No avoiding the transaction tax?
The impending failure
of a Europe-wide transaction tax – which the UK has said it would veto – has
led proponents of the tax, including German finance minister Wolfgang Schäuble,
to consider the alternatives. Jorge Morley-Smith, head of tax at the UK-based Investment
Management Association, suggests that could be a good thing for buy-side firms.
"The financial transaction
tax (FTT) as originally envisioned is so broad – it would cover all
transactions, in all markets,” says Morley-Smith. “It disproportionately
affects pension funds, long-term investors and ultimately the end-consumer. It doesn't
hit the speculative and high-frequency traders specifically, which is what I
think the European Commission was trying to do."
Commission proposed a FTT last September, suggesting a levy of 0.1% on equity
trades and 0.01% on derivatives trades conducted by EU-based financial
institutions. The current proposal from the European Commission suggests
collecting an FTT across both exchange-traded and over-the-counter instruments.
Detractors worry that the
costs of the tax could be passed on to the buy-side, while supporters insist
that the tax is necessary to claw back the cost of financial crisis from the
banking sector. The EC claims its pan-European tax would supply revenues of up
to €57 billion annually, but questions over implementation suggest this figure
"There's a strong
political drive to see a financial transaction tax,” says Morley-Smith. “Alternative
ideas, such as a select group of countries adopting the tax, had been considered
– but more and more countries are raising concerns. It's unclear what the end
result will be."
recently admitted that the original Europe-wide proposal for a blanket tax may
now be doomed – but suggested that a failure to secure any form of agreement at
all would be “disastrous”. Instead, a series of fallback options are being
considered – including the introduction of a financial activities tax, which
would essentially consist of a bank levy, i.e. a tax on all capital movements
by corporations rather than a universal tax on all international financial transactions.
activities tax continues to be a possibility,” says Morley-Smith. “Most market
participants consider this a lesser evil than the financial transaction tax.
But countries such as the UK and Germany already have a bank levy – so it would
be interesting to see how a financial activities tax might develop in
Another possibility is
to remove the VAT exemption on financial services that currently applies in the
European Union – although this could be politically contentious, since it would
affect consumers directly, reducing the value of their savings, rather than
financial institutions’ balance sheets.
exemptions wouldn't necessarily improve things for the end-consumer, because it
is they who would be paying the bill,” says Morley-Smith. “The consumer, and
not the financial institutions, benefits from the VAT exemption.”
Germany has also recently
backed the idea of a ‘bourse tax’ that could be more tenable to the UK, which
already levies a stamp duty on stock trading. A bourse tax would likely be
applied to cash equities transactions on Europe’s domestic trading venues. In
addition, Schäuble highlighted as possibilities a form of stamp duty that would
include derivatives, charges on high-frequency trading firms, or new taxes on
bonuses, profits and “risky activities”.
Meanwhile, France has
indicated its intention to introduce a unilateral financial transaction tax –
which includes a charge on high-frequency traders if they cancel too high a
proportion of their orders. Italy, Germany and Sweden are also either planning
or considering their own restrictions on high-frequency trading, separate from
the Europe-wide FTT proposal.
The European Parliament is due to give a
formal opinion on the proposed Europe-wide transaction tax by the end of March.
After Parliament has offered its opinion, a plenary vote will be held in May. If
approved, member states would be
expected to implement the tax by the start of 2014.