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
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 
COM(2010) 549 final 

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 

{SEC(2010) 1166} 

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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 

1. 

CONTEXT 

The recent financial crisis stressed the need for a more robust financial system, given the cost 
of financial instability for the real economy. In addition, there are several key challenges in 
the areas of development, resource efficiency and climate change with significant budgetary 
implications. Against this background, could supplementary taxes on the financial sector be a 
potential revenue-generating solution? 

The  European  Council  concluded  on  17  June  2010,  in  preparation  for  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.’ 

The  European  Parliament  has  also  been  debating  issues  related  to  the  financial  sector  and 
taxation. In particular its Resolution of 10 March 2010 asks the Commission and Council to 
look  at  how  a  financial  transaction  tax  could  be  used  to  finance  development  cooperation, 
help developing countries to combat climate change and contribute to the EU budget. Some 
Member States have already taken measures with regard to bank taxation. 

Such  debates  are  not  limited  to  the  European  Union.  These  are  indeed  issues  reflecting  the 
global  and  systemic  nature  of  the  financial  crisis  and  its  consequences.  There  have  been 
discussions in the G-20 on new forms of taxation. However, there is no global consensus on 
additional tax instruments.1 Most recently, the issue of taxing financial transactions has been 
prominently  discussed  during  the  UN  High  Level  Plenary  Meeting  on  the  Millennium 
Development  Goals.  Moreover,  the  High  Level  Advisory  Group  on  Climate  Change 
Financing  established  by  the  UN  Secretary  General  has  also  looked  at  the  revenue-raising 
potential  of  key  sectors  active  at  the  global  scale,  including  the  financial  sector  but  also 
international air and maritime transport. 

This  Communication  contributes  to  the  debate  by  covering  two  instruments,  a  Financial 
Transactions Tax (FTT) and a Financial Activities Tax (FAT). 

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The conclusions of the G-20 Toronto Summit say: ‘We agreed the financial sector should make a fair 
and substantial contribution towards paying for any burdens associated with government interventions, 
where they occur, to repair the financial system or fund resolution, and reduce risks from the financial 
system.  We  recognized  that  there  are  a  range  of  policy  approaches  to  this  end.  Some  countries  are 
pursuing a financial levy. Other countries are pursuing different approaches.’  

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2. 

OBJECTIVES AND RATIONALE FOR ADDITIONAL TAXES ON THE FINANCIAL SECTOR 

Regardless of the tax instrument considered, is there a rationale for adapting the tax system to 
make  the  financial  sector  contribute  in  a  fair  and  substantial  way  to  public  budgets?  The 
Commission sees three main arguments for this. 

First, to complement the extensive financial sector reforms underway, taxes could contribute 
to enhancing the efficiency and stability of financial markets and reducing their volatility as 
well  as  the  harmful  effects  of  excessive  risk-taking.  In  particular,  the  financial  sector  might 
take too much risk due to a range of factors, from actual or expected state support (resulting in 
moral  hazard)  and  information  asymmetries  to  remuneration  structures  which  together  with 
macroeconomic  developments  contributed  to  the  recent  crisis.  Hence,  the  behaviour  of  the 
financial sector creates negative externalities for the rest of the economy. There is thus a case 
for  a  corrective  tax  to  internalise  such  externalities,  provided  it  can  be  specified  to  achieve 
this objective. 

The  financial  and  economic  crisis  has  highlighted  a  number  of  misaligned  incentives  in  the 
financial  sector  as  well  as  weaknesses  in  the  regulatory  and  supervisory  framework  for  the 
financial system. As a result, significant regulatory reforms have been adopted or are in the 
pipeline.2 There is a broad consensus that regulatory and supervisory reforms are essential in 
order to enhance the resilience and the stability of the financial system. 

The Commission has proposed new crisis management arrangements aimed at improving the 
capacity  of  public  authorities  to  manage  failures  arising  within  the  banking  sector.3  This 
would  include  the  implementation  of  a  network  of  national  resolution  funds  financed  by  a 
bank levy. The Commission has set out its opinion on this issue in a recent Communication 
(COM(2010) 254 final) and will provide further detail on its proposals in the near future. 

Additional  taxes  could  indirectly  and  in  addition  to  regulation  contribute  to  the  goal  of 
improving the stability of the financial sector by dissuading it from carrying out certain risky 
activities and be a revenue source at the same time. 

Second, the financial sector is seen to bear an important responsibility for the occurrence and 
scale of the crisis and its negative effects on government debt levels worldwide. Additional 
taxes could also be justified by the fact that some governments provided substantial support to 
the  sector  during  the  crisis  and  it  should  hence  make  a  fair  contribution  in  return.  By 
contributing  to  fiscal  consolidation  and  auxiliary  resources  as  well  as  economic  efficiency, 
new financial sector taxes could help to create the conditions for more sustainable growth, as 
envisaged in the Europe 2020 strategy. 

Third, most financial services are exempt from value added taxation in the EU. The reason is 
that  the  major  part  of  financial  services'  income  is  margin  based  and  therefore  not  easily 
taxable under current VAT.  

There  are  therefore  arguments  that  the  financial  sector  could  make  a  fairer  and  more 
substantial contribution to government finances. This debate takes place in a general context 
of fiscal consolidation in the EU and elsewhere and when the world faces at least two urgent 
global  policy  challenges  with  significant  budgetary  implications.  The  EU  has  made 

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The Commission set out initiatives in its Communication COM(2010) 301. 
COM(2009) 561. 

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substantial  pledges  to  climate  protection  and  development.4  To  meet  the  commitments  new 
revenue sources should be explored further.5 

EU  Member  States  are  starting  to  put  in  place  national  tax  instruments  to  respond  to  these 
challenges. It is important that such developments take place in a coordinated framework. If 
not,  different  national  systems  levied  on  diverging  tax  bases  could  create  incentives  for  tax 
arbitrage  and  result  in  allocation  distortions  between  financial  markets  in  the  EU.  The 
emergence  of  uncoordinated  national  solutions  could  also  lead  to  double  taxation  and 
fragmentation of the financial sector, hampering the proper functioning of the Single Market. 

Any possible tax measures must also be seen put into a broader context of current efforts on 
regulatory reform of the financial sector, in particular with likely higher capital requirements, 
and  discussions  on  a  possible  introduction  of  bank  levies.  The  cumulative  impact  of  such 
measures must be borne in mind (especially if they are not carefully coordinated and phased 
in),  so  that  a  viable  financial  sector,  able  to  properly  and  efficiently  finance  the  broader 
economy, is not put at risk. 

3. 

FINANCIAL TRANSACTIONS TAX (FTT) 

The FTT is designed to tax the value of single transactions. For a wide coverage, it should be 
applied  to  a  broad  range  of  financial  instruments  (i.e.  equities,  bonds,  currencies  and 
derivatives),  even  if  some  current  proposals  envisage  limiting  the  scope  to  a  subset  (e.g. 
currency transaction levy).6 

3.1. 

Revenue aspects 

The revenue potential and the intensity of the economic impact of an FTT vary considerably 
with its product scope and coverage (global, EU-wide or national) and the size of trading in a 
given jurisdiction. In the absence of international consensus on applying such a tax, revenue 
would depend on relocation of mobile trading activities. It is also affected by possibilities to 
circumvent by re-engineering of financial products and the tax rate chosen. 

Globally, estimated tax revenues would have been around EUR 60 billion for 2006 for stocks 
and bonds transactions assuming a tax rate of 0.1 %. Some studies find ten times this amount 
if  derivatives  are  included.  However,  there  are  technical  problems  for  derivatives  such  as 
determining  tax  bases7  as  well  as  doubts  about  the  accuracy  of  revenue  estimates.  Past 

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Developed  countries  also  agreed  in  the  Copenhagen  Accord  to  a  goal  of  mobilising  jointly  USD  100 
billion a year by 2020 to address the needs of developing countries in fighting climate change. To reach 
the Millennium Development Goals, the EU pledged to increase its official development aid (ODA) to 
0.7 %  of  its  Gross  National  Income  by  2015,  which  could  entail  a  doubling  of  the  EU’s  ODA  from 
almost EUR 50 billion in 2008 to an estimated EUR 100 billion in 2015. 
The  Commission  issued  a  Staff  Working  Paper  (SWD)  on  ‘Innovative  financing  at  a  global  level’ 
(SEC(2010)  409),  which  assesses  the  potential  of  innovative  financing  at  a  global  level  for  raising 
revenues to address the challenges identified above. 
The SWD discusses the currency levy briefly. For the purpose of the present Communication, the broad 
based  FTT  covers  bond  and  derivative  transactions  on  exchanges  as  well  as  over-the-counter  (OTC) 
traded instruments which include derivative transaction as well as foreign exchange spot transactions. 
For  a  general  FTT,  collection  should  be  relatively  easy  for  exchange  traded  products.  For  over-the-
counter traded products, tax administration would be more complex but feasible given the trend towards 
increased  registration  obligations  and  the  proposal  by  the  Commission  for  the  Regulation  on  OTC 
derivatives, central counterparties and trade repositories - COM(2010) 484. 

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experiences have shown a substantial gap between expected and realised revenues. There are 
also open issues with currency transactions if levied only nationally.8 Including only exchange 
traded  equity  and  bonds  in  the  tax  base  would  give  about  EUR  20  billion  in  the  EU-27.9  If 
derivative  products  are  included,  revenue  estimates  would  be  much  higher,  up  to  EUR  150 
billion  according  to  some  calculations.  For  a  narrow  currency  transaction  levy  a  tax  rate  of 
0.005% on the world's most traded currencies based on data from 2007 could yield EUR 24 
billion annually. 

The  revenue  generated  would  be  largely  collected  in  a  limited  number  of  countries  where 
trading  activities  are  concentrated.  This  uneven  distribution  would  be  even  greater  when 
derivatives  are  included.  On  the  one  hand,  this  could  make  an  agreement  on  a  tax  more 
difficult given that all countries would have to implement the tax while only a few gain the 
revenue.  On  the  other  hand,  one  can  argue  that  investors  from  all  over  the  world  use  the 
central  market  places.  Therefore,  all  users  contribute  to  the  tax  revenue,  giving  it  a  global 
dimension. For this reason the FTT is potentially a good revenue raiser at the global level. 

It is, however, important to consider the economic burden of the tax. In general, taxes on the 
financial  sector  are  likely  to  involve  some  income  redistribution  from  bank  shareholders, 
managers  or  market  participants  to  the  general  population.  The  tax  burden  is  likely  to  be 
partly rolled over to clients and average customers, but it depends on the ability of taxpayers 
to avoid the tax. Indirectly, the tax would also increase the cost of capital for governments and 
companies. There is no available empirical evidence on the real incidence. 

3.2. 

Effects on market efficiency and economic stability 

One argument put forward in favour of the FTT is that it could implement the ‘polluter pays’ 
principle and therefore would also help internalise potential negative externalities of financial 
sector  activity.  It  has  been  argued  that  the  broad-based  FTT  could  help  stabilise  financial 
markets by reducing short-term speculative trading by penalising undesirable financial market 
transactions, mainly high frequency trading. 

Several aspects need to be taken into account. First, efficiency gains are uncertain as the tax 
may  increase  price  volatility  by  reducing  liquidity,  e.g.  in  markets  that  are  used  for  risk 
hedging.  Second,  while  the  value  to  the  economy of  high-speed  trading  is  questionable,  the 
extent to which this activity was a main driver of negative externalities in the crisis has still to 
be  studied.  Third,  the  FTT  taxes  gross  transaction  values.  Since  the  FTT  is  levied  on 
transactions rather than on value added it is cumulative. More frequently traded products will 
face a higher tax burden.  

Ideally,  to  improve  efficiency,  the  FTT  should  be  levied  on  ‘harmful’  or  highly  speculative 
transactions.  It  is  in  practice  not  possible  to  distinguish  those  from  ‘normal’  transactions. 
Hence, the FTT would have to be levied on the broadest possible base to reach its efficiency 
goal.  A  narrow  based  FTT  could  lessen  the  risk  of  geographical  relocation  if  designed 
properly.10  But  if  only  some  transactions  are  taxed,  the  tax  would  distort  financial 

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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. 
http://www.leadinggroup.org/article668.html. 
The assumptions are a cut in trade volumes of 30 % for bonds and 20 % for shares. 
The  design  will  depend  on  the  exact  base.  Examples  could  be  currency  transactions,  or  stocks  and 
bonds.  

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intermediation  by  favouring  some  activities  which  would  not  be  subject  to  an  FTT. 
Furthermore, depending on the design of the FTT it could create options for avoidance due to 
reengineering and substitution. 

To  effectively  reduce  activities  with  a  potential  negative  externality  at  global  level  and  to 
avoid  relocation  of  trading,  the  tax  should  be  applied  in  all  financial  centres.  These  global 
centres are widely interconnected and companies face low costs when shifting trade between 
them. In addition, many financial companies operate with worldwide subsidiaries. Therefore, 
the fact that the FTT needs a broad base to reach its efficiency and revenue goals also implies 
that  it  would  need  a  considerable  amount  of  global  coordination  to  reduce  the  risk  of 
relocation and avoidance. 

3.3. 

Assessment 

Globally, an FTT could be an appropriate option as a revenue raiser in particular to provide 
financing for global policy goals. For it to work effectively and fairly, participating countries 
should try to come to an agreement on global financing tools that can be acceptable to all. The 
Commission is committed to continuing to work with its international partners, in particular in 
the G20, to reach such an agreement.  

A  financial  transaction  tax  could  be  considered  at  the  EU  level  only.  However,  it  must  be 
borne  in  mind  that  the  financial  industry  is  a  global  and  interconnected  one.  Financial 
activities are concentrated in a small number of financial centres both inside and outside the 
EU which compete on the world stage. Finance is also a complex and evolving area and the 
main  players  have  a  developed  capacity  to  seek  out  new  and  innovative  ways  of  doing 
business and of structuring financial transactions.  

4. 

FINANCIAL ACTIVITIES TAX 

Another potential instrument to improve taxation of the financial sector and reduce potential 
negative  externalities  is  the  Financial  Activities  Tax  (FAT)  as  proposed  by  the  IMF.  In  its 
most extensive form (addition-method FAT), the FAT falls on total profit and wages. It can 
also  be  designed  to  specifically  target  economic  rents  and/or  risk.11  In  contrast  to  an  FTT, 
whereby  each  financial  market  participant  is  taxed  according  to  his  transactions,  the  FAT 
taxes corporations. The focus here is on the addition-method FAT. 

4.1. 

Revenue aspects 

For the 22 developed economies considered in the IMF report to the G-20, a 5 % rate of the 
addition-method FAT would create revenue corresponding to the average of 0.28 % of GDP.12 
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  FAT.  For  the  EU-27,  the  addition-method  FAT  could  raise  up  to  EUR  25 
billion. 

The geographical distribution of revenues would by and large reflect the actual distribution of 
the financial sector in the EU. However, the revenue is not as concentrated as in the case of an 

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The latter two versions are discussed in detail in the accompanying SWD. 
IMF (2010) Financial Sector taxation — The IMF’s Report to the G-20 and background material. 

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FTT.  The  reason  is  that  the  base  is  not  trading  activity,  which  takes  place  mainly  in  a  few 
financial  centres,  but  rather  remuneration  and  profit,  which  is  more  evenly  spread.  In  this 
sense the FAT would be better suited to raising revenue for national consolidation, which is 
an urgent task in many Member States. 

As regards economic burden, the effects depend on the concrete design of the tax. In practice 
there is no available empirical evidence on the real incidence of a FAT. If the tax were to be 
shifted to the customer, and given that there is no deduction for business consumers, the tax 
burden could also partly fall on users of financial services. 

4.2. 

Effects on market efficiency and economic stability 

The effects on financial activities depend on the design of the tax. An addition-method FAT 
would not directly alter the structures of markets where financial institutions are active since 
it  taxes  income  independently  of  how  it  is  generated.  In  this  sense,  it  does  not  discriminate 
between different products nor does it depend on the level of turnover. This is an interesting 
concept for the EU level since it has revenue potential and addresses some currently unsolved 
issues with the taxation of financial services. 

The FAT taxes the total gains from the business activity of financial institutions. In this sense 
it  is  levied  on  all  activities,  not  only  trading.  It  does  not  change  the  prices  of  financial 
instruments, thereby leaving the market structure as such unaffected. This means also that it 
does not directly affect the existence of high-speed trading. 

A  FAT  could  add  to  the  existing  incentives  for  profit  shifting  via  relocating  income  or 
remunerations out of the EU. Nevertheless, given the nature of the tax base and the need for 
financial  companies  generally  to  operate  for  their  basic  activities  where  consumers  reside, 
incentives for relocation could be mitigated. This has to be balanced by the fact that technical 
developments may increase the mobility of the financial sector. Finally, the introduction of a 
FAT  by  some  Member  States  in  isolation  could  potentially  create  distortions  in  the  Internal 
Market which could be incompatible with the need to secure a level playing field between the 
Member States. 

4.3. 

Assessment 

The  addition-method  FAT  can  be  interpreted  as  a  tax  on  a  proxy  for  total  value  added 
generated  by  a  financial  sector  company.13  However,  if  designed  as  a  complement  to  the 
current VAT, a number of technical issues must be resolved in order to align both taxes. The 
Commission believes that the FAT option is worth exploring in the EU context. This should 
include an assessment of its possible competitive implications and whether these are offset by 
possible disincentives for companies to relocate. 

5. 

OVERALL CONCLUSIONS AND WAY FORWARD 

The world is facing major challenges at a time when government budgets are under increasing 
pressure throughout the EU. These challenges are many and varied. They include the need to 

13 

Since  it  falls  on  wages  and  remuneration,  a  proxy  for  value  added  it  could  be  a  potential  solution  to 
VAT  exemption  of  the  financial  sector.  However,  several  caveats  have  to  be  addressed  to  make  it 
compatible with the existing VAT system. 

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improve  the  stability  and  functioning  of  the  financial  sector  in  order  to  reduce  negative 
externalities  for  the  rest  of  the  economy,  the  need  to  consolidate  public  finance  that  have 
suffered  from  the  financial  crisis,  whilst  respecting  commitments  towards  developing 
countries and to combat climate change and global resource scarcity. 

To address the above challenges, there are arguments for revisiting the taxation of financial 
sector activities. The sector should make a fair and substantial contribution to public budgets 
and there is a case for saying that this contribution should be higher than it currently is. The 
reasons are the special position the sector takes in the economy, which became so evident in 
the financial crisis, and the fact that some of its services are VAT exempt. 

In  any  future  action  on  the  taxation  of  the  financial  sector  the  Commission  will  take  into 
account  the  need  to  create  the  conditions  for  a  fair  and  balanced  taxation  of  the  financial 
sector  by  contributing  to  a  more  level  playing  field  for  the  financial  sector  in  the  internal 
market,  both  vis-à-vis  non-financial  sectors  as  well  as  internally,  to  contribute  to  minimise 
current  distortions  due  to  the  VAT  exemption  of  financial  services  and  to  reduce  possible 
cross border double taxation. It will also promote better regulation principles and contribute to 
a  more  streamlined  and  simplified  tax  environment  for  financial  services,  on  the  basis  of  a 
comprehensive  analysis  of  existing  and  developing  national  frameworks  and 
their 
consequences  for  the  functioning  of  the  Internal  Market.  In  addition,  the  Commission  will 
take into account the cumulative impact of the overall regulatory reform of this sector. 

Innovative financing mechanisms in general and new financial sector taxes in particular could 
be  an  important  element  in  responding  to  the  current  global  and  European  challenges.  As 
concluded above, the FTT is an instrument that is best suited to raising revenues at the global 
level.  The  challenge  is  to  design  a  global  financial  transactions  tax  that  would  generate 
sufficient  revenue  while  minimising  its  adverse  economic  effects.  The  Commission  will 
support further exploration and development of the FTT and its variants at G-20 level and will 
work to promote an agreement with the most relevant international partners. In the light of the 
analysis undertaken to date, FTT appears less suitable for unilateral introduction at EU-level 
since the risks of relocation are high and would undermine the ability to generate revenue.  

At this stage the Commission considers that there is greater potential for a Financial Activities 
Tax  at  EU-level.  This  option  could  deal  with  the  current  VAT  exemption  of  the  financial 
sector and raise substantial revenues. Given the innovative nature of this tax there is a need 
for further technical work on how it might be implemented. 

In the light of the conclusions above, the Commission will therefore without delay launch a 
comprehensive impact assessment, which will further examine each of these options, in order 
to be in a position to make appropriate proposals on policy actions by summer 2011. 

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