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Eurozone Countries Punt FTT Decision Into 2016

Eurozone finance ministers met to discuss the problematic financial transactions tax (FTT) on December 8, but decided to give themselves another six months to work on an agreement over its terms. Estonia, however, appears to have cold feet.

The latest discussions weren't a complete failure; the participating countries managed to agree on some basic parameters of the tax. Notably, they agreed that all share trades would be subject to the tax, including intra-day transactions. They also agreed that the taxation of derivatives should be based on the widest possible base and should not impact the cost of sovereign borrowing.

Yet, many facets of the FTT's design remain up in the air, not least the rate structure of the tax. The finer details of the taxation of derivatives also need to be worked out. The agreement states that, "In some cases, adjustments to the tax rates or to the definition of the tax base might be necessary in order to avoid distortions." And although the participating countries agreed to follow the territorial scope outlined in the European Commission's proposal, the statement qualifies this by stating: "It is now being determined whether it is more sensible to start taxation with only shares issued in member states participating in the enhanced cooperation. Important elements in this determination include relocation risks and administrative costs."

Other crucial aspects of the FTT have yet to be worked out, including the mechanisms needed to collect the tax, and how the revenues are distributed and spent.

There is another problem for the FTT group. Estonia refused to sign up to the agreement. This is because under the territorial scope of the FTT, while traders based in the country will likely have to pay the tax, the Estonian Government will unlikely see much in the way of revenue.

This reduces the original 11 EU member states taking part in the FTT to 10, and with Slovenia having expressed dissatisfaction with the an earlier deal, this leaves the group dangerously close to the nine-member state threshold needed under the enhanced cooperation rules.

Under the proposed FTT directive drafted by the Commission in 2011, the tax would be imposed on all transactions in financial instruments, with the exchange of shares and bonds taxed at a rate of 0.1 percent and derivative contracts at a rate of 0.01 percent. The tax is expected to produce revenues of as much as EUR35bn (USD38bn) a year, which supporters of the idea argue represents a fair price for the financial sector to pay for its involvement in the financial and economic crisis.

Because most member states opposed the introduction of an EU FTT, it is to apply in no more than 11 countries on the basis of "enhanced cooperation," a legislative mechanism used in the EU when unanimity on new proposals cannot be reached in the Council. The 11 countries are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.

However, achieving a consensus on the technical design of the tax has been problematic from the beginning. The FTT 11 were supposed to have concluded an agreement by this time last year in readiness for the introduction of the transactions tax in 2016. Earlier this year, the deadline was reset to December 2015, but, evidently, this has also been missed. Under the latest agreement, the participating countries have given themselves until mid-2016 to iron out the remaining issues, meaning that FTT is highly unlikely to be in place before 2017.

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