On 22 January, European finance ministers approved a motion to allow 11 EU member states to proceed with proposals to introduce a financial transactions tax (FTT). The plans now go to the European Commission to develop the framework for the taxation, including the financial instruments, rates, and parties to whom it will apply.
It comes as no surprise that the FTT proposals have caused contention and consternation. Plans for an FTT were first introduced by the Commission back in September 2011. Those plans included a taxation rate of 0.1% for transactions in shares and bonds, and a rate of 0.01% for derivatives transactions.
Disagreement over the likely impact of the proposals ensued (the Commission was forced into revising its impact assessment, which initially suggested the tax would hurt GDP). With the UK — the EU’s largest financial centre — staunchly opposing the FTT, the notion of an EU-wide legislation was discarded. But with support for the tax from the EU’s “big two” (Germany and France), the plans were soon resurrected under the guise of “enhanced cooperation”, a mechanism under EU law allowing a subset of at least nine countries to press ahead with legislation to further collective integration.
The lack of consensus among EU member states chimes with the views of investment professionals. In a survey of CFA Institute members in May 2011, opinion was similarly split: 45% of respondents believed an FTT would not be effective at any level, while 44% said an FTT would be effective but only if implemented at the G20 level or higher.
However, CFA Institute members were clear on who they thought would bear the brunt of an FTT — 75% of respondents said that the end-customer would mainly bear the cost. Only 15% thought that the tax would be borne by the financial sector, the intended target of policymakers. On that basis, the FTT plans would appear ill-conceived.
It remains to be seen whether the Commission, given the mandate by the Council of finance ministers, will return to its original proposals or devise a new framework for the 11 consenting countries (which include Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia, and Slovakia). But given the borderless nature of finance, it is likely that whatever is drawn up by the Commission, those countries outside of the FTT bloc will not escape entirely.
For instance, the tax could be levied on transactions by financial institutions domiciled within the bloc, irrespective of whether those transactions are carried out by branches or subsidiaries located outside of the bloc, such as in London. In that event, financial institutions based in the U.K. (or the U.S., or Asia, or any other countries for that matter) dealing in London with counterparties subject to the tax could be affected. For example, the costs of the tax borne by the relevant counterparty could be embedded in the prices that counterparty quotes, thereby passing through the tax to other institutions and ultimately end-customers.
With so much resting on the details, investors must hope that policymakers are mindful to minimise harm to those they wish to protect.
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