Financial Transaction Tax: European Implementation and American Imitation?

Momentum is building to reform the U.S. tax system and address the nation’s fiscal challenges. However, options to raise revenue to reduce the deficit and offset a potential decrease in corporate and individual tax rates are scarce. In this environment, there has been renewed interest in tax policy proposals previously considered unpalatable. One such proposal is a financial transaction tax (“FTT”). The FTT has been catching on internationally, increasing the risk of policy contagion in the U.S.

Emergence in Europe

FTT supporters have proposed the FTT to raise revenue, increase contributions from the financial sector, and reduce certain market behavior such as potentially distortive high-frequency trading. For several decades, the United Kingdom and Sweden have taxed securities trading, though market participants have either evaded these taxes or decided to invest in more tax-friendly countries. More recently, France approved a tax on the transaction of stocks of French-listed companies with a market capitalization of over €1 billion at a rate of 0.2%, and on the transaction of “naked” credit default swaps and certain forms of high-frequency trading at 0.01%. American investors have raised several issues concerning the taxation of specific instruments under this regime, such as the possibility of double taxation of American Depositary Receipts.

Previously, the European Commission (“EC”) unsuccessfully proposed imposing a European Union (“EU”)-wide FTT. The September 2011 Proposal for a Directive on a Common System of Financial Transaction Tax and Amending Directive 2008/7/EC would have imposed a tax on the transaction of stocks and bonds at 0.1% and on the transaction of derivatives at 0.01%. The tax would have been imposed on transactions where at least one of the parties was based in the EU and at least one of the parties was a financial institution. The proposed FTT would have raised an estimated €57 billion ($74.5 billion) annually. However, the EC was unable to secure the necessary member state support to allow for EU-wide adoption of the FTT.

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