Opinion of the European Central Bank of 8 November 2024 on a financial transaction tax (CON/2024/36)

OPINION OF THE EUROPEAN CENTRAL BANK of 8 November 2024 on a financial transaction tax (CON/2024/36) Introduction and legal basis

On 25 September 2024 the European Central Bank (ECB) received a request from the Ministry of Finance of the Slovak Republic for an opinion on a draft law on a financial transaction tax and amending certain acts. The draft law was adopted by the National Council of the Slovak Republic on 3 October (hereinafter the ‘Law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and Article 2(1), third, fifth and sixth indents, of Council Decision 98/415/EC , as the Law relates to Národná banka Slovenska (NBS), payment and settlement systems, and rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. In accordance with Article 17.5, first sentence, of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the Law

1.1 The aim of the Law is to burden debit transactions recorded on the accounts of legal entities, organisational units and natural persons-entrepreneurs by introducing a tax on financial transactions (hereinafter the ‘tax’) and to define the range of entities and transactions that are exempt from the tax. The Law also aims to boost electronic payments to prevent tax evasion and fraud, and to enhance tax collection and the controls for ensuring compliance with tax obligations. 1.2 The Law applies to taxpayers that are: (1) natural persons-entrepreneurs, (2) legal persons, or (3) branches of foreign legal persons, provided they are clients of a payment service provider (PSP) performing financial transactions . The tax does not apply to the Social Insurance Agency, entities connected to the State budget, or municipalities and regions . 1.3 The tax is payable by a PSP, a branch of a PSP based in Slovakia, or the taxpayers themselves if they: (1) are a client of a PSP based outside Slovakia that does not have an branch in Slovakia; (2) are a client to whom the costs related to the execution of a financial transaction, which refers to their

1 Zákon č. 279/2024 Z. z. z 3. októbra 2024 o dani z finančných transakcií a o zmene a doplnení niektorých zákonov.

2 Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). activity performed in Slovakia, are charged; or (3) have performed financial transactions on a nontransaction account . 1.4 The following are subject to the tax: (1) any financial transaction in which an amount of funds is debited from the taxpayer’s account; (2) the use of a payment card issued with the transaction account for carrying out financial transactions; and (3) any booked expenses related to the execution of a financial transaction that refers to the taxpayer’s activity performed in Slovakia . 1.5 The Law also lists a number of financial transactions that are not subject to the tax, including, inter alia: (1) payment transactions carried out in connection with the payment of taxes, levies and contributions from the State budget and health insurance contributions; (2) payment transactions in connection with the write-off and recovery of funds resulting from unauthorised or incorrectly executed payments pursuant to Law No 492/2009 Coll. on payment services and on amendments to certain laws, as amended (hereinafter the ‘Law on payment services’); (3) payment transactions relating to the management of securities or other financial instruments; (4) payment transactions in relation to the purchase of government bonds; (5) payment transactions by securities traders related to the purchase of securities on behalf of their clients; (6) payment transactions carried out from separate non-assigned payment accounts maintained by financial institutions; (7) payment transactions executed by banks or licensed traders engaged in foreign exchange activities; (8) payment transactions carried out by the State Treasury; (9) compensation payments for unavailable deposits under deposit protection legislation; (10) payment transactions executed within a payment or clearing and settlement system between settlement agents, central counterparties, clearing houses or central banks and other participants in the payment or clearing and settlement system in financial instruments and PSPs; and (11) payment transactions carried out using payment cards, excluding cash withdrawals . 1.6 The tax basis is the amount of funds debited from the taxpayer’s account in a financial transaction . For this purpose, a transaction account is defined broadly to include the payment account of a taxpayer that is a legal person or a branch of a foreign person or a payment account of a taxpayer who is a natural person-entrepreneur in which that taxpayer carries out financial transactions related to their business . With reference to booked expenses related to the execution of a financial transaction, which refers to the taxpayer’s activity performed in Slovakia, the tax basis is the amount of booked expenses related to the execution of a financial transaction . If the transaction is carried out in foreign currency, the transaction amount is converted to euro at the reference exchange rate determined by the ECB or NBS for the purpose of determining the tax basis .

7 Zákon č. 492/2009 Z. z. zo 4. novembra 2009 o platobných službách a o zmene a doplnení niektorých zákonov v znení neskorších predpisov. 1.7 A tax rate of 0.4 % applies for financial transactions, excluding cash withdrawals, in which an amount of funds is debited from the taxpayer’s account, with the tax amount capped at EUR 40. For cash withdrawals, a tax rate of 0.8 % applies. A tax of EUR 2 per year applies for the use of a payment card related to the transaction account. Lastly, a tax rate of 0.4 % applies for the amount of booked expenses related to the execution of a financial transaction, which refers to the taxpayer’s activity performed in Slovakia . 1.8 The Law contains detailed provisions relating to the calculation, collection and administration (including record-keeping requirements) of the tax in respect of each tax period for which it is due . 1.9 The Law will apply as of 1 January 2025 .

2. Appropriate time to consult the ECB

2.1 As previously noted by the ECB, in cases of particular urgency that do not allow for a normal consultation period, the consulting authority may indicate urgency in the consultation request and the time limit for the submission of the ECB’s opinion may be reduced . However, as emphasised by the ECB on several occasions in its opinions , even in cases of particular urgency, or where the legislation has reached an advanced stage, the national authorities are not relieved of their duty under Articles 127(4) and 282(5) of the Treaty to consult the ECB at an appropriate stage in the national legislative process that allows sufficient time for the ECB to examine the draft legislative provisions and for the relevant national authorities to take the ECB’s opinion into consideration before the provisions are adopted. In this respect, the Court of Justice of the European Union has noted that the obligation to consult the ECB under the Treaty is intended ‘essentially to ensure that the legislature adopts the act only when the body has been heard, which, by virtue of the specific functions that it exercises in the Community [Union] framework in the area concerned and by virtue of the high degree of expertise that it enjoys, is particularly well placed to play a useful role in the legislative process envisaged’ .

3. Application of the tax to NBS

3.1 The ECB understands that the tax applies to NBS. While the Law excludes a number of bodies governed by public law from its scope of application, it does not exclude NBS. The Law applies to legal persons, including NBS. 3.2 Eurosystem monetary policy operations carried out by NBS may benefit from the exemption from the tax in respect of payment transactions executed within a payment or clearing and settlement system between settlement agents, central counterparties, clearing houses or central banks and other

13 Article I, Sections 6 and 7, of the Law.

14 Article I, Sections 9 to 13, of the Law.

15 Article V of the Law.

16 See Opinions CON/2010/8, CON/2010/56 and CON/2019/9. All ECB opinions are published on EUR-Lex.

17 See Opinions CON/2010/8, CON/2010/56, CON/2019/9, CON/2023/42, CON/2024/5 and CON/2024/11.

18 See Article 4, second sentence, of Decision 98/415/EC.

19 Judgment of the Court of Justice of 10 July 2003, Commission v ECB, C-11/00, EU:C:2003:395, paragraphs 110 and 111. participants in the payment or clearing and settlement system in financial instruments and PSPs . In this respect, the ECB understands that all euro-denominated payment orders relating to the participation by NBS’s counterparties in Eurosystem open market operations or the use of the Eurosystem’s standing facilities are settled on the counterparties’ accounts with NBS in the TARGET payment system . However, the wording of this exemption could give rise to legal uncertainty. For example, it might be argued that the exemption is limited to payment orders arising out of NBS’s counterparties’ participation in the TARGET payment system, as distinct from their participation in Eurosystem monetary policy operations. 3.3 The ECB understands that all payment system operations carried out by NBS (1) within the TARGET payment system, including the TARGET-SK component, and (2) within the retail payment system SIPS, both operated by NBS, will clearly benefit from the exemption from the tax under the Law in respect of payment transactions executed within payment or clearing and settlement systems . 3.4 Other exemptions from the tax which may be relevant to certain Eurosystem monetary policy operations carried out by NBS concern payment transactions relating to the management of securities or other financial instruments, which could be relevant to payment orders in connection with collateralised Eurosystem monetary policy operations, and payment transactions in relation to the purchase of Slovak Government bonds . 3.5 The extent to which NBS’s foreign exchange and foreign reserve management operations may benefit from the exemptions from the tax in respect of payment transactions executed within payment or clearing and settlement systems or relating to the management of securities or other financial instruments is unclear. 3.6 Finally, the ECB understands that the issuance of banknotes by NBS to credit institutions will be subject to the tax.

4. Monetary policy considerations

4.1 The euro area inflation rate reached record levels over the course of 2022 and posed significant challenges for the conduct of monetary policy. Guided by its primary objective of maintaining price stability, the ECB has taken determined action to ensure a timely return of inflation to the 2 % target over the medium term. Key ECB policy rates were raised by a cumulative 450 basis points between

21 See Article 27(6) of the Decision of the NBS 2/2015 on the implementation of the Eurosystem monetary policy framework in the Slovak Republic, as amended. One of the preconditions to be able to participate in the monetary policy operations of the Eurosystem is to have an account with the national central bank (NCB) where transactions can be settled. Usually, this account is in TARGET. See also Articles 19 and 22 of Guideline (EU) 2015/510 of the European Central Bank of 19 December 2014 on the implementation of the Eurosystem monetary policy framework (ECB/2014/60) (OJ L 91, 2.4.2015, p. 3). TARGET provides, inter alia, main cash accounts for the settlement of operations with central banks in euro and in central bank money. See Article 1(a) of Guideline (EU) 2022/912 of the European Central Bank of 24 February 2022 on a new-generation Trans-European Automated Real-time Gross Settlement Express Transfer system (TARGET) and repealing Guideline ECB/2012/27 (ECB/2022/8) (OJ L 163, 17.6.2022, p. 84). While there are cases where the euro-denominated account of the counterparty with the NCB is not in TARGET, this is not the case for NBS, where all euro-denominated payment orders arising out of Eurosystem monetary policy operations are settled via TARGET accounts. July 2022 and September 2023, with the intention of dampening demand and guarding against the risk of a persistent upward shift in inflation expectations. More recently, following a period of rate stabilisation, key interest rates have been reduced in view of the ongoing disinflationary process. 4.2 The conditions under which credit institutions deposit funds in the deposit facility play a key role in the monetary policy stance, and thus in the impact of monetary policy on aggregate demand and ultimately on inflation rates. If the Eurosystem monetary policy operations carried out by NBS are not exempted, the imposition of a tax will raise the price of central bank money, thereby interfering with the ECB’s monetary policy that sets the price of money through its key interest rates. For the reasons set out below, the imposition of a tax under such circumstances would not be justified. 4.3 First, the tax would interfere with the ECB’s monetary policy decisions by tightening the monetary policy stance. The monetary policy stance is steered by the key ECB interest rate on the deposit facility, which is the policy rate of reference since the revision of the operational framework implemented on 18 September 2024. The imposition of a tax, by penalising the participation of credit institutions in monetary policy credit operations, would affect the attractiveness of overnight deposits with NBS. Such a tax would thus be equivalent to an increase in the ECB’s deposit facility rate. 4.4 Second, the tax would distort the signalling of the monetary policy stance. The imposition of a higher tax on the issuance of banknotes by NBS than on digital reserves, as provided for by the Law, would indeed distort the price of central bank money, by affecting central bank reserves differently, depending on whether they are held digitally or in the form of cash. 4.5 In addition to their access to central bank reserves, credit institutions exchange liquidity in the money market. The ECB’s monetary policy decisions are determined by price stability considerations, such as the need to provide or absorb liquidity in the market, and favourable liquidity conditions in the money market are crucial for the effective implementation of these decisions. The tax may indirectly affect monetary policy implementation through its likely detrimental impact on financial market liquidity, which could impede price discovery. This could impede the achievement of the monetary policy objectives of the Eurosystem, of which NBS is a part . 4.6 Moreover, the imposition of a tax could lead to an increase in bank funding costs, which would adversely affect the provision of credit to the Slovak economy. This possibility exists in view of the increase in the cost of central bank funding – in the event that the Eurosystem monetary policy operations carried out by NBS are not exempted from the tax – and in view of the potential depletion of the deposit base of Slovak banks, as taxpayers would try to avoid the tax on their financial transactions in Slovakia and possibly shift part of their financial activity to other jurisdictions. In that respect, the tax could additionally give rise to some degree of distortion in the transmission of monetary policy throughout the euro area. 4.7 The tax may also give rise to further distortion in the transmission of monetary policy within the Slovak economy itself, with adverse implications for recovery. First, the tax could lower the demand for corporate loans. In a context of policy rate cuts, this would have detrimental repercussions on the transmission of monetary policy. Second, the tax would de facto represent a turnover tax for firms and disadvantage firms that have a high turnover and/or are cash-intensive. As the tax applies

25 See paragraph 3 of Opinion CON/2012/59. irrespective of profits, it may have a disproportionate impact on smaller firms that have lesser ability to optimise their tax liabilities, and on firms that generate low profits relative to their turnover. Moreover, this type of tax would asymmetrically affect certain transaction-intensive sectors, such as retail trade or mail-order services. This effect is likely to be exacerbated by the fact that the tax is anticipated to be higher for cash withdrawals than for electronic payments.

5. Financial stability considerations

5.1 The introduction of a permanent tax in a manner that is not harmonised with other Member States may produce distortions in financial markets and lead to fragmentation in the European financial system . As noted in paragraph 4.6, the asymmetric imposition of the tax may incentivise taxpayers to shift part of their financial activity to other jurisdictions in an effort to optimise their own tax liability. This may take the form of transferring financial operations to other entities in the same corporate group or establishing payment accounts in other jurisdictions. This may result in the migration of taxpayer deposits from payment accounts held in Slovakia which may negatively impact bank funding liquidity and costs and PSPs’ profitability. This may in turn interfere with the ability of PSPs authorised and supervised by NBS to meet the prudential requirements laid down in Directive (EU) 2015/2366 of the European Parliament and of the Council as transposed into Slovak law. 5.2 Additionally, in order to comply with the Law, PSPs will be required to implement the necessary adjustments to IT and administrative systems for the collection and transfer of the tax to the Slovak tax authority . The increased operational costs may be passed on to clients, making PSPs providing services in Slovakia less competitive vis-à-vis other providers in the Union. This may result in an increase in the price of payment services and consequently weaken demand for payment services in Slovakia, decrease the access of certain segments of the taxpayer population to payment services and partially divert economic and financial activity to other Member States . Additionally, there is a risk of double taxation for taxpayers that also operate through branches in other jurisdictions where a similar tax is also levied . 5.3 Given the potential impact the tax may have on the volume of financial transactions and the demand for payment services, the ECB recommends that the Slovakian legislature should undertake a comprehensive impact assessment to identify potential negative consequences of the tax for the Slovakian financial system and wider economy. 5.4 The ECB has consistently expressed its support for efforts taken towards the realisation of a Capital Markets Union (CMU) which would strengthen the role of the euro and integrate the Union’s financial sector . The Commission has identified heterogenous national tax regimes, leading to market

26 See paragraph 4.2 of Opinion CON/2023/35.

27 Law on payment services.

28 Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC (OJ L 337, 23.12.2015, p 35).

30 See paragraph 4 of Opinion CON/2012/59.

31 See paragraph 4.5 of Opinion CON/2023/26.

32 See, for example, paragraph 1.4 of Opinion CON/2022/11, paragraph 1.2 of Opinion CON/2022/19, paragraph 1.2.1 of Opinion CON/2023/11 and paragraph 1.3 of Opinion CON/2023/30. fragmentation and impeding cross border investment, as one of the most significant barriers to the establishment of a well-functioning CMU . In this vein, the heterogenous tax treatment of financial transactions by a Member State may interfere with the advancement of the CMU and of Union efforts to harmonise the regulation of payment transactions to ensure market participants fully benefit from the internal market . Accordingly, the ECB invites the Slovakian legislature to consider the consequences of the tax on the Union’s objectives with respect to the CMU.

6. Cash withdrawal considerations

6.1 Payment transactions carried out with payment cards, other than cash withdrawals, are exempted from the tax . While a tax rate of 0.4 % and a maximum of EUR 40 apply for financial transactions in which funds are debited from the taxpayer’s account, a tax rate of 0.8 % with no upper limit applies for cash withdrawals. Furthermore, a tax of EUR 2 per year is payable for the use of a payment card related to the transaction account. 6.2 On 28 June 2023 the Commission published a proposal for a Regulation of the European Parliament and of the Council on the legal tender of euro banknotes and coins , which includes an obligation for Member States to ensure sufficient and effective access to cash throughout their territory. 6.3 Cash withdrawals are a key channel of access to euro cash. Since individual payment transactions carried out with payment cards are exempted from the tax, the tax introduces an additional cost with respect to the use of cash that does not apply to card payments. As a result, it introduces a constraint on access to cash that undermines the effectiveness of the legal tender status of euro banknotes . The ECB therefore recommends that the tax should be reconsidered. The ECB is neutral with regard to cash and electronic means of payment, meaning that it does not favour one instrument over another. As a result, the ECB follows a carefully considered and balanced approach to national measures taken in this area. National measures should not make the use of euro banknotes more expensive in practice than electronic methods of payment, thus putting the effectiveness of legal tender at a disadvantage . 6.4 Moreover, the ECB is concerned that the tax may set a precedent for the possible future taxation on the channels available to access euro banknotes and coins .

7. Legal and central bank independence considerations

7.1 Pursuant to Article 127(1), first sentence, of the Treaty, together with the Law on Národná banka Slovenska (hereinafter the ‘Law on NBS’), the primary objective of the European System of Central Banks (ESCB) and of NBS is to maintain price stability. Pursuant to Article 127(2), first indent, of the

33 COM(2020) 590.

34 See Opinion CON/2024/13.

36 COM(2023) 364 final.

37 See paragraph 2.3 of Opinion CON/2015/55.

38 See paragraphs 2.1, 2.2 and 2.4 of Opinion CON/2015/55.

39 See paragraph 2.3 of Opinion CON/2015/55. Treaty, a basic task to be carried out through the ESCB, including NBS, is to define and implement the monetary policy of the Union. Pursuant to Article 17 of the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’), in order to conduct their operations, the NCBs, including NBS, may open accounts for credit institutions, public entities and other market participants and accept assets, including book entry securities, as collateral. Pursuant to Article 18.1 of the Statute of the ESCB, in order to achieve the objectives of the ESCB and to carry out its tasks, the NCBs may (1) operate in financial markets by buying and selling outright (spot and forward) or under repurchase agreement and by lending or borrowing claims and marketable instruments, whether in euro or other currencies, as well as precious metals; and (2) conduct credit operations with credit institutions and other market participants, with lending being based on adequate collateral. Pursuant to Article 18.2 of the Statute of the ESCB, the ECB is to establish general principles for open market operations and credit operations carried out by itself or the NCBs, including NBS, including for the announcement of the conditions under which they stand ready to enter into such transactions. 7.2 Pursuant to Article 127(2), second and third indents, of the Treaty, two of the basic tasks to be carried out through the ESCB, including NBS, are to conduct foreign exchange operations consistent with the exchange-rate policy for the euro in relation to non-EU currencies and to hold and manage the foreign reserves of the Member States, including Slovakia. Pursuant to Article 23, second and third indents, of the Statute of the ESCB, the NCBs, including NBS, may acquire and sell spot and forward all types of foreign exchange assets and precious metals, and hold and manage these assets. 7.3 Pursuant to Article 128(1) of the Treaty, the ECB has the exclusive right to authorise the issue of euro banknotes within the Union. The ECB and the NCBs, including NBS, may issue such notes. The banknotes issued by the ECB and the NCBs are the only such notes to have the status of legal tender within the Union. Furthermore, according to the Court of Justice, Article 128(1) of the Treaty underpins the singleness of the euro and is a precondition for the effective conduct of the Union’s monetary policy . 7.4 NBS is a public institution whose primary objective – in line with the Treaty, the Statute of the ESCB and the Law on NBS – is, as noted above, to maintain price stability. In order to achieve this, NBS participates in the common monetary policy which the ECB sets for the euro area. In the performance of such tasks by NBS, the Slovak authorities should respect the principle of central bank independence . The principle of central bank independence enshrined in Article 130 of the Treaty requires, inter alia, that: (1) an NCB’s functional independence should be ensured by having the necessary means and instruments for achieving price stability independently of any other authority; and (2) an NCB’s financial independence should be respected by ensuring that a Member State may not put its NCB in a position where it has insufficient financial resources and inadequate net equity to carry out its ESCB-related tasks. 7.5 If Eurosystem monetary policy operations carried out by NBS are not exempted from the tax, the Law may impair NBS’s functional and institutional independence. First, the Law may impair functional

41 See judgment of the Court of Justice of 26 January 2021, Hessischer Rundfunk, C-422/19 and C-423/19, EU:C:2021:63, paragraph 43.

42 See paragraph 3 of Opinion CON/2012/59. independence as the tax – if applicable to NBS’s monetary policy operations – could disrupt the monetary policy transmission mechanism by penalising the participation of credit institutions in monetary policy operations, such as credit operations, and hence affect the attractiveness of overnight deposits within NBS. Second, the Law may impair NBS’s financial independence as the imposition of the tax on NBS’s monetary policy operations might negatively impact NBS’s ability to restore its reserves independently with the income arising from these operations, because part of this income would need to be systematically allocated to the payment of the tax, leading de facto to limiting the financial resources available to NBS to carry out its ESCB-related tasks . 7.6 To conclude, as a matter of principle, the imposition of a tax on NBS’s monetary policy, foreign exchange, foreign reserve management and cash issuance operations would be incompatible with the Eurosystem’s functional independence, and therefore unjustified. Given the unclear and inconsistent scope and wording of the exemptions from the tax that NBS may to some extent enjoy in respect of its Eurosystem operations, and also taking account of the need to protect NBS’s financial independence, the ECB invites the Slovak authorities to consider granting NBS a general exemption from the tax. This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 8 November 2024. [signed] The President of the ECB Christine LAGARDE

43 See paragraph 3 of Opinion CON/2012/59.