TAX NEWS - JUNE 2010

UK Tax: Osborne to go ahead with tax on UK banks

George Osborne, chancellor, is to press ahead with plans for a levy on UK-based banks, in spite of the G20 finance ministers at the weekend scrapping worldwide plans for a banking tax.

Mr Osborne is expected to outline his thinking on a unilateral British bank tax in his Budget on June 22, undeterred by the hostile reaction to the idea from some ministers at the G20 meeting at Busan in South Korea.

The prospect of a global bank levy died at 5am on Saturday when weary finance ministers agreed to drop the proposal from their final communiqué in the face of a wave of opposition, led by Canada.

Canada did not bail out its banks in the financial crisis and sees no need for a levy. However, British officials admit that a number of other countries – including Australia, China and some developing nations – were sceptical.

Mr Osborne's team said the idea has now been shelved until after Canada hosts a G20 summit in Toronto this month but believed Britain will not be alone in taxing banks for the systemic risk they pose to society. Bank levies were still likely to be introduced in the US to pay back the taxpayer cost of the bank bail-out, and in many, if not all, European Union countries.

The Toronto summit might agree principles guiding the implementation of a tax for those that want to pursue the idea.

But without global agreement, the size of the levies is likely to be smaller than otherwise to keep a reasonably level playing field, and are unlikely to make a big dent in bank balance sheets.

A G20 communiqué said banks should make contributions only in countries where taxpayers had bailed out highly indebted banking systems. Even then, implementation would take into account each nation's "circumstances and options".

The main proponents of a global banking levy – the UK, Germany, France, the US and the International Monetary Fund – were surprised at the degree of hostility from opponents. They thought an agreement was possible by the end of the year.

Banking regulators were happy because the failure of the global bank tax idea sharpens the focus on the Basel III banking regulations – including capital requirements – which they believed was more important for controlling risks in banks.