Ms Brenda McVeigh:

I thank the committee for the invitation to attend today's meeting to discuss the details of the European Commission's financial transaction tax, FTT. The European Commission issued a press release in September 2011 to present a proposal for a FTT. The tax would be levied on all transactions in financial instruments between financial institutions when at least one party to the transaction is located in the EU. The exchange of shares and bonds would be taxed at a rate of 0.1% and derivative contracts at a rate of 0.01%. The Commission estimated the FTT could raise approximately €57 billion every year. This estimate was on the basis that FTT would issue in all member states. However, members will be aware that this will now not be the case. The Commission proposed that the tax should come into effect from 1 January 2014.

The Commission decided to propose a new tax on financial transactions for two reasons. The first was to ensure the financial sector makes a fair contribution at a time of fiscal consolidation in the member states. The financial sector played a role in the origins of the economic crisis. Governments and European citizens at large have borne the cost of massive taxpayer-funded bailouts to support the financial sector. Furthermore, the sector is currently under-taxed compared with other sectors. The proposal for a FTT would generate significant additional tax revenue from the financial sector to contribute to public finances. The second reason is that a co-ordinated framework at EU level would help to strengthen the Single Market. Today, several member states, including Ireland, have in place a form of FTT. The proposal would introduce new minimum tax rates and harmonise different existing taxes on financial transactions in the EU. This will help to reduce competitive distortions in the Single Market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises. The FTT at EU level would strengthen the EU's position to promote common rules for the introduction of such a tax at a global level, notably through the G20.

The revenues from the tax would be shared between the EU and the member states. The current proposal is that part of the tax would be used as an EU own resource, which would partly reduce national contributions. Member states might decide to increase their share of the amount collected by taxing financial transactions at a higher rate. Members of the committee may be aware that the issue of how revenue from the tax will be allocated is still up for discussion.

At the ECOFIN meeting in June of this year it became clear that an EU-wide FTT would not be agreed, and those countries who favour the tax will now try to introduce it by way of enhanced co-operation, in which at least nine countries must participate. This requires those countries to write to the Commission asking it to produce a formal proposal for such a directive. Eleven countries - Germany, France, Austria, Belgium, Portugal, Slovenia, Spain, Italy, Slovakia, Estonia and Greece - have written to the European Commission to this effect. On 23 October 2012, the Commission submitted its proposal for a Council decision to authorise enhanced co-operation in the area of the FTT.

Under the terms of the Commission's original draft directive, the FTT would have applied to financial transactions which were carried out by a financial institution established in the EU, or by a financial institution that was not established in the EU but transacted business with another EU financial institution or was acting on behalf of a person who was established in the EU, whether the institution was acting for itself or for a third party. The tax would have applied whether the transaction was undertaken in a regulated market, over the counter or as an inter-group transaction. The term "established in the EU" has a broad meaning. It includes financial institutions from outside the EU which transact business with an EU-resident person, company or individual. This is a specific mitigating design feature in order to respond to the risk of relocation. The terms “financial instrument”, “derivative” and "financial institution" are drafted very widely and cover the vast majority of transactions in financial instruments. However, many financial activities are not considered to be financial transactions in the context of the FTT, which follows the above-mentioned objectives. Share and bond issues and most day-to-day financial activities relevant to citizens and businesses remain outside the scope of FTT, as do insurance contracts, mortgage lending, consumer credits, payment services etc. Also, currency transactions on spot markets are outside the scope of the FTT, which preserves the free movement of capital. However, derivatives agreements based on currency transactions are covered by the FTT since they are not currency transactions as such. In addition, the issue or redemption of shares or units in an undertaking for collective investment in transferable securities, UCITS, or alternative investment fund will be liable to the FTT.

We have not yet received a revised Commission proposal for the enhanced co-operation FTT. While the enhanced co-operation countries have requested the objectives and scope be based on the original Commission proposal, we understand the Commission is considering whether some adjustments are required to their original proposal to reflect the smaller number of member states that would be applying it.

The Economic and Social Research Institute, ESRI, and the Central Bank were requested to prepare an assessment of the FTT as drafted by the Commission. This report was circulated to Oireachtas Members and published in July. Given the wide variation in the estimated revenue yield from a FTT when different factors are taken into account and the uncertainty as to the form the tax would take, the report states that more detail would be needed on the final shape and scope of the tax before a definitive conclusion could be reached about its impact on the Irish financial system and taxation revenue.

The report indicates that the net revenue gain for Ireland from the introduction of a FTT is likely to be modest. Based on assumptions used by the Commission, the report estimates the potential yield from the FTT to be between €490 million and €730 million. Under the Commission's proposal, two thirds of this yield would have gone directly to the EU to fund its budget. If the EU retained two thirds of the yield, on the basis of the yield estimates in the ESRI-Central Bank report, the net yield to Ireland would be in the region of €163 million to €243 million - not dissimilar to the current yield from stamp duty on share transfers, which was €195 million in 2011. Ireland would have been forced to abolish this if it were to introduce a FTT.

The report identified some disadvantages and potential disadvantages to the introduction of a FTT. The first was the impact on the financial sector.A FTT could displace financial sector activity, especially when alternative locations are readily available - in this case the UK. This would pose a real risk to Ireland given that the financial services sector accounts for 10% of GDP and approximately 33,000 jobs. The second was the macro-economic impact: a FTT would probably lead to a lower level of economic activity in the financial sector, which might also result in lower receipts from income tax and corporation tax. The third potential disadvantage was the impact on the Exchequer. A stamp duty of 1% applies to transfers of shares in Irish companies. The Commission's proposal would involve the abolition of this tax and the loss of existing stamp duty revenue, approximately €195 million in 2011.

Ireland will not be among those countries participating in the FTT by enhanced co-operation. Ireland's position is that a FTT would be best applied on a wide international basis to include the major financial centres. If it cannot be introduced on a global basis, it would be better if it were introduced on at least an EU-wide basis, rather than only in the eurozone. This would prevent any distortion of activity within the Union. This is in line with the Commission's desire that the tax should be applied on a global basis. Such an approach would avoid the risk of activities gravitating to jurisdictions where taxes are not levied on financial transactions. A FTT could affect the financial services industry, especially in the IFSC, and lead to some activities moving abroad, particularly if it were not introduced on an EU-wide basis. A FTT could affect transactions in Irish Government bonds, particularly in the secondary market, and may also affect the ECB's ability to give effect to its own monetary policy via the repurchase or repo market. A number of countries such as Sweden and the UK have also raised this point in respect of their own debt management. Of concern to us is the Commission's own projection that a FTT could reduce EU growth and raise the cost of using financial products for ordinary non-financial companies.

Both of these aspects would be harmful to EU recovery.

As previously indicated, the introduction of the FTT would have required Ireland to abolish its current tax on financial transactions, which is a stamp duty on transfers of shares in Irish incorporated companies and which currently stands at 1%. One of the Commission's aims in introducing a FTT is to ensure that the financial sector makes a fair contribution to the cost of the crisis. Ireland is committed to the principle that the banks will contribute to the cost of State support. The banks have been charged for the Government's guarantee of their liabilities and the National Asset Management Agency Act provides for a surcharge on the banks should NAMA result in a loss for the taxpayer. The Central Bank and Credit Institutions (Resolution) Act 2011 provides for the introduction of such a levy on authorised credit institutions, which would be paid into a bank resolution fund.

The Minister for Finance has stated that Ireland is not in favour of a FTT as an own-resource measure. Ireland has traditionally opposed the concept of an EU-wide tax and believes that the financing of the EU budget should continue to be mainly based on gross national income. There have been suggestions that revenue from a FTT could be used for a particular policy goal such as development or climate finance. Ireland has traditionally opposed the hypothecation of tax revenues - that is, the dedication of all or part of the revenue from a specific tax to a particular purpose - as this may restrict the use of such revenues for public policy purposes as the Government sees fit.

A total of 11 countries have written to the European Commission requesting a proposal for a FTT by enhanced co-operation. On 23 October the Commission submitted its proposal for a Council decision to authorise enhanced co-operation in the area of FTT. The Council will be obliged to decide on the matter after consent from the European Parliament. A subsequent Commission proposal for a directive implementing the enhanced co-operation in the area of a FTT should follow in due course, although the timing of this is not clear. Ireland will not be among the participating countries but the Minister has said that we will not stand in the way of those who want to introduce a FTT under this mechanism. Our non-participation in the new enhanced co-operation initiative is consistent with the position we have taken to date on the Commission's FTT proposal.

The enhanced co-operation mechanism is relatively new. This will be only the third measure in the EU to proceed by way of enhanced co-operation - if it does proceed - and the first in taxation. We have concerns about the enhanced co-operation procedure, not only in principle but also because this is the first occasion on which it will be used for tax purposes, due to a lack of clarity on what this means in practice.

Officials from the Department of Finance and the Revenue Commissioners held separate meetings with officials of the European Commission and the European Council recently to discuss the procedures for the introduction of a FTT through enhanced co-operation. The Commission is working on a revised proposal in advance of the Council vote to allow enhanced co-operation for a FTT to proceed. However, at a recent COREPER meeting, Council legal services stated that the Commission cannot present a proposal until it has authorisation from the Council that enhanced co-operation can proceed. Also, once consent to proceed with enhanced co-operation is given by the Council, the enhanced co-operation countries could change the scope of the FTT, so long as the revised proposal meets with the general principle of the original proposal - that is, to impose levies on financial transactions. Therefore, the non-participating countries would be up-front in agreeing to the introduction of a FTT without knowing what shape it might finally take. Obviously, Ireland and the 15 other non-participating countries are seeking clarification about this procedure. This also has implications for Ireland in chairing meetings under the Presidency and acting as an honest broker for both participating and non-participating member states.

The Council vote on whether to allow the participating member states to proceed with the introduction of a FTT by enhanced co-operation will be by way of qualified majority voting, QMV. This requires at least 255 votes in favour, representing a majority of the members, where the proposal is from the Commission. In addition, a member of the European Council or the Council itself may request that where an Act is adopted by the European Council or the Council by a qualified majority, a check is made to ensure that the member states comprising the qualified majority represent at least 62% of the total population of the Union. The qualified majority is of all countries, including those which abstain and not just those which vote for and against.

We will continue to monitor discussions on the FTT to ensure the compatibility of any proposed measure with the internal market and with existing taxes on financial transactions. We are anxious to avoid double taxation of transactions. For example, a transfer of shares in an Irish-registered company which involved a financial institution in an enhanced co-operation country could be subject to both Irish stamp duty and a FTT. Ireland is likely to be chairing meetings on an enhanced co-operation FTT during its EU Presidency from January to June next year. We will facilitate the discussions but we will also be seeking to ensure that the concerns of non-participating member states are addressed. We are anxious to obtain clarity about the procedure, particularly in the context of chairing meetings during our Presidency.

Members may also be aware that there was a "state of play" discussion at yesterday's ECOFIN meeting, which was attended by the Minister for Finance. At that meeting, the Commission presented its authorising mandate for enhanced co-operation and indicated that it is working quickly on the draft proposal. The new Minister from the Netherlands indicated that his country would consider opting in to the enhanced co-operation procedure subject to three conditions. The Council legal services advised that the Commission could only table the proposal after the vote had been taken. The Presidency indicated that it would proceed in a practical way and would first wait for the decision of the European Parliament - which we expect in December - before proceeding.

I thank members for their attention. We will be happy to respond to any questions they may wish to pose or observations they may make.