Copenhagen Economics has been asked by the Commission to study the response of financial instruments to different types of financial taxation. The study has been published as a part of the Impact Assessment associated with the new proposal for taxation of the financial sector:   http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sector/index_en.htm   The report studies the location, profits and transactions of financial firms as a response to increased taxation. The report has three main conclusions: –          Location: There is no strong empirical evidence suggesting that higher tax rates have historically affected the number subsidiaries to be located in high-tax countries. On the other hand, the amount of capital allocated to such subsidiaries responds somewhat more to higher taxes. –          Profits: Banks have historically been able to pass on higher taxes to their customers (e.g. in the form of high lending rates) thus keeping taxable profits relatively stable. An important exception is banks with substantial international operations, which, to a large extent, have been able to shift taxable profits from high tax regions to lower tax regions. –          Transactions: There is substantial evidence showing that taxes on financial products such as equities, bonds etc. lead to large reductions in traded volumes of the taxed products (the tax base). Taxing financial transactions will reduce the tax base relatively more than taxing e.g. financial profits. The most important reason is that the financial sector and its customers have a wide variety of means to avoid paying transaction taxes while continuing the activity in new ways. For example by packing together new products outside the scope of the tax or simply by moving trade with the existing product to other countries.   Based upon recent reviews and relevant studies on capital mobility more generally, we provide broader recommendations of tax proposals if the aim is to raise significant amount of revenues. Broadness of the tax base is a paramount concern. The tax base should (to the extent possible) cover all products with similar characteristics, be levied on all relevant institutions (not just banks) and should cover as many countries as possible to avoid “leakage” in a financial system that has been dramatically internationalised in recent years. Moreover, taxes on derivative products need to reflect the often wafer-thin profits that are associated with each trade: even tiny tax rates may make the financial activities unprofitable. The purpose of such a tax may indeed be to achieve this effect, but the downside is that no significant revenues will be collected.   Read the report here

 

  For more information, contact partner Sigurd Næss-Schmidt