Ms Brenda McVeigh:

I thank the committee for the invitation to attend this meeting to discuss the legislative proposals from the European Commission for a Financial Transactions Tax, which I will call FTT hereafter. I am joined by colleagues from the Department of Finance and from the Revenue Commissioners so we can provide optimal assistance to the committee today.

At the time of our last meeting with this committee, in May of this year, the first read through of the European Commission’s Proposal for a Council Directive, implementing enhanced co-operation in the area of financial transaction tax, had reached Article 2.1, subparagraph(8)(e). Since then, one further meeting of the working party on tax questions took place under the Irish Presidency of the EU. We had planned to hold a further meeting in June but had to cancel this as a result of industrial action in the Council. While we held the Presidency, we aimed to progress this dossier as transparently and inclusively as possible.

On 1 July, the EU Presidency passed to Lithuania. Two further working party meetings have been held to date under its Presidency and the first read through of the proposal has now been completed. As members will be aware, we have a voice in those meetings, but ultimately, it is for the 11 participating member states to decide what they want to achieve.

Some of the issues which were raised by both participating and non-participating member states since our previous appearance before the joint committee, but also during the past year, are: whether pension funds should be included within the scope of the tax; use of the issuance and establishment principles as a basis of assessment; collection mechanisms and the role of non-participating Member States in collecting the tax; and double taxation. Issues previously raised, such as the potential impact on the trading of sovereign debt in secondary bond markets and how inter-bank lending might be affected by the proposal, especially in the repo market, were reiterated. During the first read-through of the proposal, it became apparent that final agreement has not been reached between the 11 participating member states in respect of the type of tax they would like to introduce. It has been acknowledged that adoption of the proposal by the original target date cannot now be achieved because a new compromise text needs to be drafted, considered and agreed before its adoption. The Commission has, therefore, acknowledged that the January 2014 implementation date will not be achieved and it now proposes implementation by mid-2014.

Ireland's position is that a financial transactions tax, 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 to 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 danger of activities gravitating to jurisdictions where taxes are not levied on financial transactions. The FTT that is currently being discussed at EU level is not an EU-wide tax. Some 11 member states are considering adopting an FTT by way of enhanced cooperation but 17 others are not doing so. As a result, our position has not changed. The Minister has also previously indicated Ireland's principled opposition to dealing with tax measures under enhanced co-operation. If Ireland were to participate in the FTT, it would be required to abolish its current tax on financial transactions which takes the form of a stamp duty on transfers of shares in Irish incorporated companies. This is currently charged at 1% of the value of transactions.

An FTT could impact upon the financial services industry, particularly the IFSC, and lead to some activities moving abroad, especially if it was not introduced on an EU-wide basis. The Irish funds industry is currently performing very well. It has over €2.5 trillion in assets under administration and €1.25 trillion in Irish domiciled funds. This is a significant increase on the figures for 2012. Numbers employed throughout the entire financial services industry have remained stable despite the reduction in staff at Irish banks. The IFSC employs 33,000 people and contributes over €1 billion to the Exchequer annually through corporation tax and employment taxes.

An FTT could also affect transactions in Irish Government bonds, including in the secondary market, and might also affect the ECB's ability to give effect to its own monetary policy via repo market. A significant number of countries have also raised this point in respect of their own sovereign debt management. The NTMA has advised that an FTT could cause a potential negative impact and cost for primary issuance-access from reduced secondary market liquidity and potential systemic damage to the bilateral repo market, a key product for borrowing and lending cash between counter-parties.

Members of the Economic and Financial Committee Sub-Committee on EU Sovereign Debt Markets recently stated that the introduction of an FTT would have a significantly negative effect on sovereign debt markets and might impair the good-functioning of secondary markets for sovereign debt, resulting in reduced liquidity, reduced investor demand and therefore higher financing costs for states. The European Investment Bank, EIB, has also expressed concerns and suggested that serious consideration be given to the general exemption from the scope of an FTT, of all transactions on sovereign bonds, EIB bonds and bonds issued by multilateral development banks. We are also concerned by the fact that the Commission's own projections indicate that an FTT could reduce EU growth and raise the cost incurred by ordinary, non-financial companies in respect of their use of financial products. Both these aspects would be harmful to EU recovery.

One of the Commission's aims in introducing an FTT was 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, to be paid into a bank resolution fund.

Banks operating in Ireland continue to reduce their level of borrowing from the ECB. During August, total utilisation of ECB facilities by banks in Ireland declined marginally in the region of €300 million. This equates to a decline of 1% to approximately €43.3 billion, the lowest level since September 2008. Drawings from the ECB by covered banks declined by approximately €400 million, or 1.2%, during August. The continued decline in ECB borrowings reflects a reduction in the balance sheet funding requirement within the covered banks in recent months. Year on year, borrowing from the ECB is down by approximately €27.3 billion, or 45%, and stood at approximately €33.5 billion at the end of August. The steady decline in reliance on ECB funding reflects the continued strengthening of the banking system and has been achieved through managed deleveraging, deposit gathering and the return of AIB, Bank of Ireland and Permanent TSB to international funding markets.

We are mindful of any destabilising effects the introduction of an FTT would have at this point, especially when there is such uncertainty regarding the potential impacts of such a tax and the form it might take. As we face into budget 2014, we need to place our public finances on a more resilient and sustainable footing. Most importantly, we must continue to roll out focused measures that will support private industry to create the jobs that the economy needs to recover. The Government is wholly committed to securing economic stability, job creation and a more prosperous future for our citizens.

As the EU-IMF programme of financial support is coming to an end, the Government's focus has now firmly turned to exiting from it. The Government intends to achieve a successful and durable exit from our programme and a full and sustainable return to the financial markets. We need stable and liquid markets to be in place for this. Significant work on the return to markets has already been accomplished and is evidenced by the benchmark long-term Irish bond yield, which has fallen by approximately ten percentage points in the past two years. This has allowed the NTMA to re-engage with the debt markets, including in selling this year's new ten-year benchmark bond, the first such sale since our entry into the EU-IMF programme in November 2010. We are opposed to anything which may have a negative impact on those markets. Post-programme we must ensure that Ireland's return to a long-term, sustainable growth path continues and that the recent momentum we have seen in the jobs market will be sustained over the coming years.

The committee may be aware that France and Italy have recently introduced FTTs in their respective countries. The French FTT was introduced in July 2012. Instead of the €1.5 billion yield projected, the tax take has been €700 million. The latter is less than 50% of the expected intake. The Italian FTT was imposed on shares in March 2013 and on derivatives in July 2013. Although there have been reports of a reduction in trading activity since its introduction - as was the case in France - no yield figures are available to date. Legislation to introduce an FTT has been produced in Spain and Portugal. Variations of FTTs are already in place in Belgium, Finland and Greece. The UK has a stamp duty reserve tax, which is similar to our stamp duty on shares, although the tax rate in the UK is 0.5% whereas ours is 1%. Elections recently took place in Germany. The Christian Democratic Party secured over 41% of the vote, while its coalition partners, the Free Democratic Party, secured less than 5% and is no longer in the Bundestag. A coalition government involving the Christian Democrats and the Social Democrats, who have publicly stated their support for an FTT, is a possibility.

The UK has raised a legal challenge to the decision authorising the enhanced co-operation procedure for the FTT. We understand that the challenge is based on legal advice received by the UK authorities which indicates that the rules governing legal challenges in respect of enhanced co-operation have not yet been definitively tested in the European Court of Justice and that there is a material risk that the court could decide that any challenge lodged against the final directive, when this is agreed, could be rejected as being too late. This is the first time the enhanced co-operation procedure has been used in a matter of major economic significance. The only other precedents in this regard relate to patent and divorce law. The UK, with the support of the Czech Republic, Luxembourg and others, believes that the FTT, as proposed, runs counter to the agreed EU objective of encouraging economic growth, particularly at a time of economic fragility. The UK and its allies also believe that the proposal would have significant negative impacts which will be damaging to economic growth and which will lead to job losses. It would also potentially increase the costs to consumers. For example, the FTT, as proposed, would increase costs to pension funds and, therefore, savers and manufacturing industries. This would damage EU competitiveness in the global marketplace. It would also increase costs to governments in managing sovereign debt, which is a significant issue for many member states. Naturally, we share this concern.

The UK legal challenge is based around three issues, the first of which revolves around the impact that the tax would have on non-participating member states. In the UK's view, if the FTT directive were adopted in its current draft form, the tax would infringe upon the rights and competences of non-participating member states and depart from accepted international tax norms. We have considerable sympathy with this. The second issue relates to the UK's specific concerns regarding the proposed deemed establishment rule under which financial institutions in non-participating EU member states would be deemed to be established in the FTT area - and, therefore, liable for the tax - when dealing with counter-parties based in the FTT area. The UK considers that this is likely to breach Article 327 TFEU and would be in conflict with international tax law and customary international law.

Again, there is a sound basis for this position.

The tax in the form proposed by the EU Commission could oblige UK tax authorities to collect the FTT under existing EU agreements on mutual assistance. However, the UK believes this raises fundamental concerns, as Article 332 TFEU provides that expenditure resulting from implementation of enhanced co-operation shall be borne by the participating member states.

The UK has indicated that it will continue to contribute to Council discussions on the FTT and remains hopeful that these discussions can lead to changes to the design of the tax which address its main concerns and reduce the potential economic damage from the tax. If the negotiations in Council result in a final design which addresses its concerns, it will reconsider their legal challenge.

On 6 September, the European Council legal services issued an opinion that Article 4(l)(f) of the draft directive is not compatible with Article 327 of the Treaty on the Functioning of the EU, as it infringes on the taxing competencies of non-participating member states and is discriminatory and likely to lead to the distortion of competition and also exceeds the jurisdiction of member states. The article in question provides that a financial institution located in a non-participating member state can be deemed to be established in a participating member state for the purposes of the tax. The Commission has stated it does not agree with the opinion of the Council legal services. The opinion was discussed briefly at the last working party on tax questions meeting in September and the Presidency indicated it would be discussed more fully at a future meeting.

The Department of Finance has asked the Office of the Attorney General to examine the Council legal services opinion and has asked the Lithuanian Presidency to request the Commission for an outline of its views on the Council opinion. Ireland is not participating in the FTT and will await the advice of the Attorney General regarding the Council opinion. Any issues or concerns expressed in that advice will be raised at the EU Council working party that is charged with discussing the proposal.

We are now awaiting a compromise text but have not received any indication as to when this will be available. As of today, the next working party meeting has not been scheduled. Although Ireland is not a participating member state, we intend to fully participate in future working party meetings to ensure that our issues and concerns are brought to the attention of the other member states but we can advise the committee that it is clear from our attendance to date, that many of our concerns are shared not only with the non-participating 17 member states but also with the 11 participating states. We will be happy to take any questions.