TAX NEWS - JUNE 2010

Far apart on global bank tax

by Paul Vieira, 02 June 2010 -- As the days dwindle before the Group of 20 summit in Toronto, so do the chances of the world's biggest economies coming to an agreement on the bank tax that Canada has vociferously opposed.

Signs emerged Thursday that tax proponents are accepting that defeat is in the cards.

Timothy Geithner, the U.S. Treasury Secretary, said there would be no agreement on the bank tax at this weekend's meeting of his G20 peers in Busan, South Korea. "I don't think we're on the verge of a global consensus on [the] bank levy yet," he told reporters in Seoul, adding there is no "universal support" among G20 countries.

And Britain, once the biggest advocate for a global bank levy, has softened its approach under new Prime Minister David Cameron, who said Thursday that he understands Canada's opposition.

"Our experience was of a very large bailout, by the taxpayer, of the banks, and I think it's quite legitimate for people to say that in future what we need is a bank levy to make sure the banks all pay a charge," Mr. Cameron said at a joint media conference with Canada's Prime Minister, Stephen Harper, who was visiting Britain. "The experience in Canada is different, and I'm not surprised that they take a slightly different view."

The Korea Times, an English-language publication in Seoul, quoted aides to the South Korea President suggesting the G20 was set to abandon bank tax efforts. South Korea is co-chair of the G20 this year, along with Canada.

The push for a bank tax was already on shaky footing, after G20 finance and central bank officials failed to endorse the measure at their April meeting in Washington. The European Commission, among the levy's strongest supporters, announced last week it was prepared to implement a bank tax in Europe whether the G20 was onboard or not — a sign EU policymakers realized a global levy was not happening.

Nevertheless, Canadian officials have turned up the pressure against the bank tax ahead of the G20 leaders' summit, to avoid the bank tax debate dominating discussions in Toronto. Canada's opposition is based on some key points:

- The bank tax would penalize countries that did not bail out their banking system. Banks in these countries would be forced pass on the cost of the tax to clients, resulting in higher financing costs.

- And the levy could create so-called moral hazard, in that banks would continue the type of risky lending new regulations are suppose to prevent, with the knowledge that authorities have money available to help the financial sector in times of trouble.

Experts say the bank tax debate has become so divisive that the G20 would ultimately agree to a set of standards on financial rules, but leave it to individual countries to decide how they should be implemented. Mr. Harper signalled as much Thursday in his media conference with Mr. Cameron.

"Look, every country always has the option of pursuing its own policies for its own financial sector. That's an option that exists for Britain and for all of us," said Mr. Harper, who is also set to visit French president Nicolas Sarkozy, another tax advocate.

Finance Minister Jim Flaherty has argued the bank tax has become a distraction to G20 efforts to develop new financial rules aimed at preventing another credit crisis, as well as a policy framework to unwind global imbalances.

In a stop in Beijing before heading to Busan, Mr. Flaherty outlined the four points Canada wants to focus on at the G20 Toronto meeting: sustainable growth, of which debt-laden countries cut spending and emerging economies promote domestic consumption; financial-sector reform, with an emphasis on higher capital levels, tighter leverage limits and better supervision; governance at global institutions like the IMF and World Bank; and the promotion of trade liberalization.