The European Union has unveiled its proposal for a financial transaction tax (FTT), to be implemented under an enhanced co-operation procedure by Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.
Together, these 11 EU countries are to introduce a new FTT, with the European Commission is setting out a common approach to collecting the tax.
The Commission said the tax would be a way to make banks and other financial services companies pay their fair share of the cost of recovering from the crisis. They were a major cause of the economic downturn and received substantial government support to help them survive, it said.
The tax would cover all financial transactions involving a party located in one or more of the 11 countries. The minimum rate would be 0.01% for derivatives, and 0.1% for every other transaction, including purchases of shares and bonds. Participating countries are free to apply a higher rate.
Of the 27 EU countries, 16 will not apply the tax immediately. But they can join the scheme later and, through the EU have given the go-ahead for the 11 to introduce it. Britain and Sweden opposed the tax, while the Netherlands has expressed a strong interest.
The International Securities Lending Association (ISLA) said it was disappointed by the very wide scope of the tax. The trade association, which has more than 90 members comprising insurance companies, pension funds, asset manager, banks and securities dealers representing more then 4000 clients, noted the proposal that securities lending and repo transactions will be subject to the tax on one leg of the transaction at 0.1%.
Detailed discussion will now be held on how to apply the tax. All EU countries can take part in the talks, but only the 11 will be able to vote, and must agree unanimously before it can be implemented planned for Jan. 1 2014.
ISLA published the following statement on its website: The ISLA Tax Group has been following developments and we will be considering what actions we may take to try and get a more appropriate outcome for securities lending transactions. We expect there to be considerable discussion and negotiation between the member states through 2013 and that it is likely that the measures proposed will change. We also believe that the timetable proposed by the Commission is extremely optimistic.
The estimated revenue from the FTT is 30-35 billion a year. Some of that could go to the EUs budget. Each participating countrys contribution would be reduced by the same amount. The rest of the tax revenues would go to national budgets, to be used like other tax revenues to reduce debt or invest in growth and jobs, for example.
Julie Patterson, director of Authorised Funds and Tax at the UK Investment Management Association (IMA), said that although the UK did not sign up the tax, UK investors, pensions and funds will suffer the effects of the tax if they invest in securities from those countries that have adopted it, or if they undertake transactions with counterparts in those countries.
Moreover, unlike stamp duty on UK equities, the tax will apply twice to every transaction for the seller and for the buyer, said Patterson.
It is important to ensure that the tax doesnt hit every transaction multiple times where intermediaries are involved. It is not uncommon for there to be four or more intermediaries involved in a transaction, making what appears on the surface to be a 0.1% tax significantly more substantial.
Simon Lewis, the chief executive at the Association for Financial Markets in Europe (AFME) said: The Commissions proposal for a financial transaction tax in 11 EU member states is regrettable and likely to serve as another brake on economic growth.
This tax will have a negative impact on business in several ways. The tax on equities will increase the cost of raising capital for Europes businesses and the tax on bonds increases the cost of debt funding for both businesses and governments. The tax on derivatives will also have a negative impact on hedging transactions undertaken by the real economy in order to manage risk.
AFME will continue to analyze the Commissions proposals not least with regard to their extra-territorial impact, at this time when the EU and US have launched important and timely free trade negotiations. As participants in the G20, the EU and its members have committed to work together to support policies that will lead to sustainable and balanced growth the imposition of an FTT with extra-territorial reach runs counter to that important objective. It is essential that the economic evidence is fully taken into account as the negotiations.”
(JDC)