 
way in which the Member States interpret the scope of the exemption and the option to tax. 

In some Member States, financial institutions are subject to specific tax measures designed to 
compensate  for  the  VAT  exemption.  These  are  known  as  the  application  of  the  addition 
method and will be discussed in the section on the Financial Activities Tax16. 

2.4.  Overall assessment of financial sector taxation 

While the CIT does not seem to tax the financial sector lighter than other sectors, the VAT 
exemption of financial services might lead to a favourable tax treatment of the sector despite 
the  fact  that  input  VAT  is  not  deductible  for  the  sector.  There  are  currently  no  data  on  the 
contribution of the sector to overall personal income tax receipts (via the taxation of financial 
sector employees' wages and salaries).  

3.  POLICY INSTRUMENTS 

In  addressing  the  three  policy  goals  outlined  above  a  number  of  tax  instruments  have  been 
discussed in recent months17. It is important to distinguish these proposals as they are often 
confused  in  the  public  debate.  In  this  following  section,  the  focus  will  be  on  the  Financial 
Transaction Tax (FTT) and the Financial Activities Tax (FAT). The two instruments represent 
two  different  approaches  to  taxation.  While  the  FTT  is  a  turnover  tax  on  financial 
transactions,  the  FAT  is  a  profits  and  remuneration  based  tax.  Other  instruments  have  been 
discussed, decided or already enacted in several Member States but will not be discussed here. 
Such taxes include:  

14  

15  

16  

17  

The  problem  of  VAT  on  financial  services  is  described  in  detail  in  Kerrigan,  Arthur  (2008):  The 
Elusiveness of Neutrality –Why Is It So Difficult  To Apply VAT to Financial Services? International 
VAT Monitor March/ April 2010. 
PricewaterhouseCoopers  (2006),  Economic  effects  of  the  VAT  exemption for  financial  and  insurance 
services, Report to the European Commission. 
Note  that  some  countries  apply  specific  method  to  compensation  for  VAT  exemption.  For  example, 
New Zealand applies VAT to general insurance (but not to life insurance, creditor protection policies, 
and  other  financial  intermediation  services),  Singapore  taxes  agency  services,  Australia  includes 
financial agency services and non-life insurance and provides input credits for financial services, Israel 
and Quebec apply the addition method (Poddar, S., 2003, Consumption Taxes: The Role of the Value-
Added Tax in Taxation of Financial Intermediation, P. Honohan Editor, Oxford University Press, pp. 
345-380. 
For a presentation and evaluation of instruments under consideration see the documents from the IMF 
and the European Commission cited above.  

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(a)  Bonus  taxes:  impose  a  surcharge  on  bonuses  paid  to  employees  in  specific  sectors  and 
which are above a defined threshold. 

(b) A surcharge to the corporate income tax for the financial sector. 

(c) A Currency Transaction Levy (CTL): this would have the same principle as the FTT but 
would target currency conversions only. A “Global Solidarity Level” based on this principle 
was  recently  proposed  by  the  Committee  of  Experts  to  the  Task  Force  on  International 
Financial Transactions and Development" in a recent report18. Contrary to the FTT, the levy is 
not designed to change market behaviour as such. The study argues that the very low rate of 
0.005%  would  lead  to  only  negligible  effects  on  markets.  It  is  designed  as  a  pure  revenue 
raiser19. 

One reason for not including these instruments is that increased profit and bonus taxation is 
covered by the FAT, while a currency transaction levy is part of a general FTT. 

Furthermore,  a  general  remark  on  tax  revenue  estimates  for  new  tax  instruments  should  be 
made.  Estimating  revenue  changes  when  reforming  existing  taxes  is  already  a  difficult  task 
since  behavioural  changes  due  to  tax  rate  or  base  changes  are  often  difficult  to  predict. 
Estimating revenue for taxes which would be newly introduced and which have (at least for 
the  FTT  to  some  extent)  the  goal  to  change  market  behaviour  and  structure  significantly  is 
even  more  challenging.  Therefore,  all  revenue  estimates  presented  below  should  be 
interpreted  with  great  caution  and  serve  mainly  to  give  an  order  of  magnitude.  Moreover, 
notwithstanding  the  often  substantial  projected  receipts,  the  consequences  of  governments 
increasing  their  reliance  on  this  relatively  volatile  sector  for  their  revenues  should  be 
considered carefully. 

3.1.  The Financial Transaction Tax 

The concept of a Financial Transaction Tax has recently received wide public attention. Such 
a tax would be applied to all financial transactions in particular those carried out on organised 
markets such as the trade of equity, bonds, derivatives, currencies, etc.20. It would be levied at 
a relatively low statutory rate and would apply each time the underlying asset was traded. The 
tax collection or the legal tax incidence should be – as far as possible – via the trading system 
which executes the transfer21. 

18  

19  

20  
21  

The  Experts  to  the  Leading  Group’s  Task  force  on  International  Financial  Transactions  and 
Development  recommended  for  a  number  of  reasons  the  global  application  of  a  currency  transaction 
levy to finance development aid. This tax is a subset of the broad FTT discussed here. It limits the scope 
to currency transactions only. http://www.leadinggroup.org/article668.html. 
As far as a CTL is concerned, levying a tax of 0.005% on the world's most traded currencies could yield 
an amount of EUR 24 billion annually using data from 2007. According to recent estimates, a CTL of 
this rate levied on transactions with the euro involved would yield a yearly amount of EUR 9.5 billion 
while a coordinated tax on all major currencies except the USD would generate EUR 15.5 billion. A tax 
on Euro and Pound only would raise some EUR 12 billion per year. See Schmidt, Rodney (2008): The 
Currency  Transaction  Tax  –  Rate  and  revenue  estimates,  North-South  Institute,  United  Nations 
University Press. Hillman, David (2009): The Currency Transaction Levy. 
Directive 2004/39/EC establishes clear definitions of regulatory market and multilateral trading system. 
Note that the legal or statutory tax incidence can be different from the economic incidence. The latter 
will be discussed in more detail below. 

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In order to give a range of potential revenues, two different scenarios will be discussed in this 
paper. The variants discussed here differ in their definition of the tax base22. 

a. A broad based FTT (FTT1) 

The  first  variant  is  to  tax  stock,  bond  and  derivative  transactions  on  exchanges  as  well  as 
over-the-counter  (OTC)  traded  instruments23.  For  stocks  and  bonds  the  value  of  the 
transaction constitutes the  tax base, for derivatives the notional (or underlying) value of the 
contract. This is FTT1 which has a very broad tax base due to the inclusion of derivatives24. 
The revenue raising potential of the tax as well as its economic effects depends on the design 
of the tax and especially on the tax bases selected. In general, the tax base is usually defined 
as  the  value  of  the  transaction.  For  example,  if  an  investor  buys  20  shares  of  a  corporation 
worth EUR 100 per share the tax base would be EUR 2,000. In this sense, it is easy to define 
tax bases for transactions where the asset price is determined by the market at the time when 
the  transaction  is  executed.  This  is  the  case  for  spot  transactions  like  stocks,  bonds  and 
currency exchanges.  

For derivatives, the determination of the transaction value is more complex. In principle, one 
could argue that the value of the notional value could be the tax base. Given the sometimes 
high leverage of certain derivatives this has two effects. On the one hand, taxing the notional 
value creates a very large tax base. On the other hand, the tax payment is large compared to 
the  actual  price  paid  for  the  contract.  While  this  could  reduce  leverage  taken  by  means  of 
these  contracts  it  would  also  increases  the  costs  for  companies  when  hedging  risk.  Also, 
taxing the notional might lead to double taxation in the case where the underlying is traded 
and  taxed  at  the  spot  market  if  for  example  an  option  is  executed.  Instead  of  taxing  the 
notional,  an  alternative  way  of  taxing  derivatives  could  be  to  tax  the  actual  price  only25. 
However, this would reduce the tax base significantly. Taken together, there remain important 
issues with regard to the definition of the tax base for derivatives.  

b. A narrow based FTT (FTT2) 

This  is  the  reason  why  a  second  tax  base  is  considered.  This  narrow  based  FTT  is  called 
FTT2. FTT2 is based on the conservative assumption that only bonds and stock transactions 
are taxed. These two scenarios describe two potential tax bases, one at the high, and the other 
at the low revenue end. In case of an implementation of an EU-wide FTT, it will depend on 
the precise definition of the EU tax scope and base whether it is closer to the broad FTT1 or 
the narrow based FTT2. 

22  

23  
24  

25  

Some current proposals envisage limiting the scope to a subset, namely the above mentioned. currency 
transaction levy. 
The OTC transactions include derivative transaction as well as foreign exchange spot transactions. 
FTT1 corresponds to the data basis for the estimates in Schulmeister, Stephan, Margit Schratzenstaller 
and  Oliver  Picek  (2008).  A  General  Financial  Transaction  Tax.  Motives,  Revenues,  Feasibility  and 
Effects. Research Study by the Austrian Institute of Economic Research. 
This is only possible for derivatives where a premium is actually paid. This is not the case for all types 
of derivatives, notably interest rate swaps. 

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3.2.  The Financial Activities Tax 

Within  its  G-20  report  which  focuses  on  making  the  financial  sector  pay  for  public 
interventions,  the  IMF  is  proposing  introducing  a  Financial  Activities  Tax  (FAT)26.  A 
Financial Activities Tax would be levied on the sum of profit and remuneration of financial 
institutions. In practice, several countries already apply some versions of Financial Activities 
Tax (see Section 5.4). 

The IMF proposes three alternative versions of the FAT: 

a. The addition method FAT. 

A  broad  version  of  the  FAT  would  be  to  tax the sum of wages  and profits defined in cash-
flow  terms,  i.e.  with  full  expensing  of  investment  and  no  deduction  for  financial  costs.  In 
other words, the base would be the profit, minus capital formation, plus wages. 

As  such,  this  tax  base  would  proxy  value-added  by  taking  the  sum  of  cash-flow  profit  and 
remuneration for each tax period. It has been used in some countries as a surcharge applied to 
sectors that are fully or largely exempted from VAT. In fact, such a system is also known as 
the addition method VAT. 

b. The rent-taxing FAT. 

The  FAT  can  also  be  designed  to  tax  rents  only.  Such  a  tax  would  be  designed  by  taxing 
remuneration and cash-flow profit above a defined level of profit. The threshold for cash-flow 
profit  could  exclude  'normal  profit'  by  the  application  of  either  an  Allowance  for  Corporate 
Equity (ACE, which allows the deduction of a notional allowance for equity) or a definition 
of  profit  which  would  include  both  real  transactions  and  financial  transactions27.  For 
remuneration,  the  threshold  would  be  more  arbitrary  and  could  include  a  benchmarking 
exercise across sectors. 

c. The risk-taxing FAT. 

A third version of the FAT would tax excess return due to unduly risky activities. This version 
of  the  FAT  is  very  similar  to  the  rent-taxing  FAT.  The  difference  is  that  both  exempt  the 
normal profit either automatically (in the case of an R+F base) or by the application of a rate 
that is designed to be roughly similar to the cost of debt-financing (in the case of ACE), while 
for the risk-taxing FAT, the threshold is in addition set at a level based on what is considered 

26  

27  

For the reasons explained in section 2.2, the idea of a (profit) tax targeted on the financial sector was 
also floated in the European Commission's staff working document on innovative financing at a global 
level. The European Commission also pointed to taxation of bonuses, which represents a way of taxing 
economic rents if those are captured by managers via higher bonuses. 
A cash-flow corporate tax base can be of 3 different types: the R-base, the R+F base, or the S-base. The 
R-base  corporate  cash-flow  includes  real  transactions  only.  That  is  the  difference  between  sales  and 
purchases,  excluding  financial  transactions  (both  in  terms  of  revenues  or  expenses).  The  R+F  base 
includes  real  transactions  and  non-equity  financial  transactions  (i.e.  borrowing  and  lending  of  funds). 
This  is  the  sum  of  sales,  borrowed  funds,  interest  received  and  loan  repayments,  minus  the  sum  of 
purchases, interest paid, debt repaid and lent funds. The S-base includes the net flow from corporations 
to shareholders. This is dividends paid plus the purchase of shares, minus the issue of new shares. See 
OECD (2007), Fundamental Reform of Corporate Income Tax, Paris. 

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as  excessive  return  to  (average)  equity.  Therefore,  parts  of  the  rents  could  theoretically  be 
untaxed as long as the return to equity does not exceed this threshold. 

4.  FINANCIAL TRANSACTIONS TAX 

4.1.  Policy debate and options for an FTT 

A  Financial  Transaction  Tax  has  been  recently  discussed  and  received  attention  from  the 
European Parliament28, the European Council and a number of Member States. 

One  reason  for  the  interest  in  the  FTT  is  that  the  tax  could  address  all  three  policy  goals 
outlined  above  at  the  same  time.  In  this  sense,  the  tax  might  create  a  triple  dividend  by 
improving market efficiency, act as a contribution of the financial sector and raise substantial 
revenue.  However,  opponents  argue  that  the  FTT  would  not  address  the  harmful  effect  of 
excessive risk-taking seen in the run-up to the recent crisis since it does not address or only in 
an indirect way the underlying market failures e.g. the misaligned incentives in the financial 
sector. 

While there is large interest in achieving the goals outlined above by the implementation of an 
FTT, the debate has not yet focused on more detailed issues, including the definition of the 
tax base, the tax rate, the taxable event and the degree of coordination needed for a successful 
implementation of an FTT. 

4.2.  The economics of FTT 

The  rationale  for  the  FTT  is  based  on  two  assertions  about  the  tax.  Firstly,  it  is  seen  to 
improve the functioning of financial markets through curbing harmful short-term speculation 
and  reducing  volatility  by  making  it  less  profitable.  Secondly,  it  is  expected  to  raise 
significant amounts of revenue, even if the tax rate is very low (e.g. 0.1 %)29. 

a. Effects on financial markets 

The FTT has - independent of its tax base definition - a number of economic effects. It is seen 
to be efficiency enhancing. This argument is based on the idea that short-term and high speed 
trading  is  particularly  harmful  and  speculative.  Proponents  of  a  financial  transactions  tax 
argue  that  the  tax  would  reduce  speculation,  thereby  linking  trade  more  closely  to  the 
underlying fundamental economic market conditions and make financial markets less volatile. 
The  assumption  behind  this  is  that  most  short-term  trading  is  either  highly  speculative  or 

28  

29  

The European Parliament's Resolution of 10 March 2010 asks the Commission and Council to look at 
how the tax could be used to finance development cooperation and help developing countries to combat 
climate change, as well as how the tax could contribute to the EU budget. 
The FTT was also debated at the G-20 level. The IMF report on a fair and substantial contribution of 
the  financial  sector  came  to  the  conclusion  that  the  tax  should  not  be  dismissed  on  the  ground  of 
administrative problems. However, the report voiced reservations as regards the advisability of a FTT 
for the purpose of the G-20 to make the financial sector pay a fair and substantial contribution towards 
paying for any burden associated with government interventions to repair the banking system. The IMF 
document argued that the tax might create side effects which could be detrimental to the functioning of 
markets. The Staff Working Document of the European Commission on “Innovative Finance at global 
level” came to similar conclusions. 

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based  on  technical  trading  which  relies  on  historical  asset  prices  but  does  not  take  into 
account the fundamental economic data.  

In reality, it turns out to be difficult to make a meaningful and operational distinction between 
speculative  and  non-speculative  transactions.  It  is  impossible  to  disentangle  harmful  from 
beneficial transactions simply based on their time-horizon30. It has in particular been shown 
that  the  time  horizon  of  an  investment  is  not  necessarily  a  good  predictor  for  the  degree  of 
uncertainty  or  speculation  underlying  the  potential  yield  of  that  investment.  For  example, 
short-term  financial  transactions  are  often  related  to  trade  or  other  commercial  transactions 
such as hedging. Under a broadly based FTT all short- and long-term transactions would be 
taxed,  including  transactions  aimed  at  longer-term  investments  by  pension  and  insurance 
funds.  On  the  other  hand,  high  frequency  computer  trading  would  become  more  expensive 
with an increase in transaction costs. This could indeed be seen as an improvement if this is 
"excessive" trading without economic function.  

One  could  interpret  this  as  a  private  overinvestment  in  information  retrieving  which  has  no 
social  value  since  it  does  not  improve  market  efficiency  as  argued  by  Stiglitz  (1989)31. 
However, short-term transactions also have the function to allow arbitrage to equalize prices 
and  find  counterparts  to  trade  with.  Many  empirical  studies  show  that  the  introduction  of 
transaction  taxes  reduce  the  number  of  transactions,  making  it  more  difficult  to  find 
counterparts  on  markets  and  disrupting  the  arbitrage  function,  leading  to  more  price 
volatility32.  

The tax would also increase the cost of financing for companies and governments via higher 
interest  rates  if  the  tax  falls  on  the  investor.  This  could  be  solved  by  exempting  certain 
products from the tax. However, exempting products might also increase administrative costs 
by  defining  rules  for  exemption.  It  would  also  contradict  the  argument  that  wide  product 
coverage would be preferable in order to reduce short-term speculation on all products. 

Given the complexity of some financial transactions, the impact of a transaction tax and the 
feasibility of such a tax remain largely uncertain in many cases. Given this complexity, there 
may  be  considerable  unintended  effects  and  the  possibilities  of  circumvention  of  the  tax 
increase  with  the  complexity  of  the  operation.  An  implementation  of  a  tax  would  therefore 
also require a mechanism that deals with new financial products which might be created in the 
future.  Options  could  be  to  automatically  add  new  financial  instruments  to  the  tax  base  in 
each  country  or  to  negotiate  their  taxation  at  the  EU-level.  The  risk  of  tax  avoidance  exists 
also  in  geographical  terms  as  some  transactions  might  move  to  jurisdictions  which  do  not 
apply the tax. 

30  

31  

32  

It must be said that there is no agreement among economists on which operations may be considered as 
"speculative" and which ones may not. 
Stiglitz,  Joseph  (1989).  Using  Tax  Policy  to  Curb  Speculative  Short-term  Trading.  In:  Journal  of 
Financial Service Research, 3(2-3): 101-115. 
The Commission Staff Working Document and the IMF report to the G-20 discuss this issue in more 
detail. 

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Finally, the FTT is at variance with the requirement of “production neutrality”, as it changes 
relative  input  prices  for  business33.  It  is  comparable  to  a  sales  tax  and  since  it  is  levied  on 
transactions  rather  than  value  added  it  is  cumulative.  Products  which  are  more  frequently 
traded than others, e.g. the shares of large companies with many shareholders will face higher 
tax burdens. 

b. Tax Incidence – Would the Financial Sector carry the burden? 

There is no empirical evidence on the real incidence of a FTT. Transactions taxes are under 
the  political  and  public  spotlight  because  they  are  perceived  as  a  contribution  of  the  highly 
speculative financial institutions to the costs of the financial crisis. However, there is often a 
difference between the legal tax payer (legal incidence) and the economic agent who actually 
carries  the  economic  burden  of  a  tax  (economic  incidence).  In  the  context  of  a  Financial 
Transactions  Tax,  the  economic  incidence  of  the  tax  could  fall  either  on  traders,  on  stock 
exchanges,  on  companies  and  governments  (via  higher  capital  costs)  or  on  final  consumers 
via higher prices for financial services. For evaluating the distributional aspects of the tax, a 
starting point is to analyse whether the tax is progressive (i.e. it taxes the rich proportionally 
more  than  the  poor  or  less  wealthy).  Unfortunately,  such  empirical  analyses  are  currently 
unavailable,  because  of  a  lack  of  data.  It  is  often  argued  that  the  tax  could  potentially  have 
progressive properties since rich people are supposed to hold, and therefore trade, more than 
poorer  ones.  However,  it  cannot  be  taken  for  granted  that  this  assumption  necessarily  holds 
since it also concerns the activities of financial intermediaries such as pension funds, which 
also manage the savings of middle- and lower-income earners.  

c. Revenue estimates 

For the FTT1, the Austrian Institute of Economic Research estimated the potential revenue of 
a general FTT for 2006. The Austrian figures suggest that a general FTT rate of 0.1% could 
raise  between  USD  177  billion  (EUR  145)  and  USD  467  billion  (EUR  372)  in  Europe 
depending  on  the  assumptions  of  the  decrease  in  trading  volume34.  The  major  part  of  these 
substantial  amounts  (between  80%  and  90%  of  the  revenue,  depending  on  the  assumptions 
about the reduction of transactions) would be collected from taxing transactions in derivatives 
on  organised  exchanges  and  transactions  on  over-the-counter  (OTC)  derivative  markets. 
These  estimates  are  based  on  the  assumption  that  the  entire  notional  value  of  the  traded 
derivatives would constitute the tax base and therefore, they must be considered with caution 
when  assessing  the  actual  size  of  the  tax  base  and  revenues35.  There  are  also  doubts  on  the 

33  

34  

35  

This is the result of the production efficiency theorem. Since taxing production reduces total output, it is 
more  efficient  to  tax  output  directly.  (Diamond  and  Mirrlees  (1971),  Optimal  Taxation  and  Public 
Production. The American Economic Review, Vol. 61) 
Note that Switzerland and Norway are included in this estimate. Values have been converted to EUR 
using the average exchange rate for 2006 of 1.2556 USD/EUR. 
An example for taxing the notional value of a derivative is the following. An EU-based company has to 
pay a bill of USD 11million in 3 months and fears a devaluation of the Euro. The company wants to 
hedge the risk that the Euro falls below USD 1.10. It acquires an option to buy USD at an exchange rate 
of  1.10  USD  per  Euro  in  3  months.  The  price  for  this  option  is  EUR  30,000.  The  value  of  the 
underlying is USD 11 million = EUR 10 million EUR. Assuming a very low tax rate of 0.01%, the tax 
payment would be EUR 1,000. Now compare the tax payment (EUR 1,000) to the price (EUR 30,000). 
If we define the tax payment in relation to the real cash-flow of buying the option as an effective tax 
rate,  the  effective  rate  is  3.3%  in  this  example.  Now  assume  that  the  company  wants  to  hedge  the 

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quality of the data for revenue estimates for derivatives. Table (5) gives the potential revenue 
for some EU countries. Given the above-mentioned open issues with the notional value as tax 
base, the estimates might be too high. 

Table  (5):  Estimated  revenue  from  taxing  shares,  bonds,  and  derivatives  (FTT1)  for 
countries where data was available, EUR billion (2006), tax rate 0.1% 

 Country 
Projected Receipts 

BE 
3.3 

DE 
35.5 

FR 
15.0 

IT 
5.1 

OE 
1.6 

NL 
5.1 

UK 
162.8 

Source: Schulmeister et al. (2008) 

Using FTT2 as the tax base and therefore not taxing derivatives traded on OTC markets and 
exchanges, the remaining tax revenue from spot transactions on exchanges would be between 
USD 72 (EUR 57) billion and USD 80 (EUR 64) billion or 0.15% and 0.17% of global GDP. 
Table (6) shows the estimates for some European exchanges in more detail. 

Table (6): Estimated revenue from taxing shares and bonds (FTT2), EUR million (2008), 
tax rate 0.1% 

 Exchange 

Share 
Trading 

Bond 
Trading 

Revenue 
Shares 

Revenue 
Bonds 

Athens (EL) 
BME Spanish (ES) 
Borsa Italiana (IT) 
Bratislava SE (SK) 
Bucharest SE (RO) 
Budapest SE (HU) 
Bulgarian SE (BG) 
Cyprus SE (CY) 
Deutsche Börse (DE) 
Irish SE (IE) 
Ljubljana SE (SL) 
London SE (UK) 
Luxembourg SE (LU) 
Malta SE (MT) 
NASDAQ  OMX  Nordic  Exchange 
(DK, EE, FI, IS, LV, LT, SE) 
NYSE Euronext (BE, FR, NL, PT) 
Prague SE (CZ) 
Warsaw SE (PL) 
Wiener Börse (OE) 
Total 

77,282 
1,639,054 
1,019,484 
14 
1,601 
20,877 
1,261 
1,397 
3,181,146 
55,695 
1,589 
4,264,020 
1,299 
48 

909,832 
2,999,217 
29,880 
47,253 
71,177 
14,322,128 

28 
4,650,178 
175,458 
23,049 
46 
1,613 
125 
15 
123,943 
24,944 
255 
4,465,192 
57 
435 

1,991,782 
33,099 
22,685 
702 
800 
11,514,404 

Source: World Federation of Exchanges and own calculations. 

62 
1,311 
816 
0 
1 
17 
1 
1 
2,545 
45 
1 
3,411 
1 
0 

728 
2,399 
24 
38 
57 
10,025 

0 
3,255 
123 
16 
0 
1 
0 
0 
87 
17 
0 
3,126 
0 
0 

1,394 
23 
16 
0 
1 
8,060 

Applying the tax only to bonds and stock trades without derivatives (FTT2) in the EU27 and 
Iceland  exchanges,  the  revenue  estimate  is  around  EUR  18  billion  for  2008.  The  (simple) 

extreme case that the Euro drops below parity with the USD. The price would be only 5,000 EUR in 
this case given the low risk that this case will occur in the next three month. In this case, the tax base is 
USD 11 million = EUR 11 million. The tax payment would be EUR 1,100. This leads to an effective 
tax rate of 22% when relating the tax paid with the actual price paid. For the taxation of derivatives, the 
effective tax rate as defined above will therefore be different and depend on the characteristics of the 
contract. 

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assumptions made here are a reduction in trade volumes of only 30% for bonds and 20% for 
shares and a tax rate of 0.1%. Table (6) shows the results for some European stock exchanges 
based  on  data  from  the  World  Federation  of  Exchanges  (WFE).  Note  that  some  exchanges 
cover  more  than  one  country.  The  data  does  currently  not  provide  a  split  to  separate 
transactions between those countries which share exchanges. 

Note that the use of backward looking data (2006 for FTT1 and 2008 for FTT2) might create 
too  high  revenue  figures.  Values  might  be  lower  in  the  future  years,  in  particular  due  to 
underestimation  of  tax  avoidance  due  to  relocation  of  markets  and  migration  to  non-taxed 
products, depending on  the feasibility  of wide geographical coverage and the inclusion of a 
wide  range  of  financial  products  and  markets  (exchange  and  over-the-counter)  in  its  scope. 
Also,  it  is  not  clear  whether  all  transaction  volumes  which  are  used  in  the  estimates  can 
actually  be  taxed  according  to  the  assumptions  made.  This  is  especially  the  case  for  the 
taxation  of  derivatives  which  account  for  the  largest  part  of  the  revenue  estimates  in  FTT1. 
Furthermore, behavioural changes might depend on the characteristics of individual markets. 
In conclusion, the revenue estimates have to be interpreted with caution36. 

The  potential  tax  revenues  would  be  very  uneven  from  a  geographical  point  of  view.  Since 
investors  from  all  over  Europe  and  the  world  use  the  big  financial  centres  the  economic 
burden might be transferred at least partly to these international investors even though the tax 
would  be  collected  in  national  markets.  As  figure  1  shows  that  uneven  revenue  is  more 
pronounced  for  the  FTT1  with  derivatives  included.  Note  that  data  is  not  available  for  all 
Member States for these estimates. However, it is reasonable to assume that the revenue for 
most Member States not listed in the graph is marginal since their financial sectors are in most 
cases relatively small compared to the countries included.  

36  

For a critical review of revenue collection from transactions taxes see also Honohan and Yoder (2010): 
Financial Transactions Tax - Panacea, Threat, or Damp Squib? World Bank Policy Research Working 
Paper No. 5230, March 2010.  

EN 

17 

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Figure (1): Share in tax revenue of selected EU Member States (FTT1) 

IT
2.2%

BE
1.4%

OE
0.7%

NL
2.2%

FR
6.6%

DE
15.5%

UK
71.3%

Source: Schulmeister et al. (2008) 

The  revenue  estimates  in  Table  (6)  show  that  also  for  FTT2  most  revenue  is  collected  in 
larger European exchanges like the UK, Spain and Germany. In the EU, most revenues from 
the general financial transactions tax would be collected in countries with significant financial 
centres, while revenues in most other countries would be much lower. One might argue that 
while  all  countries  introduce  the  tax  and  carry  some  of  its  burden,  the  benefit  of  the  tax  in 
terms of revenue is located only in few countries with large financial centres. However, the 
economic distortions in terms of reduction in trade volumes and risk of relocation of financial 
transactions due to the tax might also be strongest in countries with large financial centres.  

In  conclusion,  the  uneven  revenue  collection  might  be  of  less  importance  if  the  tax  is  an 
effective  device  to  improve  market  efficiency  to  the  benefit  of  all  investors,  domestic  and 
foreign.  If  the  goal  of  the  tax  is  to  raise  revenue,  this  would  raise  the  question  as  to  who 
should receive the revenue of such a tax and whether or not an agreement to share revenues 
internationally should be envisaged since otherwise benefits will be distributed unevenly.  

4.3.  Potential for unilateral introduction 

A prerequisite for a global as well as a unilateral introduction of a transaction tax at EU level 
is a relatively high degree of co-ordination of tax bases and tax rates. The financial products 
covered  by  the  tax  as  well  as  the  applicable  tax  rates  should  be  the  same  in  all  countries 
concerned or at least vary only marginally. This is necessary to reduce incentives for shifting 
to markets with lower tax rates and smaller product coverage. There might also be a need to 
find  solutions  with  financial  centres  outside  Europe  in  order  to  reduce  the  migration  of 

EN 

18 

   EN 

 
transactions. Although some third countries use such taxes, the tax coverage is usually narrow 
and  allows  certain  exemptions  which  might  create  possibilities  for  relocation37.  Also, 
relocation  might  occur  to  financial  centres  outside  the  continent  which  do  not  have  any 
transaction  taxes.  The  strength  of  this  effect  depends  on  the  level  of  the  tax  rate  and  the 
perimeter of the tax base. 

The Swedish experience with transaction taxes which is described in detail in Annex B shows 
that if evasion and relocation is easy and cheap, the market effects can be dramatic. However, 
legal security could be a means to decrease the potential for relocation. For example the UK 
stamp  duty  (Annex  B)  that  covers  only  transaction  in  securities  of  UK-registered  corporate 
companies  seems  to  be  rather  resistant  to  relocation.  The  risk  for  relocation  might  be 
mitigated for exchanges trading domestic stocks and bonds; it is less clear whether this would 
also  be  possible  for  foreign  stocks  and  bonds  traded  domestically  and  derivatives.  The 
increased use of registration duties could help to reduce this problem. 

Another possibility to reduce relocation incentives would be the use of differentiated tax rates. 
Tax  rates  could  vary  for  different  markets  and  products  according  to  their  mobility.  This 
would  decrease  the  potential  relocation  but  also  reduce  tax  revenue  and  increase 
administrative costs. Also, it would be difficult to decide which tax rates should be applied to 
which  product  and  the  differentiated  tax  rates  might  create  distortions  between  the  uses  of 
different products. Also, if the FTT is seen as a corrective device, differentiated tax rates set 
according to the mobility of financial products might undermine this function. 

Network externalities or agglomeration rents are often seen as reasons why relocation could 
be  mitigated.  The  idea  is  that  a  very  low  tax  rate  would  not  lead  to  relocation  given  the 
advantage  from  concentration  in  one  market  place.  This  argument  has  its  merits,  but  it  is 
difficult to evaluate in practical terms. The effect could be very diverse for different product 
classes.  Furthermore,  while  in  the  short-term  agglomeration  might  be  considered  as  an 
immobile asset of a region, this is not necessarily the case once new investment opportunities 
and market structures evolve. 

The  administrative  costs  of  collecting  a  financial  transactions  tax  could  be  relatively  low. 
Data from the United Kingdom (UK), where a stamp duty is levied, show that the collection 
cost is only 0.21 pence per pound collected. The main reason is that the vast majority of UK 
company shares are held in the CREST settlement system which automatically debits the duty 
when shares are transferred. In contrast to that, for the income tax, the value is 1.24 pence and 
0.76 pence for the corporation tax38. However, this levy is a pure securities transactions tax, 
and does not tax a wider range of non-securities transactions, such as lending or depositing, 
for which administrative costs might be higher. 

Legal aspects have to be considered as well. In relation to the original proposal by Tobin for a 
currency  transactions  tax,  likely  legal  obstacles need  to  be  taken  into  account,  regarding  its 
compatibility  with  free  movement  of  capital  and  payments  between  Member  States  and 
between Member States and third countries.. These concerns might also apply to derivatives. 
Similarly, the compatibility of such a levy with Article XI of the General Agreement on Trade 

37  

38  

See  Annex  B  for  country  experiences  from  UK,  Sweden,  Switzerland  and  Taiwan  with  transfer  and 
transaction duties. 
See  the  Departmental  Autumn  Performance  Report  2009  of  HM  Revenue  &  Customs  available  at: 
http://www.official-documents.gov.uk/document/cm77/7774/7774.pdf  

EN 

19 

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in  Services  (GATS),  which  provides  that  WTO  Members  cannot  apply  any  restrictions  on 
international  transfer  and  payments  for  current  transactions  relating  to  their  specific 
commitments,  would  have  to  be  further  assessed39.  The  introduction  of  a  tax  on  financial 
transactions might also require changes to Council Directive 2008/7/EC40.  

5.  FINANCIAL ACTIVITIES TAX 

5.1.  Policy debate and options for a FAT 

As  mentioned  above,  the  Financial  Activities  Tax  has  gained  attention  following  the  IMF 
report  to  the  G-20  in  which  three  options  for  the  FAT  have  been  discussed:  the  addition-
method  FAT,  the  rent-taxing  FAT  and  the  risk-taxing  FAT  (corresponding  to  FAT1,  FAT2 
and FAT3 in the IMF report). 

5.2.  The economics of FAT 

The  rationale  for  the  FAT  is  to  target  specifically  financial  sector  activities,  without 
intervening into the direct operation of financial markets. It can, however, be designed (rent- 
taxing  FAT  and  risk-taxing  FAT)  in  such  a  way  as  to  improve  market  efficiency  and 
discourage high risk taking. 

a. Effects on financial markets 

Although  alternative  designs  exist,  a  FAT  essentially  targets  the  sum  of  profit  and 
remuneration of a financial institution. The FAT is therefore not transaction-based, but relies 
instead  on  items  of  the  financial  statements  of  financial  institutions  (i.e.  profit  and 
remunerations).  

The FAT should not be confused with the concept of a bank levy. For example, one form of 
the bank levy which is currently discussed would be levied on leverage. This is based on the 
idea that leverage is an indicator for risk exposure of an institution and its interconnectedness. 
The tax base of a bank levy is the balance sheet. The tax base for a FAT would be profit and 
remuneration  and  is  taken  from  the  profit  and  loss  statement.  The  idea  here  is  to  tax  the 
outcome of a company's activity in terms of profit and wages rather than levy a duty based on 
a structural indicator like leverage. 

The FAT's effects on financial activities may take several aspects. First, in terms of its effects 
on  market  structures  and  risk-taking,  the  addition  method  FAT  would  not  directly  alter  the 
markets structures where financial institutions are active since it taxes profits independently 
from how they are earned. In this sense, it does not discriminate between different products 
nor depend on the level of turnover, and hence brings no corrective mechanism per se. For all 
versions  of  the  FAT,  however,  by  making  financial  services  more  expensive,  it  would 
decrease the size of the financial sector. 

39  

40  

See also the Innovative financing at a global level - Commission Staff Working Document SEC(2010) 
409, 1.4.2010 - on this issue. 
Council  Directive  2008/7/EC  of  12  February  2008  concerning  indirect  taxes  on  the  raising  of  capital 
(OJ L 46, 21.2.2008, p. 11). 

EN 

20 

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The rent-taxing FAT that tax rents only would not be distortive. If the financial sector earns 
economic rents and experiences a higher profitability due to its unique role in the economy, 
economic rents translate into higher before-tax company profits. If the policy goal is to reduce 
these rents in order to correct for the potentially distorted size and behaviour of the financial 
sector, a tax that falls directly on this profit is a solution. 

The risk-taxing FAT attempts to tax excess return due to unduly risky activities. Such a tax 
would  directly  target  the  harmful  effects  of  excessive  risk-taking.  This  would  be  done  via 
applying  a  relatively  high  tax  rate  (as  to  discourage  risk)  on  returns  above  a  defined  level. 
This FAT therefore introduces some elements of progressivity. For capital, the interest rate on 
risk-free investments could be taken and increased by return on risk component. The latter is 
of course difficult to estimate. For wages, the average wages in other sectors could serve as a 
proxy. This would however not account for structural differences in sectors which might lead 
to  different  wage  structures  in  addition  to  potentially  untaxed  rents.  In  addition,  this  FAT 
cannot  distinguish  between  high  returns  due  to  unduly  risky  behaviour  or  due  to  skills  and 
efforts. This makes the threshold somewhat arbitrary. 

Second,  all  versions  of  the  FAT  could  be  designed  to  be  neutral  vis-à-vis  financing  and 
investment  decisions,  and  hence  not  distort  the  activities  of  the  financial  sector  while  still 
reducing  its  size.  This  can  be  achieved  by  the  application  of  either  an  Allowance  for 
Corporate Equity (ACE) or a definition of profit which would include both real transactions 
and financial transactions.  

Third,  any  version  of  the  FAT  could  lead  to  differences  in  treatment  between  financial 
institutions  subject  to  such  a  tax  and  quasi-financial  institutions  outside  its  scope.  The 
implementation  of  a  FAT  should  therefore  cover  as  large  as  possible  range  of  financial 
institutions.  The  whole  financial  sector  indeed  includes  banks,  credit  card  companies, 
insurance  companies,  consumer  finance  companies,  stock  brokerages,  investment  funds  and 
some government sponsored enterprises. 

Fourth,  all  versions  of  the  FAT  can  be  seen  as  tax  on  the  profits  from  net  transactions  and 
other  financial  sector  business.  This  is  an  important  difference  compared  to  the  FTT  which 
would tax gross transactions and have a cumulative effect. As such the tax take is independent 
of the risk characteristics of the product traded and instead a function of the number of times 
the product is traded. 

Fifth, in the technical design of the risk- and rent-taxing FAT important parameters deriving 
from "normal" profit rates or wage levels would need to be determined, which illustrates the 
potential practical complexity of such taxes. 

Finally, given the ongoing regulatory work, the assessment of the possible introduction of a 
FAT  would  have  to  take  into  account  the  cumulative  impact  of  the  regulatory  plus  the  tax 
changes. 

b. Tax Incidence – Would the Financial Sector carry the burden? 

There is no empirical evidence on the real incidence of a FAT. However, the incidence of the 
addition method FAT when all remuneration and cash-flow profit is taxed could possibly fall 
on the consumers of financial services. Indeed, in case the tax is shifted to the customer and 

EN 

21 

   EN 

since there is no deduction for business consumers the tax burden could also partly fall on all 
users of financial services.  

Both  the  rent-taxing  and  the  risk-taxing  FAT  provide  less  incentive  to  shift  the  tax  to 
customers  since  the  profit  maximization  condition  would  be  unaffected  and  therefore 
marginal investments remain undistorted. 

c. Revenue estimates 

Turning to revenues, the potential of the FAT depends on the type of FAT that is chosen and, 
obviously,  on  the  assumptions.  An  appropriate  estimation  of  revenues  would  require 
comprehensive  firm-level  data  as  with  aggregate  data  profits  of  some  companies  are 
compensated by losses of others, blurring the picture41. 

Still, using aggregate data and specific assumptions, the IMF reports that the tax base for the 
addition  method  FAT  varies  from  2.5%  of  GDP  in  Sweden  to  8.4%  of  GDP  in  Ireland  and 
even 23.2% of GDP in Luxembourg. The sample's GDP-weighted average is 4.14% of GDP. 
For  the  Rent-taxing  FAT  and  the  Risk-taxing  FAT,  the  GDP-weighted  average  would  be 
1.78% and 0.79% of GDP.  

Hence, applying  a low FAT  rate  of 5% and extrapolating the  results from the sample of 15 
Member States collected by the IMF (2010) – and representing 91% of EU27 GDP – to the 
EU27  for  the  three  methods  provide  broad  orders  or  magnitude  for  tax  revenues  of 
respectively  EUR  25.9  billion,  EUR  11.1  billion  and  EUR  4.9  billion.  Table  (7)  gives  an 
overview of the country values. 

41  

Profits are defined as gross operating surplus and mixed income in the financial intermediation sector. 

EN 

22 

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Table  (7):  Revenue  estimates  for  the  various  forms  of  FAT  (based  on  2008  GDPs),  
tax rate 5% 

Member 
States 

BE 
BG 
CZ 
DK 
DE 
EE 
IE 
EL 
ES 
FR 
IT 
CY 
LV 
LT 
LU 
HU 
MT 
NL 
OE 
PL 
PT 
RO 
SI 
SK 
FI 
SE 
UK 

Tax 
base 
% 
GDP 
4.2 
n.a. 
n.a. 
4.0 
3.6 
n.a. 
8.4 
n.a. 
3.5 
3.3 
3.6 
n.a. 
n.a. 
n.a. 
23.2 
3.6 
n.a. 
4.9 
4.0 
n.a. 
4.8 
n.a. 
n.a. 
n.a. 
1.9 
2.5 
6.1 

Addition method FAT 

Rent-taxing FAT 

Risk-taxing FAT 

Tax 
revenue 
% GDP 

Tax revenue mio 
EUR 

Tax 
base % 
GDP 

Tax 
revenue 
% GDP 

Tax revenue mio 
EUR 

Tax 
base % 
GDP 

Tax 
revenue 
% GDP 

Tax revenue 
mio EUR 

0.2 
n.a. 
n.a. 
0.2 
0.2 
n.a. 
0.4 
n.a. 
0.2 
0.2 
0.2 
n.a. 
n.a. 
n.a. 
1.2 
0.2 
n.a. 
0.2 
0.2 
n.a. 
0.2 
n.a. 
n.a. 
n.a. 
0.1 
0.1 
0.3 

724 
n.a. 
n.a. 
466 
4,492 
n.a. 
764 
n.a. 
1,905 
3,215 
2,822 
n.a. 
n.a. 
n.a. 
456 
190 
n.a. 
1,460 
564 
n.a. 
413 
n.a. 
n.a. 
n.a. 
175 
418 
5,537 

1.8 
n.a. 
n.a. 
1.8 
1.5 
n.a. 
5.7 
n.a. 
1.7 
0.9 
1.6 
n.a. 
n.a. 
n.a. 
15.3 
2.0 
n.a. 
2.0 
1.7 
n.a. 
2.6 
n.a. 
n.a. 
n.a. 
0.9. 
0.9 
2.7 

0.1 
n.a. 
n.a. 
0.1 
0.1 
n.a. 
0.3 
n.a. 
0.1 
0.0 
0.1 
n.a. 
n.a. 
n.a. 
0.8 
0.1 
n.a. 
0.1 
0.1 
n.a. 
0.1 
n.a. 
n.a. 
n.a. 
0.0 
0.0 
0.1 

310 
n.a. 
n.a. 
210 
1,872 
n.a. 
518 
n.a. 
925 
877 
1,254 
n.a. 
n.a. 
n.a. 
301 
106 
n.a. 
596 
240 
n.a. 
223 
n.a. 
n.a. 
n.a. 
83 
150 
2,451 

1.5 
n.a. 
n.a. 
0.7 
0.5 
n.a. 
1.8 
n.a. 
0.9 
0.8 
0.4 
n.a. 
n.a. 
n.a. 
5.7 
0.9 
n.a. 
0.6 
1.8 
n.a. 
0.5 
n.a. 
n.a. 
n.a. 
0.2 
0.7 
1.1 

0.1 
n.a. 
n.a. 
0.0 
0.0 
n.a. 
0.1 
n.a. 
0.0 
0.0 
0.0 
n.a. 
n.a. 
n.a. 
0.3 
0.0 
n.a. 
0.0 
0.1 
n.a. 
0.0 
n.a. 
n.a. 
n.a. 
0.0 
0.0 
0.1 

259 
n.a. 
n.a. 
82 
624 
n.a. 
164 
n.a. 
490 
779 
314 
n.a. 
n.a. 
n.a. 
112 
47 
n.a. 
179 
254 
n.a. 
43 
n.a. 
n.a. 
n.a. 
18 
117 
998 

Sample 
EU27 

4.14 

0.21 

23,600.9 
25,920.7 

1.78 

0.09 

10,116,1 
11,110.5 

0.79 

0.04 

4,479.4 
4,919.7 

Source:  IMF  (2010),  Financial  Sector  taxation.  The  IMF's  Report  to  the  G-20  and  background  material. 
Editors:  S.  Claessens,  M.  Keen  and  C.  Pazarbasioglu.  and  own  calculations.  The  estimates  assume  no 
behavioural response. For the rent-taxing and the risk-taxing FAT, the IMF takes 40% of the wage differential 
between the top 25% earners in the financial sector and the top 25% earners in other sectors. This 'surplus' is 
12% of wage costs. For the risk-taxing FAT, the benchmark for the return on average equity above which profit 
would be taxed is 15%. See IMF (2010) for other assumptions and details. Note that the IMF applies an R+F 
base by subtracting capital formation from profit. The EU27 figures are retrieved by taking the GDP-weighted 
average values of the sample for the tax base and applying them to EU27 GDP for 2008. 

For the 22 developed economies – representing about 62% of world GDP – considered in the 
IMF  report  to  the  G-20,  a  5%  rate  of  the  addition-method  FAT  would  create  revenue 
corresponding to an arithmetic average of 0.28% of GDP.42. Using the country level estimates 
for the share in GDP to calculate absolute figures, this would translate into total revenue for 
the 22 countries of roughly EUR 75 billion for the addition-method FAT43. 

42  

43  

IMF (2010). Financial Sector taxation. The IMF's Report to the G-20 and background material. Eds. S. 
Claessens, M. Keen and C. Pazarbasioglu. 
The  revenue  for  other  FAT  versions  would  be  EUR  35  billion  for  the  rent-taxing  FAT  and  EUR  10 
billion for the risk-taxing FAT. 

EN 

23 

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In terms of their geographical distribution, the potential tax revenues would - by and large -  
mirror  the  share  of  Member  States  in  the  activities  of  the  financial  sector  (which  is  more 
diversified than their share in trading places).  

Figures  (2),  (3)  and  (4)  respectively  present  the  distribution  for  the  addition-method,  rent-
taxing  and  risk-taxing  FAT.  For  Member  States  for  which  data  is  missing  in  table  (7)  are 
assumed to raise tax revenues in percentage of GDP in the same  proportion  as the sample's 
GDP average. The sign (*) indicates the countries concerned. 

Figure (2): Share in tax revenue of EU Member States (Addition-method FAT) 

SI* 0.3%

BG* 0.3%

SK* 0.5%

LT* 0.3%

LV* 0.2%

EE* 0.1%

CY* 0.1%

MT* 0.0%

FI 0.7%
HU 0.7%

RO* 1.1%
CZ* 1.2%

PT 1.6%

SE 1.6%

LU 1.8%

DK 1.8%

EL* 1.9%

OE 2.2%

BE 2.8%

PL* 2.9%

IE 2.9%

NL 5.6%

ES 7.3%

UK 21.3%

DE 17.3%

IT 10.9%

FR 12.4%

EN 

24 

   EN 

 
 
Figure (3): Share in tax revenue of EU Member States (Rent-taxing FAT) 

SK*
0.5%

SI*
0.3%

BG*
0.3%

LT*
0.3%

LV*
0.2%

CY*
0.1%

FI
0.7%

HU
0.9%

EE*
0.1%

MT*
0.0%

UK
22.0%

RO*
1.1%

CZ*
1.2%

SE
1.4%

DK
1.9%

EL*
1.9%

PT
2.0%

OE
2.2%

LU
2.7%

BE
2.8%

PL*
2.9%

IE
4.7%

NL
5.4%

FR
7.9%

DE
16.8%

ES
8.3%

IT
11.3%

Figure (4): Share in tax revenue of EU Member States (Risk-taxing FAT) 

RO*
1.1%

CZ*
1.1%
PT
1.3%

IE
1.4%

FI
1.4%

DK
1.8%

EL*
1.9%

SE
2.6%

BE
2.7%

PL*
2.8%

HU
0.8%

SK*
0.5%

LU
0.3%

SI*
0.3%

BG*
0.3%

LT*
0.3%

LV*
0.2%

CY*
0.1%

EE*
0.1%

MT*
0.0%

DE
19.4%

NL
4.6%

OE
5.1%

ES
8.5%

FR
15.1%

IT
12.2%

UK
14.1%

EN 

25 

   EN 

 
 
5.3.  Potential for unilateral introduction 

Because  it  relies  on  items  easily  identified,  a  FAT  is  theoretically  easy  to  introduce.  The 
easiest  version  would  be  the  addition  method  FAT.  The  other  two  versions  require  the 
determination of some normal or risk adjusted return and wage payments which might create 
practical  problems.  A  FAT  could  also  add  to  the  existing  incentives  to  shift  profit  via 
relocating profit or remuneration that derive from differences in current CIT and PIT systems. 
The unilateral introduction of a FAT triggers relocation and competitive disadvantage risks as 
in the case of the FTT. Nevertheless, given the nature of the base and the need for financial 
companies to generally operate for their basic activities where consumers reside, the risk of 
relocation can be assumed to be lower than in the case of the FTT. Technical developments 
may increase the mobility of the financial sector. For example, in the field of retail banking 
the development of internet banking may provide opportunities for avoidance. 

Another important issue is the inequality of treatment across sectors that a FAT would create. 
This  issue  may  conflict  with  legislation  or  general  tax  practices  in  some  countries.  On  the 
other  hand,  a  FAT  could  arguably  also  be  seen  as  a  tax  surcharge  that  aims  at  correcting 
inequalities of treatment across sectors (e.g. VAT exemption). 

In  principle,  because  it  relies  on  existing  items  of  the  balance  sheet,  both  the  technical 
difficulties  and  the  administrative  costs  of  implementing  and  collecting  the  FAT  could  be 
limited.  However,  given  the  different  accounting  rules  in  Member  States  a  creation  of  a 
coherent framework might be difficult. 

Finally,  in  the  context  of  the  European  Union,  the  compatibility  with  the  VAT  directive,  in 
light of the existing jurisprudence (e.g. Case C-475/03) would need to be verified, given that 
its base proxies value added. For the same reason, the FAT would require several adjustments 
to  make  it  interact  with  the  invoice-credit  VAT.  These  adjustments,  discussed  by  the  IMF, 
include  the  absence  of  input  VAT  crediting  against  the  FAT  and  vice  versa,  border 
adjustments in the case of the addition method FAT, a mimicking of zero-rating for operations 
with clients outside the EU, and to mitigate the absence of crediting, a FAT rate that is lower 
than the standard VAT rate. These are non-trivial technical issues. 

EN 

26 

   EN 

 ANNEX A: TAXATION OF FINANCIAL TRANSACTIONS IN THE EU 

Country 
(date of last 
update) 

Austria 
(12/7/2010) 
Belgium 
(16/6/2010) 

Capital duty 
(on the creation of, or increase in, share capital) 

Tax rate 

Tax base 

1% 

- 

Direct contributions of capital 
to an Austrian company 
- 

- 

- 

Bulgaria 
(5/7/2010) 

Cyprus 
(13/6/2010) 

Czech Republic 
(12/7/2010) 

- EUR 102.52 plus 
0.6% on the 
nominal value of 
the share capital;  
- EUR 17.09 
allotment fees for 
the issue of the 
shares. 
- 

Capital duties and allotment 
fees are payable on the 
authorized share capital and 
on the issue price of the 
shares 

- 

- 

- 

Denmark 
(16/6/2010) 
Estonia 

- 

- 

EN 

Transfer tax 

Stamp or other duty 

Tax rate 

- 

Tax base 

- 

EUR 1.7 per thousand euro 
worth of securities 
(maximum of EUR 500) 
0.6% 

- 

- 

- 

- 

- 

Shares, bonds and other securities, 
whether traded on the Stock 
Exchange or not 
Physical delivery of bearer 
securities. (Trade in short-term 
commercial papers is not taxable. 
Tax not applicable to securities 
issued upon formation of a company 
or an investment fund.) 
Transfer of shares of a limited 
liability company and the transfer of 
an existing business incur a notary 
fee 

- 

- 

- 

- 

Tax rate 

Tax base 

- 

0.15% 

- 

0.15% 

- 

Stamp duty for documents 
concerning bank transactions 

A notary fee is due on the 
transfer of shares of a limited 
liability company and the 
transfer of an existing 
business 
Transactions in, or 
transactions announced in, the 
Cyprus Stock Exchange 

Administration fees are 
payable on certain services 
rendered by various 
government bodies 
- 

- 

- 

- 

27 

EN 

 
  
 
 
 
 
 
 
 
 
 
Country 
(date of last 
update) 

(16/5/2010) 

Finland 
(1/7/2010) 

France 
(15/7/2010) 

Capital duty 
(on the creation of, or increase in, share capital) 

Transfer tax 

Stamp or other duty 

Tax rate 

Tax base 

Tax rate 

Tax base 

Tax rate 

Tax base 

- 

- 

- 

1.6% 

In general, there is no capital 
duty or similar duty on the 
formation and expansion of 
capital of companies. 

3%, with a maximum of 
EUR 5,000 

5% 

Stamp duty is levied on 
certain documents and in 
connection with various legal 
transactions, such as 
promissory notes, bills of 
exchange and certain other 
certificates, and mortgage 
certificates. 

- 

- 

On the sales price, but only if the 
transfer is not made through the 
stock exchange. 
No transfer tax is due if shares of a 
foreign company are sold or if both 
the seller and the purchaser are non-
residents. However, this exemption 
does not apply if one of the parties 
to the transfer is a Finnish branch of 
a foreign bank or a foreign 
investment company. The tax is 
always payable on transfers between 
non-residents if the transferred 
shares are shares in a Finnish 
housing or real estate company. 
For shares; only if the transfer is 
made by written deed executed in 
France 

The transfer of shares in non-quoted 
SAs whose assets consist principally 
of immovable property and the 
transfer of shares in SARLs and 
interests or quotas in legal entities 
whose capital is not divided into 
shares (e.g. partnerships).  
The same rate applies to a purchase 
of an existing unincorporated 
business as a going concern. The 
transfer of shares or quotas in a 
foreign legal entity is exempt from 
registration duty in France, unless 
made by a written deed executed in 
France. 

EN 

28 

EN 

 
  
 
 
 
 
 
 
 
 
 
 
 
Country 
(date of last 
update) 

Capital duty 
(on the creation of, or increase in, share capital) 

Transfer tax 

Stamp or other duty 

Tax rate 

Tax base 

Tax rate 

Tax base 

Tax rate 

Tax base 

Germany 
(1/7/2010) 

- 

- 

- 

- 

0.15% 

On the proceeds from the sale of 
shares listed on the Athens Stock 
Exchange or on any other 
recognized stock exchange in the 
world. 

2.4% 

Greece 
(10/5/2010) 

1% 

−  Any kind of contribution to 
the share capital on the 
formation of a company. 
−  The increase in a company's 
capital, unless its the result 
of the compulsory 
revaluation of immovable 
property or of the 
capitalization of profits, 
reserves or provisions other 
than the share premium 
reserve. 
−  The contribution of assets or 
working capital by a non-
resident company to its 
branch in Greece, if the non-
resident company has its seat 
or permanent establishment 
outside the EU. 
−  Profit-sharing loans and 
loans used for a capital 
increase are immediately 
subject to the capital duty 
except when shares are 
issued. 

Minor fees are due upon 
registration of transactions in 
the Commercial Register. 
This concerns mainly the 
formation of a company, a 
change in the capital and 
reorganizations. 
On the issuance of loans 
between businesses or 
between individuals and 
companies and payment of 
interest on such loans. Loans 
granted by banks operating in 
Greece or abroad and interest 
payments on such loans are 
exempt 

EN 

29 

EN 

 
  
 
 
 
 
 
 
 
 
Country 
(date of last 
update) 

Capital duty 
(on the creation of, or increase in, share capital) 

Transfer tax 

Stamp or other duty 

Tax rate 

Tax base 

Tax rate 

Tax base 

Tax rate 

Tax base 

Hungary 
(24/6/2010) 

Ireland 
(25/3/2010) 

Italy 
(2/3/2010) 

- 

- 

- 

- 

- 

- 

- 

4% 

- 

Unless shares and other securities 
are acquired at an auction organized 
by a public body. 
From 1 January 2010; on the 
acquisition of shares in real estate 
holding companies, provided that as 
a result of the acquisition the 
ownership of the transferee reaches 
or exceeds 75% of all outstanding 
shares. 
- 

- 

- 

0%-9% 

EUR 168 

7% 

Stamp duty on certain 
documents evidencing 
transfers of other forms of 
property than real estate 
A registration tax is due on 
contributions of cash and 
assets (other than immovable 
property) in exchange of 
shares.  
This registration tax is also 
due:  
- on transfer of shares, bonds 
and similar securities based 
on contracts executed in Italy 
before a public notary 
- on contracts executed 
abroad or with different 
formalities when presented to 
an Italian registration office 
or an Italian court. 
If on contributions of 
immovable property, the tax 
is proportional; the rate is 

EN 

30 

EN 

 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Country 
(date of last 
update) 

Capital duty 
(on the creation of, or increase in, share capital) 

Transfer tax 

Stamp or other duty 

Tax rate 

Tax base 

Tax rate 

Tax base 

Tax rate 

Tax base 

Latvia 
(21/6/2010) 
Lithuania 
(28/6/2010) 
Luxembourg 
(12/7/2010) 
Malta 
(8/7/2010) 

Netherlands 
(1/7/2010) 

- 

- 

- 

- 

- 

- 

- 

abolished 01/01/2009 

- 

- 

Poland 
(7/7/2010) 

0.5% 

Initial capital contribution to a 
newly registered company 
and on the transfer of an 
effective place of 
management or registered 
office from a non-EU country 
to Poland 

- 

- 

- 

- 

6% 

1% 

usually 7% (15% for 
agricultural land) of the value 
of the property as indicated in 
the transfer deed. 

- 

- 

- 

Stamp duty on transfer of 
marketable securities (except 
when listed on the Malta 
Stock Exchange and inter 
vivos transfers of foreign 
marketable securities to 
persons resident in Malta 
effected through a local bank 
or a person holding an 
investment services licence. 
A nominal registration fee is 
payable upon registration of a 
company, depending on the 
amount of the authorized 
share capital. 
- 

- 

- 

- 

- 

- 

- 

- 

- 

2% 

EUR 210 to 
2,250 

The acquisition of shares in a real 
estate company (if the acquisition 
gives the acquirer at least one third 
of the subscribed share capital) 
Shares, bonds and other securities if 
the underlying rights are exercised 
in Poland 

- 

- 

EN 

31 

EN 

 
  
 
 
 
 
 
 
 
 
Country 
(date of last 
update) 

Capital duty 
(on the creation of, or increase in, share capital) 

Transfer tax 

Stamp or other duty 

Tax rate 

Tax base 

Tax rate 

Tax base 

Tax rate 

Tax base 

Portugal 
(12/7/2010) 

See Stamp duties 

- 

- 

0.4% 

A capital duty (in the form of 
stamp duty) is imposed on 
capital contributions to capital 
companies upon incorporation 
or any subsequent capital or 
equity increase. The duty is 
also levied on the transfer 
from a non-EU state to 
Portugal of the place of 
effective management and/or 
legal seat of a capital 
company with its legal seat 
and/or place of effective 
management in that third 
state. 
(Exemptions, for example, in 
respect of: 
- capital contributions, upon 
incorporation or capital 
increases, through the 
contribution of all the assets 
and liabilities of the 
contributor or of one or more 
branches of activity;  
- incorporation and capital 
increases of venture capital 
companies and holding 
companies (SGPS);  
- the change of the corporate 
purpose of a capital company;  
- capital increases paid in 

EN 

32 

EN 

 
  
 
 
 
 
 
 
 
 
 
Country 
(date of last 
update) 

Capital duty 
(on the creation of, or increase in, share capital) 

Transfer tax 

Stamp or other duty 

Tax rate 

Tax base 

Tax rate 

Tax base 

Tax rate 

Tax base 

Slovak Republic 
(24/6/2010) 
Slovenia 
(18/6/2010) 
Spain 
(1/6/2010) 

Sweden 
(25/5/2010) 
United Kingdom 
(14/6/2010) 

- 

- 

1% 

- 

- 

- 

- 

On the contribution of capital 
to a company or a branch 
upon the formation or a 
subsequent increase of the 
subscribed capital, and on the 
liquidation and immigration 
of companies to Spain. 

- 

- 

- 

- 

- 

- 

- 

- 

Normally not, except when transfer 
of unquoted shares of SAs and pre-
emptive rights to subscription of 
such shares by the intervention of a 
notary or a stockbroker if the 
transfer leads to the acquisition of 
control over a non-listed company in 
which 50% or more of its assets 
consist of Spanish-situs immovable 
property. 
- 

- 

- 

- 

- 

- 

0.5% 

cash (following the ECJ 
decision in Optimus, C-
366/05)). 
- 

- 

- 

- 

A stamp duty reserve tax 
(SDRT) is levied on certain 
transfers of shares and 
securities. 

EN 

33 

EN 

 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Country 
(date of last 
update) 

Capital duty 
(on the creation of, or increase in, share capital) 

Transfer tax 

Stamp or other duty 

Tax rate 

Tax base 

Tax rate 

Tax base 

Tax rate 

Tax base 

Non-EU countries 

Switzerland 
(1/6/2010) 

1% 

0.15% (Domestic 
securities), 0.3%(Foreign 
securities) 

A 1% federal stamp duty 
(Emissionsabgabe) is payable 
by resident companies (AGs, 
GmbHs, KAGs and 
cooperatives) upon the 
issuance of shares or other 
participation rights and the 
increase in their nominal 
value to the extent that the 
share capital exceeds CHF 1 
million. The taxable amount 
is equal to the total amount 
contributed to the company or 
the value of the shares issued, 
whichever is higher.  
Qualifying venture capital 
companies are exempt from 
the duty. In addition, certain 
types of transactions are 
exempt, including: 
- participations taken or 

A transfer tax (Umsatzabgabe) is 
levied on the transfer of domestic or 
foreign securities where one of the 
parties is a Swiss security broker. 
Swiss brokers include banks and 
bank-linked financial institutions as 
defined by Swiss banking law. In 
addition, companies that own 
taxable securities of a book value in 
excess of CHF 10 million qualify as 
security brokers.  
A broker who acts as a party to the 
transaction must pay one half of the 
transfer tax for himself and another 
half on behalf of each party who is 
not a broker. If the broker merely 
acts as an intermediary, he is only 
required to pay one half of the 
transfer tax on behalf of each party 
who is not a broker. If a Swiss 
security broker deals at a foreign 

EN 

34 

EN 

 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Country 
(date of last 
update) 

Capital duty 
(on the creation of, or increase in, share capital) 

Transfer tax 

Stamp or other duty 

Tax rate 

Tax base 

Tax rate 

Tax base 

Tax rate 

Tax base 

increased in connection with 
mergers, changes of legal 
structure, spin-offs or 
transfers of corporate seats 
from abroad to Switzerland; 
- participations in 
cooperatives to the extent 
they do not exceed CHF 1 
million in total; and  
- participations formed by the 
use of share premium reserves 
of AGs if the company can 
prove a previous payment of 
the duty for these 
contributions. 
If at a later moment the 
requirements for an 
exemption no longer exist, 
stamp duty becomes due on 
the remaining part of the 
existing participation right.  
No stamp duty is due upon 
formation and expansion of 
capital by partnerships, 
associations and foundations. 

stock exchange in securities that are 
subject to Swiss transfer tax, the part 
of the tax allocated to the other party 
to the transaction is not levied.  
The taxable base is equal to the 
consideration paid; if there is no 
consideration, the taxable base is the 
fair market value of the security. 
The duty is levied at a rate of 0.15% 
for domestic securities and 0.3% for 
foreign securities.  
Eurobonds, other bonds 
denominated in a foreign currency 
and the trading stock of professional 
security brokers are exempt. Certain 
types of transactions are exempt:  
- initial purchase of shares in 
resident companies, including those 
purchased through a bank or a 
holding company (subject to stamp 
duty upon the issuance);   
- the transfer of an option to acquire 
shares;  
- the redemption of securities for 
cancellation;  
- the initial purchase of bonds issued 
by foreign debtors and shares in 
foreign companies not denominated 
in Swiss currency;  
- the transfer of foreign money 
market papers; and  
- the transfer through security 
brokers of foreign bonds whether in 
Swiss or foreign currency between 
two foreign parties. 

EN 

35 

EN 

 
  
 
 
 
 
Country 
(date of last 
update) 

Capital duty 
(on the creation of, or increase in, share capital) 

Transfer tax 

Stamp or other duty 

Tax rate 

Tax base 

Tax rate 

Tax base 

Tax rate 

Tax base 

Taiwan 
(1/4/2010) 

Securities transactions tax is levied 
on all securities on the stock 
exchange, except government 
bonds. Securities transaction tax on 
bank debentures and corporate 
bonds is not imposed from 1 January 
2010 to 31 December 2016. 

0.3% of the transaction 
price for a transaction in 
shares issued by a company; 
and 0.1% of the transaction 
price for a transaction in 
corporate bonds and other 
government approved 
marketable securities such 
as certificates issued by 
securities investment trusts. 
Since 1998, a stock index 
futures transaction tax is 
imposed on both parties to 
the transaction based on the 
contracted amount. The 
current transaction tax is 
levied per transaction at a 
rate of not less than 0.01% 
and not more than 0.06%, 
based on the value of the 
futures contract. 

Source: IBFD "European tax survey" database. Date: 22/07/2010 

EN 

36 

EN 

 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX B: COUNTRY EXPERIENCE  

B.1 TRANSFER TAXES AND STAMP DUTIES 

United Kingdom  

The  UK  stamp  duty  on  transfers  of  securities  consists  of  two  instruments:  (1)  Stamp  duty 
(charged on instruments of transfer) and (2) Stamp Duty Reserve Tax (SDRT) (charged on 
underlying agreements to transfer securities where an instrument is not executed). 

The two go hand in hand when considering transaction taxes on shares. Stamp Duties in the 
UK are collected on documents used to effect the sale and transfer of ownership in shares and 
other securities of UK-based companies. In order to collect duties on transactions carried out 
through  electronic  share  dealing  systems,  the  Stamp  Duty  Reserve  Tax  (SDRT)  was 
introduced in 1986. Stamp duties are levied on the underlying value of the transferred good. 
The standard rate is currently 0.5%. 

Revenue from duties on the transfer stocks and shares also augmented over the last decade. 
After the economic downturn in 2001-02 revenue declined for two years in a row. From 2004-
05 onwards revenue steadily increased despite the fact that the tax rate remained unchanged at 
0.5% in this period. There are three main reasons for this development. Firstly, share prices 
increased  significantly  in  recent  years  as  a  consequence  of  the  economic  boom.  Secondly, 
volume of traded shares also increased since the number of incorporated companies increased. 
Lastly,  turnover  also  augmented  since  shares  have  become  important  products  for  medium- 
and short-term investments. However, revenue declined also for this category in 2008-09. The 
reasons are the reduction in transactions volumes as well as significantly lower stock prices 
due  to  the  financial  crisis.  This  observation  suggests  that  revenue  from  stamp  duties  is  pro-
cyclical with economic activity. In fact, revenue from stamp duties on transfers of  financial 
assets was more than 30% lower in 2008-09 compared to 2007-08. 

The SDRT taxes transactions in shares where no instrument of transfer is executed and which 
are therefore outside the scope of the "standard" Stamp Duty. In this sense, it is a transaction 
tax, levied on agreements to transfer chargeable securities while the "standard" Stamp Duty is 
charged  upon  documents.  SDRT  accounts  for  the  majority  of  revenue  collected  on  share 
transactions  effected  through  the  UK's  Exchanges.  On  average  almost  90%  of  revenues 
actually stem from the SDRT. Table (B.1) shows the revenue data for both types in the second 
and  third  column44.  The  fourth  column  shows  the  total  revenue  from  the  two  sources.  The 
peak is in 2000-01 just before the end of the Internet bubble. Columns 5 and 6 show the tax 
revenue in relation to total tax revenue and GDP. The Stamp Duty was on average about 0.7% 
of  total  tax  revenue.  In  terms  of  GDP  and  total  tax  revenue  the  highest  values  have  been 
reached during the boom years at the end of the last century, notably in 2000-01. For 2008-09 
the value is back to the level of the mid 1990ies which is around 0.2% of GDP. 

44  

The  split  between  the  two  levies  is  only  available  from  2001  onwards.  Note  that  small  differences 
between values single and sums occur due to rounding when converting revenues in Sterling Pound to 
Euro. 

EN 

37 

   EN 

 
                                                 
Both,  SDRT  and  standard  Stamp  Duty  are  levied  on  share  transactions  in  UK  incorporated 
companies currently taxed at 0.5% of the purchase price of shares. It is charged whether the 
transaction takes place in the UK or overseas, and whether either party is resident of the UK 
or not. Securities issued by companies overseas are not taxed. This means that the tax is paid 
by  foreign  and  UK-based  investors  who  invest  in  UK  incorporated  companies.  To  put  it 
differently, the tax is connected to the location of headquarters. 

Table  (B.1):  Revenue  from  stamp  duties  on  stocks  and  shares  
and other liable securities in the UK 
Stamp Duties
Standard  
Total Revenue
Stamp duty 

over Total 
Tax Revenue

over GDP 

SDRT 

Year 

1995-96 
1996-97 
1997-98 
1998-99 
1999-00 
2000-01 
2001-02 
2002-03 
2003-04 
2004-05 
2005-06 
2006-07 
2007-08 
2008-09 

n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
n.a. 
4,218 
3,669 
3,280 
3,454 
4,105 
4,767 
5,372 
3,673 

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
367
455
418
548
961
745
716
349

1,810
1,966
3,033
3,696
5,617
7,383
4,586
4,124
3,698
4,001
5,067
5,511
6,091
4,022
in m Euro

0.59 
0.60 
0.73 
0.79 
1.10 
1.26 
0.77 
0.69 
0.65 
0.64 
0.77 
0.77 
0.82 
n.a. 
in % 

0.20 
0.20 
0.25 
0.28 
0.40 
0.46 
0.28 
0.24 
0.22 
0.23 
0.28 
0.28 
0.30 
0.22 
in % 

Source: HM Revenue and Customs and own calculations 

Given  the  existence  of  the  tax,  one  should  observe  that  investors  discount  higher  future 
transaction costs when trading shares. These costs should be capitalized in lower share prices. 
In  fact,  empirical  studies  show  that  the  stamp  duty  influences  the  share  prices  negatively. 
More  frequently  traded  shares  are  stronger  affected  than  low-turnover  shares.  Therefore  the 
tax revenue capitalizes at least to some extent in lower current share prices. For firms which 
rely  on  equity  as  marginal  source  of  finance  this  may  increase  capital  costs  since  the  issue 
price of new shares would be lower than without the tax. Currently, there are no estimates on 
the effects on trading volumes and price volatility of the stamp duties in the UK. Given results 
from  empirical  studies  on  the  effect  of  transaction  costs  on  trade  volumes  it  is  likely  that 
Stamp Duties reduce trade volumes significantly. Whether or not this increases price volatility 
is  disputed,  however,  more  recent  studies  tend  to  find  a  positive  correlation  between  trade 
volumes and price volatility. 

While it is possible to avoid stamp duty by executing and retaining the instrument outside the 
UK, in practice the need to get the company's share register changed to show the name of the 
new owner, combined with the restriction on unstamped instruments being given in evidence 
or used for any purpose whatever, means that most instruments of transfer are presented for 
stamping. 

Stamp duty reserve tax is difficult to avoid because the vast majority of UK company shares 
are  held  in  the  CREST  settlement  system  which  automatically  debits  SDRT  when  they  are 
transferred. Nevertheless, there are two mechanisms to avoid SDRT legally: 

EN 

38 

   EN 

 
  
  
 
 
American depositary receipts (ADRs)  

Many  UK  companies  have  ADR  programmes  which  enable  them  to  market 
themselves  in  the  US.  Shares  are  issued  to  a  US  depositary  bank  which  issues 
"American  depositary  receipts"  (ADRs)  in  respect  of  them.  It  is  the  receipts  rather 
than the underlying shares that are traded on the US markets. Such trading is currently 
free from standard 0.5% SDRT transfer charges, but, to compensate, there is a charge 
instead (only paid once at the higher rate of 1.5%) when the shares are issued to the 
depositary bank. Placing shares into an ADR system is not regarded as avoidance. 

Exchange Traded Fund (ETF)  

An overseas collective investment scheme that lists on a UK exchange (ETF) currently 
qualifies  for  exemption  from  SDRT  provided  that  it  is  not  centrally  managed  and 
controlled  in  the  UK  or  has  a  UK  share  register.  The  exemption  was  introduced  in 
2007 to encourage overseas ETFs to list in the UK and use of these schemes is thus 
legitimate.  However,  owners  of  an  ETF  share  do  not  legally  own  the  shares  in  the 
fund. If investors want to have voting rights the ETF cannot be used to avoid stamp 
duty. 

Sweden 

In  the  1980s  Sweden  experienced  strong  growth  of  the  financial  sector45.  This  was 
accompanied  by  significant  increases  in  the  salaries  of  professionals  in  this  sector.  It  was 
argued  that  the  financial  sector's  contribution  to  the  economy  and  the  society  was  small 
compared to the resources it used. Furthermore, excessive financial transactions were seen as 
destabilizing  the  economy  and  as  promoting  disproportionate  wage  differentials  between 
sectors.  The  latter  point  was  politically  of  great  importance.  Despite  the  resistance  of  the 
Ministry of Finance, Sweden introduced a 50 basis points tax on the purchase or sale of equity 
securities in January 1984. A round trip transaction (purchase and sale) resulted therefore in a 
100  basis  points  tax.  The  tax  applied  to  all  equity  security  trades  in  Sweden  using  local 
brokerage  services  as  well  as  to  stock  options.  The  fact  that  only  local  brokerage  services 
were  taxed  is  in  the  literature  seen  as  the  main  design  problem  of  the  Swedish  system. 
Avoiding the tax only required using foreign broker services. In July 1986, the tax rate was 
increased to 100 basis points. In 1987, the tax base was extended and half the normal rate was 
also applied to transactions between dealers. 

In  January  1989,  the  tax  base  was  widened  again  and  a  tax  on  fixed-income  securities  was 
introduced. The tax rate was considerably lower than on equities, as low as 0.2 basis points 
for a security with a maturity of 90 days or less. On a bond with a maturity of five years or 
more, the tax was three basis points. Only 15 months later, on 15 April 1990, the tax on fixed-
income securities was abolished. In January 1991 the rates on the remaining taxes were cut by 
half and by the end of the year, they were also abolished completely. 

There are different reasons for the abolishment of the tax. First of all, the revenues from the 
taxes were disappointing. The revenues from the tax on fixed-income securities were expected 

45  

The description of the Swedish experience is based on Umlauf (1993) and Campbell and Froot (1993). 
Sweden levied transaction taxes on stock exchange and stock options, fixed interest securities and the 
connected derivatives. 

EN 

39 

   EN 

 
                                                 
to  amount  to  1,500  million  Swedish  kroner  per  year,  but  the  average  was  only  around  50 
million a year. Furthermore, since trading volumes fell, the capital gains tax became less and 
less  applicable  and  revenue  declined.  The  increase  in  revenue  from  equity  transaction  taxes 
was almost entirely offset by this reduction in capital gains taxes. The net budget effect was 
accordingly close to zero. An additional reason for the decline in revenue from capital gains 
taxes was the decline in share prices that accompanied the introduction of the transaction tax. 
The  day  the  tax  was  announced,  share  prices  fell  by  2.2%.  Taking  into  account  possible 
trading based on insider information in the weeks before the official announcement, the price 
decline  is  estimated  to  have  amounted  to  5.35%.  These  declines  were  in  line  with  the  net 
present value of tax payments on future trades. Investors discounted the future payments and 
prices for equity decreased driving up capital costs accordingly. 

Next  to  the  low  revenue  generated  from  the  tax,  relocation  became  a  serious  problem  in 
Sweden. 60% of the trading volume of the eleven most actively traded Swedish share classes 
moved to the UK after the announcement in 1986 that the tax rate would double. 30% of all 
Swedish equity trading moved offshore. By 1990, more than 50% of all Swedish trading had 
moved to London. Foreign investors reacted to the tax by moving their trading offshore while 
domestic investors reacted by reducing the number of their equity trades. 

Even  though  the  tax  on  fixed-income  securities  was  much  lower  than  that  on  equities,  the 
impact  on  the  traded  volume  was  much  more  dramatic.  During  the  first  week  after  the 
introduction of the tax, the volume of bond trading fell by 85%, even though the tax rate on 
five-year bonds was only three basis points. The volume of futures trading fell by 98% and 
the  options  trading  market  disappeared.  Trading  in  money  market  securities,  which  faced  a 
tax as low as 0.2 basis points, fell by 20%. This reaction was due in large part to the existence 
of a wide variety of non-taxed substitutes. Once the taxes were eliminated, trading volumes 
returned and grew substantially in the 1990s. 

Switzerland 

A  prominent  example  of  a  transfer  tax  outside  the  EU  is  Switzerland.  A  transfer  tax 
(Umsatzabgabe)  is  levied on  the  transfer of domestic or foreign securities  where one of the 
parties  is  a  Swiss  security  broker.  Swiss  brokers  include  banks  and  bank-linked  financial 
institutions  as  defined  by  Swiss  banking  law.  In  addition,  companies  that  own  taxable 
securities of a book value in excess of CHF 10 million qualify as security brokers.  

A  broker  who  acts  as  a  party  to  the  transaction  must  pay  one  half  of  the  transfer  tax  for 
himself and another half on behalf of each party who is not a broker. If the broker merely acts 
as an intermediary, he is only required to pay one half of the transfer tax on behalf of each 
party  who  is  not  a  broker.  If  a  Swiss  security  broker  deals  at  a  foreign  stock  exchange  in 
securities that are subject to Swiss transfer tax, the part of the tax allocated to the other party 
to the transaction is not levied. 

The  taxable  base  is  equal  to  the  consideration paid;  if  there  is  no  consideration,  the  taxable 
base is the fair market value of the security. The duty is levied at a rate of 0.15% for domestic 
securities and 0.3% for foreign securities. 

Eurobonds,  other  bonds  denominated  in  a  foreign  currency  and  the  trading  stock  of 
professional security brokers are exempt. Certain types of transactions are exempt:  

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- 

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- 

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initial purchase of shares in resident companies, including those purchased through a 
bank or a holding company (subject to stamp duty upon the issuance);  
the transfer of an option to acquire shares;  
the redemption of securities for cancellation;  
the  initial  purchase  of  bonds  issued  by  foreign  debtors  and  shares  in  foreign 
companies not denominated in Swiss currency;  
the transfer of foreign money market papers; and  
the  transfer  through  security  brokers  of  foreign  bonds  whether  in  Swiss  or  foreign 
currency between two foreign parties. 

The revenue of the Swiss transfer tax was CHF 1.9 billion CHF in 2007. This corresponds to 
0.37% of GDP. 

Taiwan 

An  example  for  a  country  with  transactions  taxes  outside  Europe  is  Taiwan.  The  securities 
transaction tax is imposed upon gross sales price of securities transferred and the tax rates are 
0.3%  for  share  certificates  issued  by  companies  and  0.1%  for  corporate  bonds  or  any 
securities offered to the public which have been duly approved by the government. However, 
trading of corporate bonds and financial bonds issued by Taiwanese issuers or companies are 
temporarily exempt from STT beginning 1st January 2010. The Taiwanese government argued 
this  "would  enliven  the  bond  market  and  enhance  the  international  competitiveness  of 
Taiwan’s enterprises"46. The legal taxpayer is the seller of the securities and tax is collected 
by the broker or sales agent or the transferee in cases of direct transactions.  

Since  1998,  Taiwan  also  levies  a  stock  index  futures  transaction  tax  is  imposed  on  both 
parties to the transaction based on the contracted amount. The current transaction tax is levied 
per transaction at a rate of not less than 0.01% and not more than 0.06%, based on the value 
of the futures contract. Revenue from the securities transaction tax and the futures transaction 
tax was about EUR 2.4 billion in 2009. The major part of this revenue came from the taxation 
of bonds and stocks (96.5%). The taxation of stock index future shares was 3.5%. In total, this 
corresponds to 0.8% in terms of GDP. 

46  

See http://www.ey.gov.tw/ct.asp?xItem=65822&ctNode=1334&mp=11 for the press release.  

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B.2 MEMBER STATES' EXPERIENCES WITH FAT ELEMENTS

47 

Denmark 

Denmark introduced in 1990 a duty on wage and salary costs (Lønsumsafgift48) for businesses 
engaged in certain activities that are exempted from VAT. The tax base is generally the sum 
of labour costs and taxable profit49. For several sectors, including financial activities, the tax 
base is defined as labour costs plus a supplement of 90%.  

The general tax rate is 3.08%. Specific rates apply to various sectors. For financial services, 
the  rate  is  5.08%  of  labour  costs  plus  an  additional  4.5%  of  90%  of  labour  costs  (i.e.  an 
effective  rate  of  9.13%  (5.08+  90%*4.5%).  This  rate  will  be  increased  to  10.5%  but  this 
measure will not be effective before 2013. 

In 2008, the annual revenues amounted to DKK 4,668.7 million (i.e. about EUR 650 million) 
or 0.26% of GDP. About 70% of this amount would be raised from the financial sector (IMF, 
2010). 

France 

France introduced in 1968 a payroll tax (taxe sur les salaires50) which is levied on employers 
who  are  not  liable  for  VAT  or  who  have  not  been  liable  for  VAT  on  at  least  90%  of  their 
turnover during the previous year. Those include bank and insurance companies. The tax base 
is  defined  as  gross  remunerations,  prior  to  the  deduction  of  employee's  national  insurance 
contribution,  including  benefits  in  kind.  The  measure  is  therefore  not  a  FAT  per  se  but  the 
underlying concept is the same. 

For  employers  who  are  partly  liable  to  VAT,  the  payroll  tax  is  due  in  proportion  of  the 
exemption. Remunerations paid by public administrations are exempted as long as this does 
not create distortions in competition. Remunerations paid to apprentices are fully or partially 
exempted,  depending  on  the  number  of  employees.  A  limited  number  of  remunerations  are 
also exempted. Those are mainly paid in the context of training of workers and incentives to 
hire unemployed. Businesses with a turnover that does not exceed a defined threshold (EUR 
80,000 for sales of goods and EUR 32,000 for services) are also exempted. 

The tax rate is 4.25%. It is increased to 8.50% for individual annual pay between EUR 7,491 
and  EUR  14,960  and  to  13.60%  for  individual  annual  pay  above  EUR  14,960.  There  is  a 
reduced rate of 2.95% for overseas territories. The tax is not due if its annual total amount is 
under EUR 840. If the tax due is between EUR 840 and EUR 1,680, the tax is reduced by an 
amount representing ¾ of the difference between EUR 1,680 and the tax originally due. Non-
profit associations are eligible to a tax credit of EUR 5,890 per year. 

The payroll tax is deductible from the corporate income tax or the personal income tax. 

47  
48  
49  
50  

The information in this section is retrieved from the Taxes in Europe database. 
Covered by the Law on tax o labour costs (lov om afgift af lønsum mv.). 
In case of losses, these are deducted from the labour costs. The system is therefore symmetric. 
Covered by articles 231 to 231 bis R and 1679, 1679A and 1679 Bis of the General Tax Code. 

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In 2008, the annual tax revenues amounted to EUR 11.3 billion. This is about 0.55% of GDP. 
About 85% of this amount would be levied from financial institutions (IMF, 2010). 

Italy 

Italy  introduced  in  1997  a  regional  tax  on  productive  activities  (Imposta  Regionale  sulle 
Attività Produttive – IRAP)51. This regional tax is applied to taxpayers engaged in commercial 
business. The tax base is the value of the net production, which is accounting profit plus most 
remuneration.  Several  exemptions  apply  for  unit  trusts,  pension  funds,  European  Economic 
Interest  Groupings,  and  some  small  taxpayers.  Deductions  are  allowed  for  contributions  for 
labour  insurances,  expenses  related  to  junior  clerks,  disable  persons  and  R&D.  In  addition, 
there is a EUR 1,850 deduction for each employee (with a maximum of five) to enterprises 
with income below EUR 400,000 and certain regions apply a EUR 9,200 deduction for each 
employee.  The  base  is  allocated  across  regions  based  on  the  number  of  workers  in  each 
region. 

The basic rate is 3.90% and it can be increased by regions up to 1 percentage point. However, 
since 2008, the rates  increased  by  regions must  be  multiplied  by  a  coefficient  of  0.9176.  In 
2008, the annual tax revenues amounted to EUR 36 billion or 2.3% of GDP. 

51  

Covered by D. Lg. N446 of 15 December 1997 and L n° 244/2007. 

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