The EU’s Proposed Financial Transaction Tax: Is it time to take alternatives seriously?

After seven years with no signs of agreement, the financial sector cannot withstand such a level of uncertainty regarding the FTT, a levy that has stymied negotiators for several years. Is it time to consider other alternatives?

Author: Antonio Castillo Espinosa, Associate Professor of International Taxation at IE Law School

Spain recently published a draft of its proposed Financial Transaction Tax (FTT). Since the European Commission proposed such a measure to all Member States seven years ago, only France and Italy have complied, making this the third unilateral initiative of its kind in the EU. To understand this proposal fully, one must consider the reasons for a FTT, and the possibility of using VAT as a means to the same end.

Historical Context

In September 2011, the European Commission published a Council Directive proposal directed at its 27 Member States, regarding a Financial Transaction Tax (FTT)[1]. The aim of the Directive was to establish a “common system” of FTT, as the Commission believed that “a coordinated framework at EU level would help to strengthen the EU single market (…) and harmonize different existing taxes on financial transactions in the EU.” Due to a lack of consensus, this proposal did not move forward and was replaced by another one, which invoked the enhanced cooperation mechanism.[2] However, this second proposal was not approved either and only ten Member States remain part of it.[3]

France and Italy enacted their own domestic FTT laws in 2012.[4] Spain announced a new FTT in 2018.[5]

Although these initiatives are sometimes perceived as an innovative form of taxation, the reality is that establishing taxes on specific financial transactions is not a new phenomenon. This tax is commonly known as a “Tobin tax,” named for J. Tobin, who first suggested the model in 1972. Even before that, the first theoretical justification for this type of taxation was developed by J.M. Keynes, in 1936.

There has been debate on the merits of establishing a FTT for the past forty years, and discussion has become even more frequent recently. A literature review reveals that the objectives behind such tax initiatives have not been consistent over time. Keynes supported the initiative as a tool to reduce speculation and decrease the cost of capital. Later, Tobin saw it as a means by which to decrease exchange rate volatility. Neither economist focused on tax collection. Recently, however, revenue potential has been seen as a primary goal of this initiative.

Considering this, one must think about the future of the EU. Three of the ten Member States participating in the enhanced cooperation mechanism have already enacted or announced their own domestic FTT. This begs the question: where is the “common system,” “coordinated framework” and “harmonization” that the EU initially proposed?

Part of the dilemma is identifying the EU’s motives in creating such a proposal. It is clear that, in addition to preventing fragmentation of the Single Market, one of its primary goals was to create increased tax revenue from the financial sector. This goal originated from the perception (be it accurate or not) that the financial sector was under-taxed due to the VAT exemption on financial transactions. The Spanish government has used this justification, as well. But is it valid?

Challenges in Establishing a FTT

Let’s start with the taxable event to which FTT is applied: financial transactions. As we know, VAT was designed to tax the supply of goods and provision of services. Given this definition, the finance industry should be no exception, as the financial sector provides many financial services. However, most of them do not have VAT. So, the question is: Why are these transactions not taxed with VAT? Does this create a tax advantage for the financial sector?

Unfortunately, there is not a straightforward answer.

Financial transactions are exempt from VAT because it is difficult to determine the “value” they “add.” The design and administration of indirect taxes applicable to financial institutions presents unique problems, as Gillis[6] described in 1987. One of the greatest difficulties is objectively determining the transaction to be assessed or, in other words, the tax base for each transaction. In most deliveries of goods and services, the gross sales value is easily identifiable. In financial operations, however, it is not as clear. For example, in thinking about banking activity, we see capital intermediation as a core service. When a bank issues a loan, the bank will receive a series of payments that corresponds to both the principal initially borrowed and the accrued interest. That accrued interest, in turn, affects the cost of remunerating deposits,[7] and generates a margin of intermediation to contribute to its benefit. In this scenario, what should the taxable base be? Should it be the principal amount of the loan, the payment of the loan installment, only the amount corresponding to the interest or only the amount of the interest corresponding to the intermediation margin? Years ago, Gillis (1987) suggest that the last option best corresponded to the added value of the transaction. However, more recently, economists like López-Laborda and Peña (2018)[8] have argued in favor of the alternatives.

Despite the aforementioned complexities, there is significant scholarship on the possible application of VAT to financial transactions: Auerbach and Gordon, 2002[9]; Schenk, 2010[10]; Mirrlees et al, 2010[11] and 2011[12]; and Grubert and Krever, 2012[13]; among others.

Tax Advantage in the Financial Sector

Determining tax advantage is also tricky. According to the aforementioned EU press release, “the financial sector enjoys a tax advantage of approximately €18 billion per year because of VAT exemption on financial services.” However, studies such as Lockwood’s (2011)[14] show exactly the opposite.

Considering the range of opinions on the matter, this issue deserves a deeper technical tax discussion on FTT versus VAT. Though this conversation is happening within academia, it has garnered little attention at the political level.

This article aims to question the real nature and viability of the European Commission proposal regarding a FTT.  After seven years of discussion, both the financial sector and European citizens deserve an answer and/or an alternative.

Public Perception

There is one additional element to the debate: citizens’ perceptions of VAT and FTT. VAT is a transactional tax that, in general, should have a negligible effect on companies, as it is paid by the final consumer of a good or service. As such, people tend to be very cautious about any measure that might increase VAT. In contrast, FTT has been designed as an indirect tax borne by the entities that carry out financial transactions. Thus, this measure tends to have greater public support[15].

It’s important to note that perceptions of the differences between these two taxes are not necessarily based in reality. Though a VAT on financial transactions would create an additional tax to be paid by the final consumers of those services, a FTT would have similar effects on people who trade with financial instruments.

Therefore, this article aims to question the real nature and viability of the European Commission proposal regarding a FTT.  After seven years of discussion, both the financial sector and European citizens deserve an answer and/or an alternative. Perhaps the EU should simply express that the FTT proposal was not a good idea, and try to stop other Member States from creating unilateral proposals like Spain’s. Or, the EU could look seriously to other alternatives, such as establishing a VAT on financial transactions.


Now, I’d like to propose (maybe provoke) that the reader try a simple, speculative exercise to see the potential effects of VAT versus FTT on tax revenue.

Between 2013 and 2015, the FTT yielded 2,459 million euros in France and 1,151 million in Italy. In both countries, citizens have credit (personal or mortgage) and insurance (life, medical and others, such as car, home and personal risk). In the same period, these transactions amounted to 1.2 billion euros in France and 0.7 billion in Italy.[16] By applying a super-reduced 0.2% VAT rate on these transactions, the additional VAT revenues in both countries would have been essentially the same as the FTT revenues.

This example is simplistic and flawed. However, it does suggest that the application of a super-reduced VAT rate to two types of financial transactions (credit and insurance) would have a similar revenue effect to that of the FTT, without necessitating the creation of a new tax. Furthermore, to the extent that the number and type of VAT-eligible financial transactions is increased, the margin for a super-reduced VAT rate would be even greater.


To conclude, I want to emphasize that the FTT, as proposed by the EU, is likely to fail. It was proposed seven years ago and still has not been approved. Some Member States have started to move forward with their own initiatives, and now there are three countries in the EU with three different FTT systems. Obviously, this goes against the proposed ideal of a common system, creates market fragmentation and, therefore, threatens the Single Market.

The other thing to consider is the justification for an FTT. The EU has repeatedly claimed that the financial sector is under-taxed due to the VAT exemption on financial transactions. Additionally, it has been argued that the financial sectors in several EU countries have received enormous amounts of money through bail outs[17]. This first claim is debatable, though the second one is fact. That said, transparency regarding the need and justification for a FTT is advisable, as basic tax principles, such as tax neutrality, are affected differently by the different scenarios outlined above.

The bottom line is that a critical sector of the economy, such as the financial sector, in a single economic space like the EU, cannot withstand such a level of uncertainty. It is time to consider alternatives to the FTT, and VAT could be one of them.

Professor Castillo is Director of Tax for Europe & Latin America at PerkinElmer (an S&P 500 Corporation), with full responsibility of all direct and indirect taxes. He provides support and guidance in areas such as business development, cash repatriation, capital and legal structure and tax planning optimization. Prior to that, he spent several years in other US and European multinational companies such as Bvlgari, Deutsche Bank or General Dynamics. He is a member of the Madrid Bar Association (ICAM), the Spanish Tax Advisors Association (AEDAF) and frequently participates as speaker in international forums about corporate taxation.

Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution.

[1] European Commission – Press release, Brussels September 28th, 2011 
[2] Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.
[3] In December 2015, Estonia left the group supporting the enhanced cooperation mechanism.
[4] The French one was effective August 2012 and the Italian one March 2013.
[5] Agreement for the 2019 State General Budget: budget for a social State.
[6] Gillis, M. (1987). The VAT and financial services. Development Research Department Economics y Research Staff. World Bank. DRD 220.             
[7] To simplify the argument, we could say that the bank lends the money it receives.
[8] López-Laborda, J. and Peña, G. (2018). A New Method for Applying VAT to Financial ServicesNational Tax Journal, 71, issue 1, pp. 155-182. 
[9] Auerbach, A. J. y Gordon, R. H. (2002). Taxation of financial services under a VAT. The American Economic Review. (92) 2, pp. 411-416.
[10] Schenk, A. (2010). Taxation of financial services (including insurance) under a United States value added tax. Tax Law Review (63) 2. New York University.
[11] Mirrlees, J. et al. (2010). Dimensions of Tax Design (The Mirrlees review). Institute for Fiscal Studies. Oxford University Press. 
[12] Mirrlees, J. et al. (2011). Tax by Design (The Mirrlees review). Institute for Fiscal Studies. Oxford University Press. 
[13] Grubert, H. and Krever, R.  (2012). VAT and Financial Services: Competing Perspectives on What Should Be Taxed. Tax Law Review 65, pp. 199–239.
[14] Lockwood, B. (2011). How the EU VAT exemptions impact the banking sector. University of Warwick – PricewaterhouseCoopers.                
[15] According to the EU´s Eurobarometer of June, 22nd 2011, 61% of the surveyed people were in favor of a FTT. 
[16] The amounts of the credits refer to the principal amount borrowed and the amounts of the insurances refer to the premiums paid. Those figures have been obtained from the Statistic Bulletins of the Bank of France, the Bank of Italy and the Italian National Association of Insurance companies.
[17] Millaruelo, A. and Del Rio, A. (2017). The Cost of Interventions in the Financial Sector Since 2008 in the EU Countries. Banco de España. Article 9/17.