By Huw Jones
LONDON (Reuters) - The "bogeymen" of derivatives and securitised debt, blamed for deepening the financial crisis, may escape a new euro zone transactions tax as policymakers fear harming funding for companies and the economy, a document seen by Reuters showed.
The 11 euro zone countries currently discussing the tax, which include France and Germany but not Britain, are meeting on Thursday to hammer out a revised proposal for the tax, which will make banks repay some of the public money that kept them going during the 2007-09 financial crisis.
Legal doubts over the original proposal has forced a rethink amid concerns that funding could be hit.
The document prepared for the two-day meeting shows the scale of exemptions on the table as countries are increasingly anxious not to crimp funding to companies or fuel concerns over government bonds just as the euro zone appears to be turning the corner after a lengthy debt crisis.
For the first time there are proposals to exempt derivatives and securitisation, two sectors found at the heart of the 2007-09 financial crisis and blamed by policymakers for fuelling bank failures that called for taxpayer rescues.
"It should be considered whether some categories of derivatives should not be included or if their taxation should be postponed, given for example their nexus with the government bonds' market and related impact on it," the document said, showing the underlying fear of a domino effect.
The document showed it was also unclear when a derivatives contract should be taxed, such as when it has been written, traded or comes to the end of its life.
Removing some derivatives contracts from the transaction tax would be a boost for France, whose banks are key players in the market.
Britain is challenging the planned levy in the EU's highest court, saying it impinges on its securities markets, the bloc's biggest.
Securitised debt, which some central bankers now want to see an increase in to aid economic recovery and wean banks off central bank funding, may also need exempting from the tax, the document said.
"Derivatives and securitisation were among the bogeymen of the financial crisis and now they have had a reality check," said Chas Roy-Chowdhury, head of taxation at the ACCA, a London-based accounting body.
Bonds may be left out of the tax's scope as well.
In the original proposal, government debt trading on secondary markets was to be taxed but the document says this could raise the cost of financing national debts and should be considered for exemption.
The document also considers exempting corporate bonds to avoid being seen as discriminatory if government debt is exempted.
There was also a need to avoid "negative effects on the financing capability of companies, considering also the difficulties in receiving funding from the banking sector in the present environment".
If so many asset classes are exempt, the tax would effectively shrink to become a type of stamp duty on shares, which France has already introduced.
The document also proposes that the "end investor" should be liable to pay the tax if no financial institution is involved in the transaction.
The fate of the tax is now seen in the hands of France and Germany, with the former keen on derivatives being exempted, while the latter's new government has pledged to implement a transaction tax.
The two countries are due to meet next month to discuss the new scope of the tax which the document signals would be implemented on a "step by step" basis.
(Reporting by Huw Jones, editing by Clare Hutchison and Elaine Hardcastle)