IMF Proposes Double Bank Tax

by Ulrika Lomas, Tax-News.com, Brussels

22 April 2010

Banks face two new levies under proposals from the International Monetary Fund, which were leaked to the press ahead of the Group of Twenty's policy discussions on the matter, due to commence in Washington on April 22.

The IMF has proposed two new taxes to cover the cost of banking failures: a ‘Financial Stability Contribution’ (FSC); and a ‘Financial Activities Tax’ (FAT) paid directly into government coffers.

The main tax, the FSC, will provide governments with the funds to cover the cost of any future bailouts, according to the IMF, while contributing also to preventing excessive risk-taking. This levy, the IMF advised, should be refined over time to establish it on a progressive basis, pegged to risk.

"If designed properly, [the] mechanism will avoid governments in the future being forced to bail out institutions deemed too important, too big, or too interconnected to fail,” the leaked IMF paper states.

The IMF’s second tax proposal, the FAT, would be levied on profits and the sector’s remuneration. "Depending on its design, the FAT would ensure that the financial sector contributes to the wider fiscal costs associated with financial crises, [and would address] some equity concerns,” the IMF paper states.

Amid opposition and talks of unilateral policy responses, particularly from Canada, the IMF underscored that the introduction of taxes on banking must be done in unison, to mitigate tax arbitrage.

"The experiences of countries in the recent crisis differ widely and so do their priorities as they emerge from it. But no country is immune from the risk of future – and inevitably global – financial crisis," the IMF paper warns. "Unilateral actions risk being undermined, and may also jeopardize national industries' competitiveness.”

Concluding the IMF paper believes that: “Coordinated action would promote a level playing field for cross-border institutions and ease implementation."

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