Financial transactions tax – precedents

Legal assistance paper

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Date produced: 04/06/2010

1. Are there any existing examples of coordination, at an international level, of national taxes on international financial flows and financial transactions? If so, what international forums/institutions are involved and what roles do they play?

2. What would be the proper international forum for coordinating taxes in this way? Would the UNFCCC be one such appropriate forum? 

3. What structure would the international coordinating fund need to take?

4. Does the language in the LCA text (FCCC/2010/6, para 22-para 42 Annex 1) enable such a coordinating fund?

5. Could a COP decision under the Convention require the development of the domestic legislation necessary for implementation of financial transaction taxes (FTTs)? Alternatively, could a COP decision mandating action by the IMF or G20 require development of such legislation?

Summary: The general principle remains that tax is a matter to be decided at a national level by each state’s government. There are currently few mechanisms in place for transnational organisation to require the imposition of financial transactions tax by a sovereign nation, but examples of these include bilateral taxation treaties and the EU VAT(IVA) tax. However, we are not aware of any existing examples of international coordination of financial transaction taxes (FTTs), although models at an international and an EU level are being discussed and proposed.  The language of the LCA text does not require the implementation of an international coordinating fund for tax and it is unlikely that states would cede this power, but it is possible that some states could set up FTTs voluntarily to fund UNFCCC activities.

1. As a general principle, taxation remains a matter of national law. There are currently only a few examples of transnational organization of tax regulation and collection, these include the EU VAT(IVA) tax, which is determined and collected at EU level and bilateral treaties (neither of which are examples of an FTT). Both the OECD and the UN have working groups that produce model bilateral treaties and commentary to the same, but these are not binding on any members and the terms of bilateral treaties often differ significantly from the models produced by these organizations.

2. The UNFCCC could be a coordinating forum, but it would nevertheless require each signatory of the Convention to voluntarily contribute to the fund.

3. As an ‘international coordinating fund’ for FTT does not currently exist, any structure for an international coordinating fund is open for discussion. The EU has made proposals recently for an EU wide financial transactions tax which could act as a global model.  There are also discussions in the USA to introduce a ‘Tobin’ tax on foreign exchange transactions (named after the Nobel Laureate economist James Tobin). It is likely that these proposals will be opposed by the UK and by Wall Street respectively and the current EU and USA proposals do not go into detail about the potential  structure of the funds.

Models for the structure of an international financial transaction tax have been proposed by academics.  These include:

  • a tax on traditional stock exchange transactions in stocks and bonds;
  • a tax on foreign exchange transactions (the ‘Tobin tax’), involving transactions in traditional foreign exchange markets (without financial derivatives); and
  • a charge on ‘all’ transactions i.e. including transactions in financial derivatives.

It will be a matter for discussion as to how any international financial transaction taxation fund may be structured and which international bodies would set the rates, control collection and/or administer the resulting fund. It is likely that these models for FTT will be relevant to the discussion.

4. The language in the LCA text provides for enhanced action on the provision of financial resources and investments. None of these provisions would require a member to impose an FTT. However, the language does provide for coordination in respect of financial resources, which would permit the study of various options, including finding a mechanism for multilateral agreement on FTTs or other funding sources.

5. There is doubt about whether COP decisions provide an unambiguous basis to impose adequately binding, enforceable commitments with respect to quantified emissions reduction commitments or financial obligations for developed countries.  Furthermore, individual states are unlikely to cede their taxing authority to a transnational organization.  Accordingly, a COP decision could not require development of domestic tax legislation. However, the member parties could voluntarily implement FTTs to fund the UNFCCC activities.