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The European Commission has proposed a Financial Transaction Tax (FTT) to be introduced in the EU from the year 2014. It will be applied to the exchange of financial instruments between financial institutions, where at least one of the parties is based in the EU. The Commission has proposed a minimum tax rate for trading of bonds and shares of 0.1%, and 0.01% for derivative products. Member States may, however, apply higher rates. The tax will be paid by both parties to the transaction in their country of residence, or deemed residence.

According to the Commission, the tax will cover 85% of the transactions between financial institutions (banks, investment firms, insurance companies, pension funds, hedge funds and others), but will not affect citizens and businesses. House mortgages, bank loans to small and medium enterprises, or contributions to insurance contracts will not be taxed. Spot currency exchange transactions and the raising of capital by enterprises or public bodies, through the issuance of bonds and shares on the primary market, also fall out of the FTT's scope.

The estimated revenues from the new tax are approximately 57 billion euros per year and will be divided between the EU and the Member States. The goal is this money to be used as own resources in the European budget, which will reduce Member States' contributions.

As a reason to propose the FTT, the Commission points out that during the crisis saving the European banks has cost governments 4.6 trillion euros. Now, in turn, financial institutions must make "a fair contribution to the cost of the crisis." At the same time, the financial sector is exempt from paying VAT, which puts it in a privileged position. The introduction of FTT is an old dream of European Commission President Jose Manuel Barroso. In June last year he even said that, despite the argument that banks could pass on the cost of the new taxes onto their customers, it was still better the financial sector to contribute somehow, rather than rely on taxpayers only. Here are his arguments, as pointed a year and a half later in his annual State of the Union Address in the European Parliament:

"Some people will ask 'Why?'. Why? It is a question of fairness. If our farmers, if our workers, if all the sectors of the economy from industry to agriculture to services, if they all pay a contribution to the society also the banking sector should make a contribution to the society. And if we need – because we need – fiscal consolidation, if we need more revenues the question is where these revenues are coming from. Are we going to tax labour more? Are we going to tax consumption more? I think it is fair to tax financial activities that in some of our Member States do not pay the proportionate contribution to the society."

Since there are already EU countries that have introduced such a tax, it is important this to be coordinated at European level, so as not to distort the single market of financial services. As a side effect, the tax is expected to reduce the risky trading activities. Countries that have already introduced some kind of an FTT (Belgium, Cyprus, France, Finland, Greece, Ireland, Italy, Romania, Poland and the UK) will have to comply with the new EU rules - to apply the minimum rate and harmonise the tax base in line with EU rules. The rest of the Member States will have to introduce the tax in the form proposed by the Commission.

The main risks are related to the question who will bear the ultimate tax burden and possible relocation of financial institutions to other countries, which could put at risk economic growth and cause a potential loss of competitiveness. The Commission argues that the tax is designed to avoid, or at least reduce these risks, although according to its own assessment it is possible the new tax to reduce future GDP
Growth from 1.76% to 0.53%. (According to the latest Commission's forecast the European economy will grow by only 1.7% in 2011.) The Commission is committed to further pursue the introduction of the FTT on a global level and will present its proposal at the G20 summit in November.

The FTT enjoys wide support in the European Parliament, which has repeatedly urged the Commission to propose it and the Member States to accept it. However, they are not united on the issue. While the leaders in the Council, France and Germany, support the proposal (as well as Spain, Finland, Luxembourg, Belgium, Austria, Hungary, Greece and Portugal), the UK has made it clear that it opposed the introduction of FTT in the EU only. The Independent quoted Chancellor of the Exchequer George Osborne as saying that it would divert investment from Europe: "I am against an EU tax. There would be no point introducing a financial transaction tax that led, the next day, to our foreign exchange markets moving to New York or Singapore or anywhere else." Similar position was expressed a year ago also by ECB President Jean-Claude Trichet.

Bulgaria has also announced that it is against the introduction of new taxes in the financial sector because "it is not expected such a measure to have a positive impact on Member States with an underdeveloped financial sector and, in particular, in the new Member States". According to the finance ministry, such a measure would hamper our country in its efforts to develop and strategically position the Bulgarian capital market, as well as the search of solid and respected investors.

These conflicting views show that tough negotiations lie ahead over the proposal of the Commission between the Member States themselves, on the one hand, and between the Council and Parliament on the other. On the course of these negotiations will depend the deadline set by the European Commission the new tax to come into effect from 1st January 2014.