Q+A-Will EU agree on taxing banks more after crisis?

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Thursday September 09, 2010 03:28:11 AM GMT

BRUSSELS, Sept 7 (Reuters) - European Union finance ministers made a fresh attempt on Tuesday to settle their differences over taxation of banks and trading.

Here is a rough guide to an issue that has divided the bloc's policymakers this year.

HOW COULD EUROPE TAX BANKING MORE?

Sweden, Germany and Britain have been the first in Europe to introduce a modest levy on banks. Hungary and Austria want to follow suit.

Berlin would also like a tax on financial transactions, such as the trading of company shares.

France is in favour of both although it would only support a transaction tax if the international community were to follow -- a move seen as unlikely.

Europe's biggest three countries disagree as to what should be done with the money from a straight levy on bank profits. Germany is using revenue from their levy for an emergency fund while France and Britain want it for the public purse.

There are also divisions over whether banks should pay levies in both their home country as well as in cities abroad like London where they may operate.

HOW MUCH COULD ADDITIONAL TAXES COST THE INDUSTRY?

The bank levy in Germany is designed to raise roughly 1 billion euros ($1.3 billion) each year, while Britain is hoping to draw in more than twice as much.

European officials estimate that a wider bank levy on profits, based on staff pay and the group's earnings, could cost the industry between 5 and 20 billion euros across the EU's 27 countries.

More money could be made, they calculate, by imposing a tax on financial transactions, such as on trading in bonds. Charges on such deals could raise at least 20 billion euros, based on a modest 0.1 percent tax. Some experts say its potential is many times this sum.

The tax net could be widened by including trading in derivatives. This is a vast market but it will remain hard to monitor and tax until Brussels forces more trading onto exchanges or through central clearing houses.

IS WASHINGTON PLANNING TO DO THE SAME ON WALL STREET?

Repeated attempts among the world's most important economic powers (the Group of 20 countries) have failed to agree on imposing bank levies or other banking taxes, which makes it difficult for Brussels to go it alone. U.S. President Barack Obama climbed down on plans for a bank levy in his package of financial reform, faced with a lack of wide support among Washington law-makers. The government does not plan any tax on financial transactions.

Imposing a substantial levy in Europe could put banks here at a disadvantage to their rivals across the Atlantic.

Sweden, which unsuccessfully experimented with such a tax, has argued that it can backfire by driving trading abroad. It hoped to raise 1.5 billion euros with its scheme but ended collecting just 80 million as trading in Stockholm evaporated.

HOW LIKELY IS IT EU LEADERS WILL AGREE A SCHEME?

Britain opposes pan-European rules and Ireland is nervous that an extra charge on its banks could exacerbate their difficulties.

Global opposition is also strong. Countries including Japan, Canada and Brazil, whose lenders came largely unscathed through the economic turmoil, derailed attempts to agree on a bank levy among the Group of 20 countries.

Next year, French President Nicolas Sarkozy will attempt to put the issue back on the agenda when France chairs meetings of the G20 countries.

The European Union's executive, which needs the support of larger powers such as Germany and Britain to pass laws, is unlikely to impose order amid this cacophony of conflicting opinions. It also faces stiff opposition abroad. Michel Barnier, the commissioner in charge of ensuring Europe functions as a single market, is working on a framework for countries to impose bank levies in the bloc although differing views may force him to compromise on vague guidelines. (Editing by Stephen Nisbet)

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