Oireachtas Joint and Select Committees
Wednesday, 2 October 2013
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Financial Transaction Tax: Discussion with Department of Finance
We will now move on to item No. 8, which is scrutiny of COM (2013) 71, a proposal for a Council Directive implementing enhanced co-operation in the area of financial transaction tax. In doing so, I would like to welcome Ms Brenda McVeigh, Mr. Seamus Milne and Mr. Liam Smith from the Department of Finance and from the Revenue Commissioners, Mr. Jim Byrne, Mr. Brian Doyle and Ms Marie Hurley. The format of the meeting will be that Ms McVeigh will make some opening remarks which will be followed by a question and answer session.
I remind Members, witnesses and those in the Visitors Gallery that all mobile telephones must be switched off. I advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. However, if witnesses are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of a long-standing ruling of the Chair to the effect that Members should not comment on, criticise or make charges against a person outside the House, or any official by name in such a way as to make him or her identifiable.
I now invite Ms McVeigh to make her opening statement.
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.
I thank Ms McVeigh for a very comprehensive statement. I propose the committee publishes this document on its website. We will designate ten minutes for the first group of questions and will finish with supplementary questions.
Mark Twain once said there are two certainties in life - death and taxes. The certainty of the FTT is the question for today. The last update we received in May indicated that 11 member states were looking to go ahead with this. Having listened to Ms McVeigh today, there seems to be some wavering in terms of that figure. Are 11 member states still looking to proceed?
Ms Brenda McVeigh:
Currently, we still have 11 member states. All we are saying is that there is still not cohesion among the 11. They have still not agreed on the form of the tax. The 11 met separately during the working party process to talk about it but we know they have not met since July. Before that, they met quite regularly.
Ms Brenda McVeigh:
If they want implementation by mid-2014, they will have to get an agreed text very soon. At the moment, we are assuming that a compromise text is being worked on because the first read through has been completed. The timetable was that they would need to have an agreed text by January of next year if they wanted to implement it by July of next year.
In terms of pros and cons, is there an advantage to Ireland staying outside this process or is there an advantage to being inside it? I assume costings have been done as to the cost to the Revenue Commissioners and the Exchequer if we were to engage in this. Has that type of modelling been done and is there a figure as to how much it would cost the Irish economy if we were to partake in the FTT?
Ms Brenda McVeigh:
We indicated to the committee the last time that it is impossible to cost it when there are so many unknowns in it. At the moment, they have not even determined the level of tax to be applied. There are indications of 1% and 0.1% on different types of products but there is no decision on the tax itself. There is no decision even on the products and the institutions that are in and out. We see the advantage as being a very plain one. Where there are so many unknowns, it would be foolish, especially when as I said the markets are stabilising and we are re-entering the markets, to do anything that would impact on those markets. Our view is that the 11 should possibly not even go ahead with it as it is. Certainly, at the moment, they are not and it is not being progressed.
Ms Brenda McVeigh:
Quite a bit of analysis has been done by the National Treasury Management Agency. Also, a report was published last year by the Central Bank of Ireland and the ESRI which did an analysis of the FTT, as then designed. There were amendments to the FTT post that. We have had considerable discussions with those two agencies. We have also had discussions with the funds' industry and, naturally, with the IFSC, which were quite extensive. We have engaged in bilaterals with other member states. There has been a lot of analysis. Certainly, at the working party meetings, there is a lot of cohesion among the non-participating states as to why we should not participate. My view is that many of the 11 are sharing the views we are expressing in regard to specific matters.
Taking on board what Ms McVeigh said, there certainly seems to be a level of reservation in the Department of Finance and in the Government on this issue. If it were to proceed, has some consideration been given the sort of negative results which might arise? Will there be relocation of financial services from the EU? Will tax avoidance measures arise? Will this reduce the trading volume in the European Union? What will be the corresponding effect on corporation tax and other taxation receipts? Has some sort of impact study been done on us staying outside it and the 11 member states going ahead with it?
Ms Brenda McVeigh:
I would not call it an impact study. On the basis of the various bilaterals we have had with other member states and on the basis of our own analysis and the analysis we have had done by the National Treasury Management Agency and the Central Bank of Ireland, etc., we anticipate there would be a loss of jobs and institutions moving out of Ireland. As I said, we have a very sizeable-----
Ms Brenda McVeigh:
We believe there will be an impact but it is hard to define what it may be when there are so many unknowns in this, especially now with the legal opinion in regard to the residence principle in the FTT, as currently drafted. If that goes, that will have a very fundamental impact. It would possibly soften it a little bit for us but at the moment, it is still there and the Commission is saying it will stay there. In the world of unknowns around the FTT, we would anticipate flight of institutions, flight of jobs and, therefore, lower taxes and lower yield for us if the FTT proceeds as it is.
If one was to look at a map of the world, the Irish Financial Services Centre should not have taken off in Dublin. A global leader in financial services - London - is less than one hour's flight away but we are uniquely different from London and financial services have worked for that reason as well as others. The predominant reason is that this is an English speaking country which is in the eurozone. If the 11 member states go with the FTT, could we not see inward flight to this country by financial houses because they would remain in the eurozone, would stay outside the FTT and would be in a country with a globally spoken language?
I have one final question. If a non-participating member's institutions trade with another FTT zone member - let us say Ireland and Germany - can Ms McVeigh clarify if the FTT would infringe on them and ensure that double taxation does not arise? If Germany applies the transaction cost and we do not, how does that actually work?
Ms Brenda McVeigh:
If a German bank is operating here and trading with a German bank in Germany or a bank in France or wherever else, it is deemed to be established here for the purposes of the FTT, so the FTT will apply to any transactions that take place between those two institutions, and the bank that is operating here will have to collect the tax involved and forward it to the German authorities.
Ms Brenda McVeigh:
No. There is no actual decision that we would get anything. Originally we were to get a portion of it and it was agreed that it would not go towards own resources, but it was not going to the member state. I think the CBI did an analysis which showed that it would probably be less than our current stamp duty uptake.
If two countries in the FTT system are communicating with one another and transactions are taking place between a German and a French bank, or perhaps a German bank and its own set French set-up, a communication takes places in which the French are drawing down a revenue - the use of that revenue is one matter - and the German institution or the German revenue is drawing down money, which can be used for something else. In a situation where those companies deal in jurisdictions where the FTT does not apply, what happens to that money?
Ms Brenda McVeigh:
It does depend on the institution and on where the institution is operating, so even though Ireland stays out of it, if it is a German bank in Ireland transacting with an institution in an FTT country, the tax applies. Therefore, the tax has to be collected. If you are asking what happens to the money that is collected-----
Mr. Jim Byrne:
Yes, because we are deemed to be inside it. The directive is silent on the method of collection, but the intimation is that if it goes through a clearing system, there will be some kind of withholding tax. There is a possibility that if it is paid from one to the other, it will operate on a withholding tax basis, so the bank that is actually inside the FTT may end up paying it twice. In other words, they will deduct it from their payment to the Irish bank. However, there is nothing definite about that.
If we stay outside the FTT and the other 11 member states were to move into it, any commercial business being done with those member states de facto has Irish companies in that zone anyway. Is that what Mr. Byrne is saying?
Ms Brenda McVeigh:
We did not meet with representatives of the IFSC Clearing House Group, but we did meet with representatives of the funds industry. We have also taken advice from the NTMA, the Central Bank and the ESRI. We have met with the likes of American Chamber of Commerce Ireland and so on, so we have gone outside the FTT zone itself and looked at the impact that might occur in respect of our institutions trading with America. The only group that we have met so far that have been in favour of the tax has been Social Justice Ireland. That group's representatives had pre-budget discussions-----
I accept that, but this is very significant and there are arguments for and against it. On balance, I am against it, but if we are looking for openness and transparency, then the views of NGOs such as Social Justice Ireland should be taken into account. It is a bit disappointing if they had not been asked in, as the funds industry had been asked in.
Ms Brenda McVeigh:
We did not ask the funds industry to come in. We have been very transparent. It is Government policy that we are not going into the FTT and that is a well known fact. Various groups have asked to discuss it with us because even though Ireland is not in the FTT, they are still concerned because of the impact of the deemed established rule. The only group that has come to us so far - we have not asked people in - has been Social Justice Ireland. It is not on the basis of an invite.
The British are taking a legal challenge to this for some of the reasons described by Ms McVeigh in respect to our position, such as jobs in the funds industry, the IFSC, problems with the issuance of government bonds generally, sovereign debt markets etc., reduced growth across the EU while we are in it or out of it. Is there any reason we have not considered taking a legal action ourselves?
Was there any independent consideration? The British can do what they like, but have we ever thought that this is so serious that we should sue to try to stop it? It seems that the arguments are set out cogently by Britain and by the Council legal services. Did we independently consider this as a risk to thousands of jobs and decide that we had better stop this in some way?
Ms Brenda McVeigh:
Like most of the other member states that are not participating, we felt that the best way of addressing this was in the working party meetings, which are very technical in nature. We have raised multiple concerns about it. We even did it during our Presidency, when we had to stay quite neutral on the whole issue. We were getting the point across that we shared the concerns of the UK and we had concerns that go beyond what the UK stated in its challenge, and we shared concerns voiced by the 11 participating states also.
I agree with Ms McVeigh about the risks for Ireland and Europe on this. If every major western country introduced the FTT, then I could accept it, but I must say that the Government approach on this - it is a political matter and not for the witnesses - seems to be very lackadaisical. The British seem to be very concerned about the impact this would have on the City of London. We have a smaller but similar job situation here, but we seem to be standing back and hoping for the best with other countries' court actions or with the Council's legal advice.
Ms Brenda McVeigh:
Luxembourg also has a major financial centre and it stayed out of the legal challenge. Luxembourg and the Czech Republic have been very vocal in their support of the United Kingdom. At the time we could not be because we held the Presidency and we agreed to stay neutral on everything, as all member states do in that position. However, there is nothing stopping us challenging the final text. The United Kingdom took the challenge now because it had legal advice, although not everyone would necessarily agree with it. The advice was that if it did not challenge now, it might be precluded from challenging texts later because it was a non-participating member state. I am unsure whether we agree with that position. As far as I am aware and as far as our understanding goes we are always able to challenge it in the final analysis and, in a way, there was no need for us to do so now. Of the 27 member states, the United Kingdom was the only one that took the view that it had to open that challenge now. It is more of a technical challenge as opposed to a challenge on the substantive part of directive.
We need a Government answer on this. It seems to me that the Civil Service cannot really tell us why we have not joined the legal challenge. It cannot say why and we cannot criticise the Civil Service for adopting a lackadaisical approach. Does the committee agree that there is such a lackadaisical approach? Perhaps it needs to be examined more carefully. Many jobs are at stake in respect of this issue in this country. I urge any groups which are watching and which support a financial transaction tax to contact the Department. Ms McVeigh has indicated that the Department would meet them and I am pleased to hear that. I encourage anyone who has a view on this to put it forward.
Members in government and in opposition have strong views on this, both in favour and against. They have dealt with the Minister on this matter on previous occasions. The Minister's is provisionally pencilled in for next week. If any members have strong views arising out of this afternoon's meeting I suggest they carry them into next Tuesday's meeting with the Minister.
I welcome Ms McVeigh and her colleagues. I have a couple of points. What is the possibility that this will never come to pass? Given all the deliberations that take place in Europe, the fact that within the 11 countries there does not appear to be agreement, the various legal challenges and the fact that the discussions are still ongoing, what are the chances this may not come to pass? There is a view that this has come about because of the financial sector and it should make a fair contribution to the cost of the crisis. I understood that the bank resolution mechanism at European level was the mechanism under which the banks were supposed to make a contribution to the crisis. Is this measure not already being catered for under the European project to address banks and the resolution mechanism? Will Ms McVeigh deal with that point?
I note that France and Italy have gone ahead of the pack. What rates are they charging at the moment for financial transaction taxes? It appears that the empirical evidence or research to which Ms McVeigh referred has not really been carried out in Europe yet. Could Ms McVeigh give an indication of which countries make up the group of 11? I know the headline countries but could she give us a complete list of the 11 which make up the enhanced co-operation countries?
Ms Brenda McVeigh:
We will get to the list of 11 presently. Deputy McDonnell asked about taking a bet on whether it is going forward. I am not overly keen on doing that at this point. I am unsure whether the committee is aware of it, but Commissioner Šemeta stated this morning that as far as he is concerned it will go ahead. He believes that a compromise text is necessary because he acknowledges the legal challenge, although he maintains that the Commission does not agree with it - I am referring to the legal opinion not the legal challenge. He maintains it will go forward. If we listen to Commissioner Šemeta's remarks we have to accept that it will not go forward in its current format. Therefore, it would be difficult to take a bet on what will go forward. We can say definitively that it is not going forward as it is. How or if it will go forward is a different question and that will really depend on the compromise text, which we have not seen yet. I presume at this point it has not been drafted. All member states have a right to see it and to determine whether they are interested in joining. We are assuming it simply has not been produced yet.
The 11 countries that are in are Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.
Ms Brenda McVeigh:
In France the tax and share purchases arrangement covers all transactions in shares of French listed companies with a market capitalisation in excess of €1 billion wherever the trade is carried out. High-frequency trading is carried out by information technology equipment within remarkably short timeframes and will be subject to a separate tax levied on the volume of cancelled orders. I assume France has not introduced something on high-frequency trading yet.
For Italy the rates for taxable transactions are 0.1% if traded on regulated markets or multilateral trading facilities, or 0.2% if executed over the counter. However, in the financial year 2013 applicable rates will be 0.12% if traded on a regulated markets and 0.22%-----
It has a very significant bearing on us in particular.
Let us go back to an earlier point. Ms McVeigh referred to the financial sector making a contribution towards the cost of the crisis. This financial transaction tax is on the actual transactions, not the banks or financial houses. They will pass it on to the customer.
The point I am trying to make is that what we are trying to get all the time is probity, prudence and so forth in how the financial and banking sector operates. If there is a resolution mechanism in place then the institutions, if they are operating outside the constraints or normal practices, will know that a charge is going to be imposed on them. One could make the point that they will ultimately pass it on to the consumer. In this case the customer will be paying the financial transaction tax. Does Ms McVeigh understand the point I am making?
Ms Brenda McVeigh:
I understand the point Deputy O'Donnell is making but we can only speak about what the directive states. The directive states that it will be imposed in respect of the transaction and therefore it will be imposed on the institutions. We could all make an assumption about where the charge will eventually end up and that is part of our concern. However, the directive does not state that it will be imposed on individuals.
It does not apply to individuals, but let us suppose a financial transaction tax is introduced in the morning and that an individual buys shares or something else. Will that individual end up paying the financial transaction tax?
The Chairman is eating into my time. Is there a fundamental flaw in the financial transaction tax as proposed? Does Ms McVeigh understand my point? It seems no one can agree on the financial transaction tax directive. There appears to be very little empirical work done on the directive. It could have very great consequences for countries such as Ireland and the UK because of the high concentration of such organisations here. There will also be an impact on bond yields for us when exiting the bailout. Is there a possibility that the financial transaction tax directive is fundamentally flawed?
Ms Brenda McVeigh:
No, I do not. The one point on which we agree is that we have stayed out of it because of issues such as that. We have mentioned the potential for job losses and the unknowns that are in it but we have certainly said in every briefing that we have produced on it - and more than once at this committee - that we believe the financial transaction tax in its current format will result in a cost to consumers and that, for us, is not viable.
Ms McVeigh's analysis and the Government position are all heading in the same direction - that is, that we should not do it. In my view, this is a mistaken view. It is disappointing that in putting forward this analysis, it is clear that the Department has not considered empirical evidence. No empirical study has been done and the Department has not listened to anyone who thinks it might be a good idea. I put it to Ms McVeigh that the Department's views and the Government's views are totally ill-informed as they are based entirely on a short-term notion of national self-interest which is not even based on any kind of empirical analysis. Given the financial crash suffered by this country as a result of global speculation I ask if the Department has a duty to look at what the costs of speculation were for this economy as a whole and to look at least at the possible merits of a financial transaction tax in order to prevent the catastrophic sort of collapse we have seen in our economy as a result of the activities of the speculators. In Ms McVeigh's view, should the Government and the Department not prejudge this but rather give serious consideration to the arguments on the other side? I suggest they listen to the people putting forward the argument and look at costs. Ms McVeigh talked about costs or potential costs to the State. I will suggest a very obvious cost which she has not even mentioned - that is, the cost to our economy, which is now suffering. This is the significant cost of massive unemployment, a huge debt, an economy crippled. There is a very good argument for saying that this derives precisely from letting these financial vultures, as I call them, off the leash over the past 25 years, with devastating consequences for the global economy. This should be quantified, in my view. There should be an empirical analysis. It might say there could be a short-term cost, but there is a question of long-term cost if this is not done.
What about the funds that could be raised? For example, Oxfam supports the financial transaction tax because in its view the moneys from the financial transaction tax are vital to financing serious action on climate change. The financial transaction tax is supposed to provide a back-up fund in case of further financial failure. The proponents of the financial transaction tax are saying the moneys raised could be key for financing major public investment to create jobs and stimulate economic growth. I suggest there should be a cost-benefit analysis of one argument as against the other. None of this has been done. We are getting a policy based on nothing. We are getting an opinion based on absolutely nothing. I do not expect Ms McVeigh to agree with me, but if we are going to have a serious debate we need to look at the reason the tax is being proposed, at the pro and con arguments. We need to have empirical analysis of what the effects might be at every level, positive and negative, so that we can have a serious debate. I ask if this is not a reasonable request from a member of the finance committee.
Ms Brenda McVeigh:
Yes, it is. There is a fundamental aspect to this discussion. Deputy Boyd Barrett referred to democracy; he argued that one must look at the pros and cons of any proposal, and I agree with him. However, there are 17 countries out of 28 that are saying this directive is not working. I have attended working party meetings and if it was working effectively the eleven countries would have adopted it by now, because the adoption date was September 2013. It is agreed among 28 member states that something in this directive is not working. All we are saying is that it is not working in its current format; we are not saying we will always stay out of the financial transaction tax. We have said we are staying out of this draft of it, as are most of the countries in Europe. We are obviously sharing a viewpoint with most other member states and, I suggest, probably with all states at this point. The view is that there is something wrong with this measure and we should not jump into it.
On the point about the moneys that could be raised, equally, one must consider the other side of that argument and the damage this could do to the markets. If it wipes out the repo or repurchase agreement markets we will have problems. Liquidity is gone and we have real problems in that area. We also have problems with our sovereign trading. That is another aspect of this measure. I accept that a simplistic view - I am not suggesting the Deputy's view is such - would be that it is raising all this money. However, the damage it is doing on the other side is what we must take into account. We cannot ignore possibilities for the sake of the big-----
I agree it must be looked at. However, Ms McVeigh has pretty much admitted that there is no empirical evidence whatsoever for some of the assertions about the possible dangers. I will put one scenario to Ms McVeigh. We have a low corporate tax rate. When a corporation decides whether it will invest here, they do not just look at the financial transaction tax or the corporation tax in isolation; they consider the package and decide whether they would be better off in Ireland than somewhere else. Given that there is a pretty significant gap between effective corporate tax rates in Britain and effective corporate tax rates here, the idea that an extra tax of one tenth of one percent on financial transactions in the IFSC is going to lead to a flood of companies moving out of the IFSC and into London is bordering on the preposterous.
Ms Brenda McVeigh:
There is a cascade effect with a repo transaction. It will not be 0.1%; it might be 0.1% times 50, for the number of times that transaction takes place in relation to that product. It is actually 0.1% in the end. That is part of the problem. The European Commission has been asked to consider such issues, but it is not coming back to us with anything. When we go to the Commission with issues of double taxation because we have a stamp duty, we are told that is our problem to fix. This is against the spirit of the treaties. We should not have to fix a problem of double taxation. As I say again to the Deputy, there is nothing to prevent us from eventually coming into the FTT in a reasonable agreed format if that is what we want. At the moment most are staying out of it because of problems such as this.
Ms McVeigh has made a statement about a cascade effect. This sort of thing needs to be analysed. Even if the figure were to be 50 times the original rate, that only amounts to 5%.
I will be absolutely honest.
When I hear that the organisations which have given the Department their opinions on this issue include the American Chamber of Commerce Ireland, National Treasury Management Agency, Central Bank, IFSC and the funds industry, it strikes me that I could have told Ms McVeigh exactly what they would say. I would like to hear the views of other types of organisations, so we have a chance of a balanced debate.
On the question of how much a financial transaction tax might raise, Ms McVeigh indicated there would be costs and so on. The Central Bank's quarterly bulletin for this year shows there has been a massive increase in investment funds, up to a net worth of €1.1 trillion. Does this not suggest that the potential take from an FTT might well be considerably larger than the ESRI estimate of somewhere between €400 million and €700 million? Ms McVeigh has put forward a sort of qualification even on the ESRI estimate, pointing out that we would have to give some €300 million of those moneys back to the EU budget. Is it not the case, however, that the €300 million would be subtracted from our total contributions to the EU budget and there would, in effect, be a net benefit to the State?
I understand that. However, taking the €180 million we are getting in stamp duty from, say, €700 million - as I said, that figure might even be larger given the high level of investment funds - we could still be looking at a potential net gain of something in the region of €500 million.
Ms Brenda McVeigh:
The point I am trying to make is that Ireland will not be drafting the text of the FTT arrangements. We are not the ones saying this is what it should or should not be. We have a stamp duty in place and are happy to continue with it. In fact, it attracts a higher rate than what is envisaged under the FTT proposals. It is for the Commission to decide on a compromise text on which we can all agree. I come back to the point that there is no agreement among member states at this time, including the 11 which already have an FTT in place, and implementation dates have been missed because there is a general awareness that this does not work on a technical level.
When the Deputy talks about potential yield, he is doing so in the absence of any agreement on what level of tax will be applied, which transactions it will be applicable to or which institutions will be covered by the tax. The report produced by the ESRI in conjunction with the Confederation of British Industry, CBI, was done on the basis of the first draft of the FTT, but the situation has moved on since then. In fairness, the report itself makes clear that its projections were based on a series of unknowns. The authors sought to estimate potential outcomes and effects as best they could while fully acknowledging that they were operating in the unknown. Ultimately, the Commission will have the final say on the details.
Has there been a serious effort to quantify these issues? I accept the point that revised drafts are being drawn up and so on, but I have never heard any hard evidence to back up the assertion that there will, for example, be a large migration of financial transactions over to London.
Ms Brenda McVeigh:
The Commission has issued a questionnaire to all member states asking them for details of the types of transactions and institutions operating tin their jurisdiction and the current situation in regard to taxes and so on. That questionnaire is vast and very complex and, as such, will be difficult to complete and will take time. We have issued it to our authorities asking them to complete it, and the same is being done in all member states. Everybody has acknowledged that it is an extremely complicated document, but it will be done and the information will be compiled by the Commission. The latter should, in my view, have gathered this information at the beginning of the process.
I will conclude by observing that the Department of Finance has a duty to be balanced in the way it examines this issue and analyses and presents the pros and cons. Unfortunately, I am not convinced that is happening.
I thank Ms McVeigh and her colleagues for their presentation. A financial transaction tax or Tobin tax is something everybody instinctively supports and considers a good idea. However, when one examines the potential ramifications in terms of costs to customers, job losses at the IFSC and so on, it becomes a little more complicated. Is the Department's position essentially that Ireland will stay out of a financial transaction tax arrangement so long as the United Kingdom does the same?
My understanding of the UK position is that it is not simply a case of Government versus Opposition. In fact, both of the main parties are opposed to an FTT on the basis of what might happen in New York as a consequence of its introduction. Would Ms McVeigh agree that there is a range of interdependent issues to consider?
I would like some clarity on what seems to be the evolving opinion or consensus on this issue. The Governor of the Central Bank made a speech some 18 months ago in which he was very critical of the proposal for a financial transaction tax. He placed heavy emphasis in that speech on potential jobs losses and the disproportionate impact on the Irish financial sector. However, when he attended a meeting of this committee more recently - not last week but on the occasion prior to that - and I asked him his current view on an FTT, it seemed his position had softened somewhat. I do not have the transcript of that meeting to hand, but his position certainly seemed to have shifted. Is Ms McVeigh aware of that shift in the Governor's view? Is there regular liaison between the Department and the Central Bank on this issue?
I am interested in the evolution of thinking on this issue and how views can change within the Irish and European contexts. Are the Department and the Central Bank in regular contact on the issue or is it something on which the Department has already made a determination without any expectation that the position is likely to change significantly?
Ms Brenda McVeigh:
We are in regular contact with our colleagues on the financial services side who deal with the Central Bank. Our own remit is tax and we are currently engaged primarily on the budget and Finance Bill. We are, however, in constant liaison with our colleagues in the financial services division who would deal with the Central Bank on this and other issues.
Ms McVeigh spoke earlier about the cost to customers and potential job losses arising out of the introduction of an FTT. Will she expand on that? Can she indicate, for instance, in a worst case scenario, where such a tax were imposed on us - I realise it would not actually happen that way - what level of job losses could we potentially see?
Ms Brenda McVeigh:
I cannot comment on that. I sound like a broken record but I have to keep coming back to the fact that in the unknown, it is difficult to quantify any of these issues. We have put forward what we see as issues of concern, our position being that while they remain a concern, we should not do anything to ramp them up. We have been advised that there certainly is potential for job losses. I assume the Government would not do anything - from what we are hearing in the Department, it seems clear the Government will not do anything - which would jeopardise jobs if we do not have to do it.
I am sure Ms McVeigh understands that we are concerned here with trying to weigh up the rationale for the introduction of a financial transaction tax. We would like to be able to quantify the number of jobs that could potentially be at risk versus the potential gains. Every move one makes in any budgetary situation has pros and cons. It is a question of weighing them up and making a value judgment.
Ms Brenda McVeigh:
I agree. However, when one does not know how something will operate in practice or even what type of institution will be impacted, it is very difficult to quantify specific potential effects. All we can say is that there are issues of concern and it is then for the Government to decide whether the concern is sufficient for it to make sense that we opt out. It is useful to consider the situation in countries which have already introduced an FTT. In France, where the tax was introduced last year, the yield seems to be 50% less than envisaged. Instead of an expected intake of €1.5 billion, the actual intake is €700 million, together with a drop in the volume of transactions. As we know, a decrease in the volume of transactions means a decrease in the volume of the work. There are indications that the Italians have also suffered a drop in yield and volume of transactions following the introduction of an FTT in that country earlier this year. One would have to assume the same scenario would play out in Ireland were we to introduce an FTT.
Ms Brenda McVeigh:
As I understand it, the answer is essentially "No". It is mostly based on listed shares at the moment. France has indicated its intention to adopt an FTT in respect of high-frequency trading, derivatives, repos and so on. The Italians have already done so, but we do not know the yield from it. Media reports are indicating the yield has dropped, but we do not yet have the quantities.
We are trying to obtain a sense of the validity or otherwise of imposing such a tax and the likely impact on different member states. If we were in possession of that data, perhaps we might arrive at a better judgment in respect of this matter. Will the Department and the Revenue Commissioners be analysing the data on a member state basis to obtain a comparison? If the answer is in the affirmative, perhaps our guests might return to the committee with the relevant data in order that we might engage in a more informed discussion on the matter.
Ms Brenda McVeigh:
Absolutely. As stated, we have the data from France . We actively seek data and we have obtained some. The questionnaire issued to member states by the Commission is going to indicate the position in any event. However, that questionnaire is both large and extremely complex and it will, therefore, take some time to collate the relevant data.
I will be addressing that matter. I call Deputy Mathews. Given that the select committee is due to convene at 5 p.m. to deal with legislation, I ask him to be as succinct as possible in the context of the questions he wishes to pose.
I thank our guests for attending and I apologise for my late arrival. I only had the opportunity to glance at the presentation so I am already on the back foot. I thank the Chairman for his indulgence and forbearance.
Have Ireland's senior and technically conversant leaders in this area had an opportunity to engage in conversations with their counterparts from other member states in respect of first principles, etc. at plenary meetings? I stand open to correction but I am of the view that the financial transactions tax has its genesis in a particular reaction to the financial meltdown which occurred across Europe and elsewhere and the financial vulnerability that exists in areas such as banking, shadow banking and insurance in respect of trust documentation as distinct from the physical delivery and production of goods and services. This is the voodoo land of intelligent, white collar individuals. Only in the past month, J.P. Morgan has been emerging from a $6 billion loss in London. The city of London may have all the players present but those players continue to be involved in highly unregulated financial transactions.
I am doing so. I refer in this regard to the rehypothecation of financial securities. Are our guests aware that rehypothecation is happening four, five and six times and that the institutions dealing with these financial assets do not have a clue with regard to their liabilities? There are multiples of hundreds of billions involved here. This matter is not discussed and that gives rise to concern. Would it be possible for the Department to take the lead on this and inquire as to what we are trying to do? Is it the case that we are trying to raise revenues across Europe by imposing a tax on financial transactions or are we trying to get a handle on the design and framework of all these markets that are more and less transparent and more and less risky? Are we trying to build up insurance funds? I am of the view that the impetus behind the FTT was to try to develop a mechanism similar to the depository insurance fund which obtains in the United States. The balance sheets of the European banks continue to be unmeasured, weak and vulnerable.
I would love a conversation to take place among the people who are conversant in this area. They should speak plainly to one another rather than bringing lever arch files to meetings with them and-----
Deputy Mathews is not asking questions. He is engaging in rhetorical form of delivery. I afforded members ten minutes for their contributions and the Deputy, who is not a member, has been speaking for five minutes and we have not yet had a response from our guests. I would welcome it if Ms McVeigh could respond to Deputy Mathews's questions or to what he implied. In doing so, perhaps she might provide clarification in respect of whether shadow banking will be contemplated under the framework relating to the FTT.
How does Ms McVeigh respond to the ideas and suggestions I am putting forward? What is the position of the Minister, for example? Any Minister might feel out of his or her depth when dealing with matters of this nature. That is fair enough. Let us encourage people to speak plain English to each other in order that we might develop frameworks and designs and identify both our purposes and what it is that we are trying to achieve. We should seek to establish whether the money recouped via the tax will just go into a general revenue pot or whether it will be used as insurance in respect of banking and shadow banking.
Ms Brenda McVeigh:
If it provides reassurance, I can inform the Deputy that we meet in plenary session. Obviously, matters should be discussed at meetings of the working party. Such gatherings provide an opportunity for bilateral and multilateral discussions to take place. We meet outside of the formal sessions in order to engage in such discussions. There is no point in ignoring the fact that only the 11 member states involved have a say in what they are finally going to achieve. At the most recent meeting of the working party, comments were made publicly in respect of how active Ireland had been during its Presidency in the context of trying to hold discussions such as those to which I refer. During the six months of our Presidency we were very active in talking to other member states and ensuring our views were heard, even outside of working party sessions. We have not been lackadaisical.
Deputy Mathews is not even a member of this committee. I will be obliged to ask him to leave if he does not behave. I thank Ms McVeigh. I note that she noted Deputy Mathews' delivery. Deputy Ó Ríordáin asked that the committee be kept informed as to the state of play relating to this matter. I opened proceedings by quoting Mark Twain and I will close by paraphrasing Seán O'Casey and state that this issue appears to be in a state of chassis. The direction in which matters are going to proceed is not well defined at this point. I would appreciate it if Ms McVeigh could inform the committee of any significant changes which might occur as the process moves forward. I would also appreciate it if she could keep us informed of any other matters are dealt with at forthcoming plenary sessions. If any such information is forthcoming, we may invite Ms McVeigh to come before us again at a later date.
I again thank Ms McVeigh and her officials for briefing the committee and for engaging with its members. What has been said has added to our understanding of the issue. I accept that we do not know where this is going but at least we understand that it may be going somewhere.