Algirdas Šemeta, Commissioner responsible for Taxation – “Key options for innovative financing in the EU”

ECON Committee in the European Parliament

Brussels, 10 January 2011

Madam Chair,

Honourable Members,

I would like to thank the ECON Committee and in particular Mrs Bowles and Podimata for the invitation to this hearing on Innovative Financing.

Last year, after comprehensive research, the Commission launched a broad debate on the use of modern financing tools for fiscal consolidation, market efficiency, and the fight against climate change. A working document has been published in April 2010 to frame our future work on these issues.

This analysis shows that for some of the instruments a “double dividend” of both raising revenues and improving market stability could indeed be reaped, in particular by putting a price on risk-taking in the financial sector and on carbon emissions.

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Today, I would like to focus my intervention on three issues raised during the debate on Mrs Podimata’s report: Financial sector taxation; carbon taxation; and Eurobonds.

Financial sector taxation

Let me begin with the financial sector taxation.

In this field, the Commission’s objectives are the following:

• First, to ensure that the financial sector is making a fair and substantial contribution to public finances.
• Second, to complement financial sector regulation in correcting undesirable behaviour for society in this area, without undermining EU competitiveness.
• Third, to avoid a patchwork of divergent national financial sector taxes which could create new obstacles to the Single Market.

After a sound preliminary analysis, the Commission set out a two-pronged approach for the taxation of the financial sector in its Communication of October 2010.

A Financial Activities Tax (FAT) appears to be a promising option for within in the EU. It could ensure that the financial sector is taxed fairly and generates much-needed revenues. Furthermore, it could ensure greater stability of financial markets by taxing profits and salaries including bonuses, which could deter excessive risk-taking. A FAT is also recommended by the IMF and by the large majority of academics as the most promising tool.

The revenue of the FAT would depend on its design and how it interacts with the regulation of the financial sector. Even though revenue estimates should be interpreted with great caution, in its most extensive form and applied at a rate of 5%, the FAT could yield revenues of EUR 25 billion for the EU 27.

Our analysis also shows that the likelihood of the burden falling on the consumer would be much less with FAT, and that the legal incidence of the tax would fall on the financial sector.

Regarding the risk to the competitiveness of EU financial institutions, the Commission will need to analyse the potential impact of FAT to ensure that the benefits of any tax we may introduce outweigh the costs. Preliminary findings show that the risk for competitiveness would be lower with EU FAT than with an EU FTT as banking activities are harder to relocate than (electronic) transactions.

At global level, the Commission supports further exploration and development of a Financial Transaction Tax. We will work with the French Presidency of the G-20 in order to promote an agreement with the most relevant international partners. I personally raised the issue with the US treasury in Washington in December, and found a readiness amongst my US counterparts to discuss further once they have seen the results of our forthcoming Impact Assessment.

Given the potentially high revenues that FTT could generate, it appears to be an attractive funding solution at global level. If applied globally and at a rate of 0.1%, tax revenues are predicted to be around EUR 60 billion. Estimates of even ten times this amount are cited by some studies if derivatives are included, although the Commission considers these latter figures to be highly uncertain.

By the summer 2011, the Commission services will prepare an Impact Assessment and scrutinise the cumulative impact on financial institutions of new regulation, bank levy and taxes.

Where are we today with the Impact Assessment?

My Services have launched studies on the current taxation of the financial sector and on a review of empirical studies. These results should serve as a basis for the evaluation of potential market reactions to taxation and the risk of relocation.

Work with different external institutions like the Bank for International Settlement, the European Central Bank, Financial Market Regulators and external academics, has been launched. It will contribute to data collection and will give further insights on available modelling approaches.

Internally, work on potential models to evaluate the influence of financial sector taxes on capital costs, growth and risk taking are ongoing. To better assess the cumulative aspects, different Commission Services work closely together.

With regard to the options analyzed, the assessment will consider the option of an FTT at EU level only and further analyse the risks of relocation. The same holds for the FAT. Of course, we will also analyse the baseline scenario which is of importance in this specific case since the financial sector is also targeted by many regulatory efforts like the changes in capital requirements and in remuneration.

All this work will form a sound basis to take appropriate policy initiatives concerning the taxation of the financial sector.

Carbon taxation

Let me now continue to the next major issue addressed in Mrs Podimata’s report: carbon taxation.

I welcome your support for a comprehensive revision of the energy taxation directive, which would make CO2 emissions and energy content the basic criteria for the taxation of energy products.

The revision of the Energy Taxation Directive has two main objectives: first to create an EU framework for CO2 taxation outside the EU emission trading system (ETS) and second, to rationalise existing taxes on energy by linking them to the energy content to avoid distortions between different types of energy sources.

As you know, the Commission is now fine-tuning the impact assessment as well as the draft proposal for a revised Directive. I aim to present a formal proposal soon to have a strong basis for discussion with the Member States on this important issue.

I see an economic opportunity in the revision of the ETD. “Green” energy taxation can help to encourage new industries and drive green innovation. The review of the ETD could offer Member States a basis for restructuring their tax systems in a more growth-boosting, job-friendly way. Revenue from environmental taxation could also help avoid an increase in taxes on labour, which would be economically more costly.

I am aware that, within the ECON Committee, you discuss the issue of border tax adjustment.

Free allocation of allowances and access to international credits for ETS companies are the measures currently in place to limit the risk of carbon leakage. In May 2010, the Commission presented a communication concluding that these measures are sufficient in the present situation.

We will, nevertheless, continue to monitor the risk of carbon leakage and to examine the potential inclusion of imports in the EU ETS.

Mrs Podimata’s report also makes reference to the idea of introducing a “carbon–added tax” as a means to achieve equal treatment of imports and domestic production.

After initial examination, the Commission has not explored this option further because of the considerable administrative costs for businesses that an extensive and detailed carbon reporting system would entail.

Furthermore, VAT-type tax has the disadvantage that the burden falls exclusively on final private consumers. This would fall short of triggering the needed behavioural changes alongside the entire production and consumption chain.

Eurobonds

Madam Chair, Honourable Members, let me now conclude with a few remarks on Eurobonds.

First of all, let me be clear on terminology. I do not mean the EU Project bonds, which President Barroso referred to in his State of the Union address. The EU Budget Review contained a section on project bonds: they would be issued by private entities for large infrastructure project financing. EU funds could be used to support the private project funding and attract financing by the EIB, other financial institutions, and private capital market investors.

In contrast, I would like to refer here to Eurobonds as a common public debt management instrument based on mutual pooling of parts of sovereign debt. Proponents of this idea point to some interesting features, which however raise additional questions. At present, the time does not seem ripe for discussion.

For the time being, the EU has established the European Financial Stability Facility and the European Financial Stability Mechanism which allow for lending to euro area Member States within the context of a joint EU/IMF programme.

In line with the European Council conclusions of December, the work on a permanent structure for crisis instrument is ongoing and includes a limited Treaty change.

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I am sure that today’s hearing will make a valuable contribution to the debate on innovative financing. Any new thoughts or ideas which arise can be used to further refine our analysis of this area, and my experts will be happy to contribute to the debate that will follow the presentations of the members of the panel.

I look forward to a fruitful exchange of views.