Views on the integrity of global capital markets
24 January 2013

Financial Transactions Tax Gets Green Light — How Will It Impact Investors?

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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.

Photo credit: ©

About the Author(s)
Rhodri Preece, CFA

Rhodri Preece, CFA, is head of capital markets policy for the Europe, Middle East, and Africa (EMEA) region at CFA Institute. He is responsible for development and oversight of capital markets activities in the EMEA region, including content development, policy engagement and outreach. Rhodri formerly served as director of capital markets policy, focusing on issues related to primary and secondary market structures. He was named one of the “40 Under 40 Rising Stars of Trading and Technology” by Financial News.

3 thoughts on “Financial Transactions Tax Gets Green Light — How Will It Impact Investors?”

  1. “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.”

    I think transaction tax may have a positive impact by slowing down stock churn. I would hope they provide for reciprocal agreements to help drive the UK and US, as well as HK and others to join in.

  2. Mark T says:

    Even their own calculations suggest it will act as a drag on GDP and like almost everything proposed since the Financial Meltdown a FTT would have done nothing to prevent it. This is a classic case of not wasting a crisis. What should not be overlooked however is the classic qui bono? question. All revenues (assuming there are any) will go to Brussels, not the individual states. Makes you wonder just how enthusiastic the commissioners would be if this were not the case.

  3. Rhodri Preece, CFA says:

    Thanks for your comments. The initial justification for the tax put forward by the European Commission was that the financial sector should contribute its “fair and substantial share” to repair the EU’s finances, and that there is a need to support crisis resolution schemes with funds from the financial sector as opposed to taxpayers’ money. On that basis, it appears true that any revenue would flow mainly to Brussels. The latest news on the FTT is that it might apply not only to institutions headquartered in the FTT bloc, but also to any securities or financial instruments issued within the bloc. If the issuance principle is applied, it could extend the reach of the tax to all main financial centres.

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