TAX NEWS - 2010

UK Bank Tax: UK banks hit with $3 bln tax; France, Germany follow

* UK says levy on balance sheets to raise over 2 bln stg/yr
* Germany, France say will coordinate similar levies
* Banks started crisis, should pay for risks - UK's Osborne
* UK bank shares pare losses, tax not as bad as feared

LONDON, June 22, 2010 -- Britain slapped a 2 billion pound ($3.1 billion) annual tax on banks on Tuesday and Germany and France said they will follow suit, telling the industry it must pay for its part in the financial crisis.

Britain's tax was less harsh than some previous estimates, however, adding to evidence that resistance from other leading economies to imposing similar levies may cap the scale of steps taken by governments.

British banking shares were down on the day but cut their losses after Osborne's speech.

"This was a crisis that started in the banking sector and the failures of the banks imposed a huge cost on the rest of society," British finance minister George Osborne said.

"So it is fair and right that in future banks should make a more appropriate contribution which reflects the many risks that they generate."

Germany, France and Britain issued a joint statement saying they would all introduce levies on their banks to ensure no country is disadvantaged.

France will present the details in its coming Budget and Germany plans to present draft legislation in the summer. phased in, helping bank shares erase most of their early losses.

"We have clarity and it's not as bad as the worst case scenario," said Andrew Lim, analyst at Matrix. "Now we know it's only 2 billion pounds and that includes the UK operations of the overseas banks."

Detailed Treasury forecasts in the Budget document showed it expects the levy to raise 1.2 billion pounds in 2011/12, rising to 2.5 billion pounds in 2013/14.

The levy will be set at 0.07 percent of assets, with a lower initial rate of 0.04 percent in 2011. It affects covered liabilities, which are assets with Tier 1 capital and customer deposits deducted, and includes a lower rate on longer maturity wholesale funding.

The tax was part of an emergency budget of harsh spending cuts and tax rises as the UK's new coalition government aimed at bringing down a record peacetime deficit.

A bank levy had been expected to cost the industry between 1 billion and 5 billion pounds, depending on its structure.

By 1420 GMT Britain's bank index was down 0.3 percent, having been down about 1.6 percent before the Budget.


INTERNATIONAL ACTION

The German, French and UK joint statement said banks should make a substantial contribution to repair budgets.

"All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk," the joint statement said.

The design of each plan may differ to reflect national needs, and will be discussed with other countries at a meeting of G20 leaders in Canada this weekend.

Osborne said Britain also continues to consider a separate tax on profits or pay.

International banks with operations in Britain will have to pay the UK levy. Smaller lenders will be excluded.

Britain's big five banks have covered liabilities of about 3.5 trillion pounds. Barclays and Royal Bank of Scotland each have just over 1 trillion pounds, which could see each pay about 400 million pounds next year and 700 million thereafter, analysts estimated.

The five banks' combined profits are expected to recover to about 22 billion pounds this year.

The UK tax structure is similar -- but a lower rate -- to a levy proposed by U.S. President Barack Obama in January.

That tax, which would charge 0.15 percent of net liabilities and would raise up to $117 billion over 10 years, has been held up and may not be passed.

The British Bankers' Association (BBA) said the levy needs to be coordinated internationally so banks are not taxed multiple times for the same assets and does not damage London as a financial centre.

Britain's "one-off" tax on 2009 bonuses is expected to bring in about 2.5 billion pounds from overseas and domestic firms.

There was also a shock windfall tax on UK banks in the famous 1981 budget of Margaret Thatcher's government, which was estimated to cost about one-fifth of bank profits.