TAX NEWS - JUNE 2010

Global Bank Tax: G-20 delays bank tax plan; India warns on stimulus rollbacks

After two days of discussion, the world's top economies scrapped plans for a universal global bank tax on Saturday, giving countries plenty of wiggle room over how to make banks pay for their bailouts in future. The G-20 finance ministers instead resolved to put government finances in better shape while agreeing that high debts could derail the growth process, even as India cautioned against the rush to withdraw stimulus measures. The G-20 said it recognised there was a range of policy approaches and it would approve a set of principles later this month in Toronto on how to protect taxpayers. The IMF is expected to present a revised draft proposal on a banking tax levy at the next G-20 meeting, scheduled at Toronto on June 26-27.

Attempts to introduce a global bank levy were ditched in the face of opposition from Japan, Canada and Brazil whose banks needed no public aid during the worst financial crisis since the 1930s. "There is no agreement to proceed with an ex ante bank tax," said Canadian finance minister Jim Flaherty. However, Britain's chancellor of exchequer minister George Osborne reiterated his pledge to introduce a UK bank tax regardless of what other countries do and will spell out his plans in a Budget report on June 22.

The joint communique, issued at the end of the two-day meet, steered clear of the contentious issue of global bank tax to fund future bailouts, but called for contribution from financial sector players to the measures taken by governments to prop up sagging economies.

With sovereign debt crisis hitting the recovery process in parts of Europe, the G-20 highlighted the need to rein in high fiscal deficits as they are making financial markets volatile.

Indian finance minister Pranab Mukherjee, who initiated gradual rollback of stimulus measures back home in the Budget for 2010-11, warned that withdrawal of fiscal and monetary props, all at the same time, could derail the fragile global recovery.

"The market is sending strong signals that the fiscal situation is a matter of concern...we should all not rush to fiscal (stimuli) exit at the same time so as not to undermine the recovery...," he said at the meeting. Mukherjee, however, said the countries with high fiscal deficits should start announcing stimulus exit now while others could stagger it for a while.