EU Hints at Scaling down Controversial Financial Transactions Tax

The European Union tax chief has hinted that the region may scale down the severity of the proposed financial transactions tax in a bid to ease market fears that the scheme would backfire.

Algirdas Semeta revealed that he would prefer to lower the tax rate for trading financial products.

However, the development is the latest in a series of setbacks for the proposal, which has met fierce criticism from the financial industry and some EU member states.

In January this year, EU finance ministers paved the way for 11 eurozone countries to design a FTT, which will effect equities, bonds and derivatives trades.

Conceived by US economist James Tobin more than 40 years ago, the scheme was proposed in the EU as a way of discouraging speculative trading.

It is expected that a stock or bond trade will receive a 0.1% tax rate, while a financial derivatives contract will receive a charge of 0.01% for every transaction. This applies if one of the trading parties is located in the EU.

While the proposal received divided opinion from member states in the EU, the remarks by Semeta is expected to mark a radical change of track for the scheme.

"The Commission is ready to examine the suggestions made for an initial introduction of the tax with lower rates for products of specific market segments," Semeta said in a speech to lawmakers in the European Parliament, adding that the rate could later rise.

"Both government bonds and pension funds should remain in the scope of the directive. For those two categories of products, however, a reduced rate ... could constitute a suitable way forward and should be further examined."

It was for the first time Semeta was speaking about changing the scheme since he outlined the blueprint for the tax.

The European Commission said last week that the tax would be delayed by at least six months, as the 11 participating countries continue to be concerned over key questions, including the scope of the levy.

The commission noted that the tax would only enter into effect in the middle of next year, even if everything goes well, because the participating states have yet to agree on certain key issues in connection with the new scheme.

In April this year, a London Economics study commissioned by the City of London Corporation, said the repercussions of 11 Eurozone countries implementing the FTT could lead to a £4bn (€4.7bn, $6bn) rise in the cost of issuing UK debt.

The study added that the cost of firms raising capital will increase by 100 basis points or more in member states that do not subscribe to the tax because of reliance on debt capital markets.