TAX NEWS - June 2010

Financial Transaction Tax: EU to Push Levies on Banks, Financial Transaction Tax at G-20

European Union leaders vowed to push for global taxes on banks and financial transactions, setting the stage for a conflict over worldwide regulation at next week's Group of 20 meeting.

With Germany, Britain and France pledging to impose levies on their own banks and to clamp down on financial speculation, the EU called for global taxes that have run into opposition from G-20 powers such as China.

"We want a system of levies and taxes for financial institutions to ensure fair burden-sharing and rein in systemic risks," German Chancellor Angela Merkel told reporters after an EU summit in Brussels yesterday. "We also want a global system."

Europe said it will put up a united front at the G-20, which has refused to endorse a bank tax under pressure from Canada, China and Brazil, three countries with banks that suffered less during the 2008 financial crisis.

Proposals for taxes on securities transactions weren't spelled out in detail, with a statement by the bloc's 27 leaders saying only that they should be "explored and developed" in concert with the world's leading economies.

At the two-day meeting, the leaders also agreed to publish the results of "stress tests" on major banks by the end of July in order to prop up confidence in financial institutions still coping with the aftermath of the 2008 market meltdown.

With U.K. Prime Minister David Cameron attending his first summit, the EU's major powers sought a common position on reshaping the financial system to buttress recent pledges by countries using the euro currency to offer as much as 860 billion euros ($1.1 trillion) in aid to stem the Greece-fueled public debt crisis.


National Taxes

The statement spoke of "systems of levies and taxes on financial institutions" at national level, allowing each government to fashion its own policy as long as a "level playing field" is maintained across the 27-nation EU.

The decision to leave the bank taxes in national hands, instead of setting them at EU level, was essential for Cameron, an opponent of handing more powers to the EU.

"We didn't want to have some sort of European-determined bank levy," Cameron told reporters.

The bank tax being considered by U.K. Chancellor of the Exchequer George Osborne would raise money for the general government budget, while other governments would create emergency funds to prevent future banking crises and contain any that break out.


Financing Fund

"There is a tax on banks that will feed a fund destined to make sure that what happened to savers doesn't happen again," French President Nicolas Sarkozy said.

The lone dissenter was the Czech Republic, which argued that new taxes would put unwelcome constraints on its domestic financial system and was allowed to opt out of any tax arrangements.

"There are many unanswered questions that need to be dealt with on expert levels before adopting a political decision that would not respect differences among individual countries," Czech Prime Minister Jan Fischer said.

In a defeat for the EU and U.S., G-20 finance ministers and central bank governors remained divided over a bank tax at a June 6 meeting in Busan, South Korea, issuing a statement that each country's "circumstances and options" would be paramount.

On the transaction tax, "Not everyone is enthusiastic, fearing that transactions will migrate from Europe," Sarkozy said. "We will bring this debate to the G-20 and we will take our decision based on the reactions of the big players."

G-20 leaders will consider an International Monetary Fund impact assessment of possible bank taxes when they take up the issue in Toronto June 26-27.

Canada, one of the opponents of a global tax, has proposed forcing lenders to keep "contingent capital" on hand to spare taxpayers the cost of future bailouts. Such securities could convert to equity in a crisis to keep lenders remain well capitalized.