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David Cameron's refusal to sign a new European Union deal will not shield the UK from the impact of a financial transaction tax (FTT), Ernst and Young has said.
New research from Ernst and Young's ITEM Club shows that the UK could still generate more than half the revenues from the FTT even if it opts out as the Prime Minister wishes. E&Y calculated that if a reverse charge mechanism was applied, the UK financial sector would contribute around 60% of total revenues.
Using information provided by the European Commission, E&Y considered the impact on the UK in two scenarios: the introduction of the FTT across the EU including the UK, and the scenario if the UK opts out. According to Neil Blake, senior economic adviser to the ITEM Club: “Taking the EC’s estimates at face-value, if the FTT is introduced across the EU, the UK financial sector would generate around 75% of the total revenues."
“However, even if the UK were to opt out of the FTT, if a reverse charge mechanism was applied, we expect the UK financial sector would still contribute around 60% of total revenues. Moreover, these revenues would flow directly to governments in the eurozone rather than to the UK Exchequer," Blake explained.
Separate research by KPMG shows that shows that of the 27 EU member states, currently only three member states are clearly in favour, with three clearly against.
KPMG’s EU Tax Centre, with the help of KPMG member firms and their EU Tax and Financial Services Tax networks, prepared an informal ´FTT Thermometer´, which displays KPMG member firms’ understanding of the overall position of their respective governments on the FTT proposals. Its findings leave another 21 member states in varying degrees of support, opposition or indecision.
Spain, France and Germany all support the measure, with Bulgaria, the Czech Republic and Sweden the three member states in strong opposition. KPMG found Austria, Belgium, Finland, Hungary, Italy, Lithuania and Romania largely positive and in support, subject to conditions such as global or EU introduction. Estonia, Greece, Poland, Portugal, Slovakia and Slovenia were either neutral, divided or having not yet expressed an opinion. Cyprus, Denmark, Ireland, Latvia, Luxembourg, Malta the Netherlands and, surprisingly, given Prime Minister David Cameron's stated opposition, the UK were found to be less positive, but supportive, pending the satisfaction of certain conditions, such as global or EU introduction.
Sarah Lane, financial services tax partner at KPMG, commented: “With only three countries clearly in favour, the Commission’s proposal obviously has a long way to go. Some of the member states which are nominally in favour of the proposal support this subject to an FTT being introduced globally, and the reality is that global introduction is not going to happen, at least not in the foreseeable future. So seen from this angle, the prospects of introduction by the EU seem very uncertain.
"There are lessons to learn from the Swedish experience of introducing an FTT back in the 1980s, which caused the bottom to fall out of the Swedish financial markets," Lane continued. "This is a vivid illustration of what many fear may happen if the FTT is introduced in the EU and may well be driving a lot of the current opposition to the proposal. In these difficult economic times governments are going to be looking very critically at anything that may drive business away or reduce GDP. Concerns about the proposal are being fuelled by reports such as that produced last December for the Italian Association of Financial Intermediaries and the Nordic Securities Association, that concluded that the proposed FTT is likely to have a significant and highly uncertain negative impact on the EU economy – not just for international financial centres such as London, but for all business and investors in the EU.
"So far little attention has been paid to the question who gets the revenue from an EU FTT, and this is clearly a crucial question. The Commission sees this as a kind of EU tax that would at least in part support the EU budget. However, even if the principle of an EU FTT was accepted, the question how the revenue is shared out – not only between the EU and member states but also between the member states themselves - is likely to be hotly debated," Lane concluded.
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