12. European Tax Harmonization

The OECD’s Inclusive Framework on BEPS (base erosion and profit shifting) addresses key terms for an agreement on a two-pillar approach to help address tax avoidance, ensure coherence of international tax rules, and attain a more transparent tax environment, including confronting the challenges arising from taxation in a digital economy. Pillar 1 concerns profit allocation, and Pillar 2 regards global minimum taxation.

BEPS—Base erosion and profit shifting.

For example, in 2009, the G-20 asked the IMF to prepare a report on how the financial sector could make a greater contribution to counteracting the fiscal costs associated with the crisis.

Treaty on the Functioning of the European Union.

For more about the French experience, see Becchetti et al. (2013); Haferkorn & Zimmermann, 2013; and Meyer et al., 2013.

As Barroso (2016) points out, in accordance with Articles 110 to 115 of the TFEU, the European institutions for tax matters are primarily designed to supervise decisions taken at the national level, thus defending the internal market and free competition.

The European Commission considered that one of the strengths of the proposed ITF is that it is a tax with a broad tax base and with two low rates, which reduces the negative distorting effects.

See also European Commission (2010, 2011).

It should be noted that the FTT proposal should also be seen in the broader framework of a comprehensive European Commission program for the regulation and supervision of financial markets.

Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia, and Spain.

All Member States specified in their requests that the scope and objectives of the Commission’s legislative proposal for implementing enhanced cooperation should be based on the initial proposal for an EU FTT. They also specified that evasive action, distortions, and transfers to other jurisdictions should be avoided.

The present Directive shall apply to all financial transactions, provided that at least one party to the transaction is established in the territory of a participating Member State and that a financial institution established in the territory of a participating Member State is a party to the transaction, either acting on its own account, or on behalf of another party, or on behalf of another party to the transaction.

Taxation in the Member State of the establishment of financial actors, regardless of where the transactions are carried out. The Directive also provides for taxation in the EU if a third country financial institution is involved in a financial transaction with a part of the EU, and if one of its branches in the EU is involved in a financial transaction. The geographical distribution of tax revenues depends on the technical characteristics of the tax. Under this Directive, geographical distribution depends on the place of establishment of the financial institutions involved in financial transactions and not on the place where financial instruments are traded. This is likely to result in a lower degree of concentration of tax revenues, in particular where financial institutions intervene on a trading platform on behalf of financial institutions established in another Member State.

Or “principle of residence” is also complemented by elements of the “emission principle,” as a last resort in order to improve the resilience of the system against relocation. In fact, by complementing the “principle of residence” with the “emission principle,” it will be less advantageous to relocate activities and establishments outside the jurisdictions of the FTT, as transactions with financial instruments subject to taxation under this latter principle and issued in the jurisdictions will be taxable in any way. This applies where none of the parties to the transaction is “established” in a participating Member State on the basis of the criteria set out in the Commission’s initial proposal, but if those parties are trading in financial instruments issued in that Member State. It essentially includes shares, bonds and equivalent securities, money market instruments, structured products, units and shares in collective investment and derivatives companies traded on organized commercial sites or platforms. In the context of the issuing principle, which is also underlying certain national taxes already in the financial sector, the transaction is linked to the Member State participant in which the transmitter is located. Persons involved in this transaction shall be deemed to have been established in that Member State due to this connection, and the institution in question will have to pay the FTT in that country.

Where those establishments of the different financial institutions which are party to or are acting on behalf of such parties are located in the territory of different Member States, those different Member States shall have jurisdiction to subject the transaction to the tax at the rate they have established in accordance with this proposal. Where the establishments concerned are located in the territory of a State which is not part of the Union, the transaction is not subject to the FTT in the EU, unless one of the parties to the transaction is established in the EU, in which case the financial institution of the third country will also be regarded as an established in the Member State concerned, the transaction being taxable there. Where transactions take place in commercial areas outside the EU, they are subject to tax if at least one of the establishments carrying out the transaction or intervening in it is located in the EU.

For the purposes of this Directive, a financial institution which fulfils one of the following conditions shall be considered to be established in the territory of a Member State: (a) has been authorized by the authorities of that Member State to act as such in respect of transactions covered by such authorization; (b) have its registered head office in that Member State; (c) have its domicile or habitual residence in that Member State; (d) have a branch in that Member State with regard to transactions carried out by that branch; (e) is a party, either on its own account, or on behalf of another person, or is acting on behalf of a party to the transaction, in a financial transaction with another financial institution that is established in that Member State in accordance with Points (a), (b), (d), or with a party established in the territory of that Member State, other than a financial institution.

This implies that institutions outside the European Union are affected by this proposal. The FTT will be charged depending on the location of the entity that issued the financial asset concerned, regardless of the location of both parties of the transaction (similar to the model for the French FTT).

The definition of a financial institution is broad and essentially includes investment firms, organized markets, credit institutions, insurance and reinsurance entities, collective investment entities and their management companies, pension funds and their managers, holding companies, leasing companies, entities of special purpose and, where possible, refers to the definitions enshrined in the relevant EU legislation adopted for regulatory purposes. In addition, other entities carrying out certain financial activities on a significant basis should be considered to be financial institutions.

As a declarative obligation, the financial institutions concerned are required to send a statement to the tax authorities of the Member State in which it has its head office or establishment on a monthly basis, containing all relevant information for the purposes of calculating the tax which became chargeable in that period (in particular, the value of the transactions and their nature).