EU Regulatory Reform (A new cloud is forming on the skyline of Europe’s financial markets and it could be big enough to overshadow all others.
Last week, the European Commission published a Working Paper entitled “Financing the EU Budget: Report on the Operation of the Own Resources System,” in which it introduced the notion of a Financial Transaction Tax (FTT). The opening gambit reads thus:
“There is the potential for widely differing taxes on financial transactions, from the ‘broad-based FTT’ affecting transactions on stocks, bonds, currencies and derivative products traded on organized markets or over-the-counter, to the simple stamp duty or transfer tax on stocks and bonds – sometimes referred to as the ‘narrow-based FTT.’ FTT benefits from wide popular support, which could facilitate its acceptance.”
In case you think you didn’t read that correctly, think again. Yes, the European Commission is seriously suggesting that a financial transaction tax on all asset classes be imposed to fund the European budget.
The current thinking seems to be that an EU-wide (or broad-based) FTT will be a challenge to get passed in the European Parliament. More likely, a “narrow-based FTT,” imposed at a national level will be pressed forward. This version of the FTT, with its emphasis on stamp duty, will very likely target Contracts-for-Difference (CfDs), which are stamp-exempt in the UK. We estimate that nearly a third of UK equity market activity is CfD-related.
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12 Comments to "Financial Transaction Tax a Troubling Idea":
mmizen
06 July 2011
Well raised Will. The budget proposals make interesting reading - couple of comments: The Commission clearly has global aspirations in the budget proposals and several mentions to it - "Given the Commission's commitment to pursue the FTT at global level... it is appropriate as a first step, to focus on a FTT solution at EU level to allow the EU to lead by example to create global momentum for action..." Also that the "rate structure should promote virtuous behaviours, for instance by favouring the use of regulated markets". Virtuous? Interesting choice of word. The Commission also notes "the cumulative impact of a FTT with the regulatory reform of the financial sector needs to be carefully considered to avoid a downward effect on main macroeconomic variables" - too true - and also notes that the views on these budget proposals may have changed since the credit-crisis. A financial tax on market behavior will change many profit models from institional to retail. If these proposals were, as you say, to drain volume from the market either to invest elsewhere or not invest at all - then the budget will need a rethink whether the vote goes through or not.
Comments (41)
asussman
07 July 2011
Don't worry, there will be exemptions for end users
Comments (159)
gbollenbacher
07 July 2011
Financial transaction taxes have often been proposed, and much less often implemented, and the reason isn't unpopularity, it's difficulty. Take, for example, a purchase of an equity, issued in the US, sold by a UK owner to a German buyer, on an ECN owned by a French bank, done on a server located in India, and settled at DTCC. What venue gets to collect the tax? Whoever that is, we'll just move that part of the transaction to another venue. It's whack-a-mole in reverse.
Comments (48)
williamrhode
07 July 2011
gbollenbacher, I don't follow your logic. Under a "narrow-based" (AKA nationally- imposed) FTT it will be easy for each to government to take responsibility for the collection of tax. Stamp duty on the transfer of shares in the UK is, effectively, an FTT. Whoever receives the shares is liable to pay stamp to the UK government. It doesn't matter where the purchaser resides, where it was executed, which server it used or where it was settled - upon receipt of the shares they have to pay stamp. Simple.
Comments (87)
gbollenbacher
07 July 2011
So the thing that triggers the tax/stamp payment is where it settles? On Crest, for example? But if I settle the same trade on Euroclear, is the tax/stamp applicable? If you were a UK company, and you saw this tax/stamp in the works, would you set up your shares to settle on Euroclear?
Comments (48)
williamrhode
07 July 2011
stamp is triggered by delivery and is payable regardless of where it settles.
Comments (87)
gbollenbacher
07 July 2011
Right, so what triggers the payment of the tax/stamp? Where the buyer is domiciled? Where the seller is domiciled? Remember that securities aren't "delivered" at all for the most part; the ownership record is simply changed on a server somewhere. Is it important where the repository is domiciled? Or where issuer of the securities is domiciled?
Comments (48)
williamrhode
07 July 2011
When an ownership record is changed on a server it constitutes delivery. The only important issue where stamp is concerned is if the shares are on a company incoporated in the UK - in that case the shares are subject to stamp. I would imagine that any entity that is authorised to settle or act as a repository for UK shares has a responsibility to report to the UK government in whose hands those shares ultimately end up.
Comments (87)
mbrenner
07 July 2011
Last year I have published a piece on the Financial Transactions Tax in the American Banker on January 22 2010. It is as relevant now. The title is: Viewpoint: Tax proposal is as Bad as it ever was. Here is the link: http://www.americanbanker.com/usb_issues/120_3/tax-proposal-is-as-bad-as-it-ever-was-1014720-1.html Professor M.Brenner
Comments (1)
williamrhode
08 July 2011
Good article, Mr. Brenner. Thanks for posting the link.
Comments (87)
rhealey2
28 September 2011
Currently on Twitter - EU Commission plans to implement the planned financial transaction
tax from 2014 on for all trades worldwide, which involve European counterparts,
i.e., 3rd party banks outside the EU will also have to deduct the tax for
European clients.(Handelsblatt). Draft EU directive apparently now doing the rounds. Watch this space.
Comments (89)
williamrhode
18 November 2011
David Cameron tries to negotiate with Angela Merkel for a scrapping of the EU FTT in return for its support of stronger economic union in the Eurozone - and fails.
Comments (87)