Financial Regulation of Netherland Bank - Essay Example

Netherland’s Bank Tax Introduction In talking about Financial regulations, it can be questioned what financial regulation means? Financial regulation can be termed as the real rules that are written down to state how a certain finance aspect shall be carried out. There are very many examples of financial regulations all over the world that have been effected by governments and organizations alike. As stated before, they are rules and laws that control the manner in which financial institutions like brokerage firms, banks, insurance and investment firms transact their financial businesses, on top of which, they also control what these financial companies can do and cannot do. Financial rules are mainly set up for various reasons such as to protect persons or organizations who or that decide to invest, enhance stability in the financial markets and ensure there is order in the financial markets. Financial regulations normally range from the ensuring that the standards that are considered the minimum requirements to the strict ones are followed. Levies or taxes imposed on banks are some of financial regulations placed on banks (Weber & Mares, 2012). A bank tax is a tax that banks pay per year on the value of all the debts of the banks in that country including money deposited with them (Knight, 2011). This paper seeks to look at recently financial regulations in Netherlands, providing a detailed and critical explanation of what the regulation entails, its proposition, its rationale, what might be its pros and cons, its comparisons with similar rules used in other countries or in previous years and how markets appear to have reacted to it. The financial regulation been looked at is the bank tax introduced in the Netherlands. The Netherlands bank tax was introduced through a bill in the Netherlands House of Representatives in 2011 during the month of December. Its aim was to implement the bank tax. This bank tax applied to all the financial organizations that held a banking license. The direction chosen by the Dutch was one other than the proposed regulation by the European Commission which was about the application of taxes on financial transactions. The bill was passed by the Dutch cabinet. In terms of the budget, this financial regulation proposal aimed at financing in part, the temporary decrease of the funds gotten from the property transfer tax. As the original bill stated, the proposed bank tax was to avail funds of over 300 million Euros each year. Looking at the bank tax in depth, it aimed at ensuring that the banking sector added to the costs that the Dutch government incurred in supporting the same sector (Armstrong & Drucker, 2008). It also aimed at enabling the Dutch government to tone down the risks that were involved in various baking activities. The European Commission had earlier in 2011 proposed to implement a financial Transaction Tax that was primarily aimed at imposing taxes on transactions that took place between banking institutions. These transactions involved bonds, shares and derivatives. Through implementation of the bank tax by the Dutch government, it took a different path from that set by the European Commission. The proposal by the European Commission affected all financial institutions which undertook such transactions. However, many of the member states took a stand against the European Commission’s proposal. Hence, the commission decided to look for other forms of such a tax and whether they would be applicable. Many countries have already undertaken such a financial regulation involving taxing banks (Weiderhold, 2013). The Netherland’s bank tax was not expected to negatively impact the economy of the country. Initial research carried out by the central bank of Netherland’s indicated that the volume of credit would decrease by a 0.5 percent margin which equated to 500 million Euros. The costs of the bank tax were expected to be passed on to the shareholders, loan providers and employees. What was conspicuously missing from the list of those to whom the costs of the bank tax would be passed on to was the account holders or customers. Taking into consideration the passing on of the costs of the bank to other stakeholder and involved parties, the efficacy of the bank tax was limited. Meaning its effect on the banking sector was relatively minimal (Spotter, 2011). The Dutch government in imposing the bank tax aimed at financing the property transfer tax reduction. What was notable was that by reducing tax in one area, the government aimed at financing by imposing another form of financial regulation in the name of a bank tax. Another reason for imposing the bank tax by the Dutch government was that it had been supportive of the banking sector in terms of finances over the years past and now was the time to be paid back. The backing of the banking sector by the bank was necessary as this sector is very important in the economics of the country along with the stabilization of the finances of the government. It is dangerous for a bank to be declared bankrupt; hence the Dutch government was obliged to support the banking sector. This was, progression of the banking sector was ensured. During the implementation of the bank tax, the government felt that the banking sector was also obliged to give back to the government (Schlingmann, Schutte & Somsen, 2012). The Europeans Commission also argued on the same basis, the basis that the support given by governments is given at a price, in that if the government was to face financial constraints, then they would be offset by financial regulations such as the bank tax. The banking tax applies to all banks. But differing with the argument set above, the bank tax was not supposed to be thought of as a certain price to be paid by the banks in exchange for the support the government had offered the banks. This is because prices are paid for certain services and goods. This was unless the Dutch government stated categorically that this bank tax was like an insurance premium which gave financial backing to the government in case it was faced with financial difficulties. Looking at the Germans, their bank tax model was made up in such a way that the revenues obtained from bank taxes were deposited into a certain fund which was to finance the German government in the future in case it was faced with financial difficulties (Schlingmann, Schutte & Somsen, 2012). It is also important to note that even as the bank tax was been applied on the argument of past support, the banking sector in Netherlands has been supported by the several banks. This is a view that is limited taking into consideration the relationship between the financial and the banking sector. This is because other financial institutions also benefited from the support the banks received from the governments. This means that the bank was a discriminative financial regulation as it did not take these other financial institutions into consideration. This can be compared with the bank tax of the United Kingdom which takes into consideration other financial institutions and includes them as part of the institutions that are regulated by the bank tax. Considering that the government of Netherlands availed part loans and part financial funding to the banks that were very beneficial to the government through high interests rates which several banks have already paid back to the government, then, it shows that in actual sense the government did not offer support to the banks but they it was a source of government funding just as the bank tax is (Triodos Bank, 2013). The bank tax model states that it is only the banking sector that was to be affected. The 3rd article of the bank tax at first set the liability for the bank tax. This liability for the bank tax was concerned with the banks that had been first set up in Netherlands and had a banking license given by the Central Bank of Netherlands. This concept of establishment of the bank tax was based on the place that the bank was established. This was in line with the application of the Netherlands civil laws to banks. However, this choice was unfortunate as it did not fit with the whole legislative proposal that connects a certain importance to accounting law (Schich, 2008). The bank tax also affected the banks that were put up under the European Union area which were accepted in the Netherlands as Banks and which were accepted on the basis of notifying the government through the European passport. Also, the bank tax was applied to banks that had been put up outside of Netherlands, but they had their physical presence in the country through branches in the country and they were issued with a license by the Central Bank of Netherlands (Schlingmann, Schutte & Somsen, 2012). What was remarkable with the bank tax was its applications to banks that banks who do not have their basis in Netherlands, banks that are regarded as foreign. This is because, even if the government of Netherlands was to provide grants or support governments, then this banks did not apply to be availed such support. Meaning that such banks were supposed to be taxed and supported by their parent countries. Article 3 of the Bank Tax Act ascertained the liability for the bank tax in very clear-cut terms. However, article 4 comprised of an allotment stipulation that was connected to the fact that banks made up parts of wider groups which were capable of undertaking other activities in addition to their banking activities that were most likely to be undertaken outside the bank’s business model. It also stated that a group could be made up of several banks. This meant that if financial statements were to be undertaken, then they were to be undertaken on a consolidated basis. Article four was supposed to tackle this truth (Moor, 2012). Through the bank tax, the financial regulator sought to limit the risks that were connected to banks in the greatest way possible. This, when viewed from a broader perspective, taxing banks availed a wider base for limiting the risks. The banks tax was to be based on the magnitude of the bank’s debt or the liabilities. What were these liabilities? Liabilities were described to include risks which made it obvious for the government to come up with and implement the bank tax. However, the government failed to expound on the reasons why other standards were not considered in the bank tax. Also, it is outstanding that the flexibility of financing of debts as connected to the bank tax was not studied. Hence, the range of the guiding effect of the bank tax was vague (Hetherington, 2011). The bank tax stated that if it was to be taxed on branches of a foreign bank, then it was to be based on the balance sheet of the whole company which comprised the branches and the head office. This was because it is only the parent company that prepares the financial statements and the branches are not allowed to do so. The bank tax in being applied on the parent bank tries to avoid the debts that are involved with branches of the foreign bank which may be capitalized at the parent bank. However, this risk seemed unrealistic when accounting laws were considered (Deloitte, 2013). The bank tax was to be considered in combination with various procedures that were supposed to limit bank risks. One measure was the deposit guarantee scheme. Under this scheme deposits of up to a hundred thousand Euros were assured if the bank they were placed with was no longer able to meet its liabilities. The other measure was the regulatory capital. The regulatory capital is the least capital that banks must keep hold of, for a sufficient solvency level. It was evaluated and deemed that the two measures decreased the balance sheet summation for the reason of applying the bank tax. However, for branches set up by foreign banks, a rule was put up which stated that the elements of equity had to be shared between the permanent establishment and the head office. Hence, the bank tax approach to featuring equity elements to permanent establishments and head offices was relied on at this point whereby an encompassing tax verdict on the pricing of transfer was affected in consideration of the commercial financial statements. Application of the bank tax using a law stipulation that was different in various points when compared to other institutions was quite incomprehensible (Snoep, Peijster, Keizjer, et al., 2013). Banks that were legally responsible to the bank tax were also certainly liable for the corporate income tax. Thus, it would have been fair that the bank tax applied to the financial statements in regards to tax which were received by the tax department. However, it can be concluded that the bank tax was actually a levy slapped on banks. The bank tax stated that at 20 billion Euros, an exemption was availed in article 9. It stated that no tax was due if the tax base was below that level. This exemption was on the basis of a ‘base exemption’ and not a ‘threshold exemption.’ However, this interpretation was not right because a threshold exemption had more efficacies because few amounts were not taxed. In regard to considerable cases, the efficiency exemption had no effect. Nevertheless, it was noted that the disruptive effect of the base exemption was minimal. This is shown by the 20 billion pounds exemption of the bank tax in the UK (FSMA, 2011). Article 10 of the bank tax stated the rate structure which involved two rates. These rates were the rate for the current debts and the rate for the long term. The current debts rate at 0.022% was higher than that rate for the long term which was at 0.011% (Loyens Loeff, n.d.). What was the rationale behind this? The rationale behind this was that the current debts of banks posed more risks than the long term ones. The contrast between the debts was managed by the continuing term of the debts at the date of the balance sheet completion. This was strange as it lead to long – term debts whereby the debts became current debts in their final year without an alteration in any of the terms of the liability. It was unclear on why there were only two debt categories. The government regarded the risk of a debt to be minimal if the term of the debt was longer. This availed a reasonable argument for the decrease in the rate in a manner that was proportionate to a longer debt term. As such, this meant an increased burden on the administration of banks. The set up of only two debt categories was in line with the duty that was as a result of accounting law (PWC, 2013). The bank tax also led to a double taxation. This was described by the fact that every group bank that was included in the group of taxpayer’s was legally responsible for the bank tax. With the knowledge that foreign banks are not exempted from the bank tax, then they too would face double taxation. The markets reacted to this bank tax by a reduction in the rate of borrowing as many market elements were fearful of an increase in the lending rates by the banks as a result of the bank tax. Reduced borrowing meant that, the market elements could not undertake their plans due to limited financial funds. Hence, the rate of growth of the market slowed down in a supposedly precaution like measure. References Armstrong, D. & Drucker, J. (2008, May 2). Dutch Bank Funded U.S. Tax Shelters. Adopted From The wall Street Journal. http://online.wsj.com/news/articles/SB120968938981461421 Deloitte. (2013). 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(November 2013). Similarities and Differences: Dutch GAAP vs IFRS. https://www.pwc.nl/nl_NL/nl/assets/documents/pwc-similarities-and-differences-dutch-gaap-vs-ifrs.pdf Schich, S. (July 2008). Financial Turbulence: Some Lessons Regarding Deposit Insurance. Financial Market Trends. Schlingmann, F., Schutte, J. & Somsen, M. (2012, January 27). Bill submitted on bank levy. Retrieved from http://www.lexology.com/library/detail.aspx?g=65be5329-0d79-40d8- 8588-f5a97df792cd Snoep, M., Peijster, K., Keizjer, J., Groenevelt, D., PotJewijd, G., Meyer, E., Rebergen, M., & Wolff, D. (2013, 2nd April). Changes to Dutch Accountancy Law. Mondaq. http://www.mondaq.com/x/230114/Accounting+Standards/Changes+To+Dutch+Acco untancy+Law Spotter, I. (2011, July 4th). Dutch Housing Market. http://www.iamexpat.nl/read-and-discuss/housing/news/dutch-housing-market-transfer-tax-reduced-to-two-percent. Triodos Bank. (2013). 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