Europe Divided On Transaction Tax

Terry Flanagan

The Dutch government is the latest to back buy-side investor calls to make a stand against the proposed financial transaction tax in Europe.

The levy, which is aimed at making the financial services sector pay for the global financial crisis, as well as trying to slow down high-frequency traders, would bring disastrous consequences to the buy side such as wider spreads, higher transaction fees and a dramatic plunge in volume.

“Such a levy would directly impact the investment returns of end-investors through the passing on of these charges, while the resulting reduction in market liquidity would likely dramatically increase transaction costs,” said Alison Crosthwait, managing director, global market structure research, at Instinet, a New York-based alternative trading venue operator, in a recent report.

In September last year, the European Commission released details about plans to introduce a continent-wide financial transaction tax—envisaged to come into effect in January 2014—with a 0.1% tax on all share transactions and 0.01% levy on derivatives trades that could generate up to €57bn annually.

“The tax is not an efficient way to make the financial sector contribute well to government income,” said Dutch finance minister Jan Kees de Jager in a letter to the Dutch parliament. “Besides that, the tax does not help to make the financial sector more stable.”

Earlier this month, finance ministers from nine European Union countries, led by France and Germany, wrote a joint letter the the Danish EU presidency requesting plans to have a financial transaction tax put in place across the trading bloc by July.

However, a U.K. pension funds body believes that it will be the end users who will be hurt most.

“A financial transaction tax would be a burden on pension schemes and a burden on savers,” said Darren Philp, director of policy at the National Association of Pension Funds, a U.K. organization that represents 1,200 pension schemes with collective assets of around $800bn.

“It would increase costs for many employers who are already struggling with a weak economy while trying to provide defined benefit pensions. Savers in defined contribution schemes will also be hit as any tax will no doubt end up being passed on to the saver. This is not the way forward to ensure financial stability.”

If they wanted to, the nine countries in support of the levy would be sufficient in number to launch their own tax through a procedure in the Lisbon Treaty known as enhanced co-operation. This would then become a limited version of the proposal that affects only themselves. However, this can only be started as a measure of last resort, after all options for getting unanimous support from the 27 member states have been depleted.

The U.K., Sweden and the Czech Republic remain fiercely opposed to the tax while there are now strong reservations even among eurozone member states, including Luxembourg, Ireland and Malta.

Germany’s finance minister, Wolfgang Schäuble, has said that he will push for the introduction of the tax but acknowledges the serious doubts of some nations and is prepared to look at “alternative sources”. One of these is for a stamp duty on share purchases, although Britain has said that it will only approve of any such measure if it is applied to all of the world’s major finance centers.

EU finance ministers are to discuss the financial transaction tax issue at the end of this month at a meeting in Copenhagen while the Commission and the Danish presidency will attempt to have a compromise proposal in place by June.

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