03.02.2012
By Terry Flanagan

Europe To Widen Transaction Tax Net

Europe’s proposed financial transaction tax should be better designed to capture more traders and make evading it unprofitable, says a new European Union draft report.

Late 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 – to make the financial sector pay for the global financial crisis.

However, the Greek socialist MEP Anni Podimata, who is charged with steering the legislation through the European parliament, said: “”I want a more watertight framework to capture more trades and to minimise the interest for tax evasion.”

Podimata, who has drafted the European parliament’s report, added weight behind the European Commission’s new proposal to charge the financial transaction tax on any financial institution located outside the EU if they trade securities originally issued within it.

This would mean that two US banks trading shares in a German company would now be liable to pay the levy, even if the transaction takes place outside the EU.

The draft report also proposes that anyone who evades paying the financial transaction tax will then see their legal ownership rights to the security withheld. This is a similar approach to that operated in the UK under stamp duty rules.

The amendment also proposes blocking institutions who don’t pay the levy, set to be taxed at the rate of 0.1% for all share and bond purchases and 0.01% for all derivatives trades, from being able to clear the trade in the EU.

One of the new focuses of the proposed financial transaction tax is to curb high-frequency trading across European exchanges.

This 0.1% tax on all share transactions would, in all likelihood, put an end to most high-frequency strategies as a trading approach as the levy would wipe out most, if not all, of the margin made by microsecond trading.

Computerised algorithms have been blamed by critics for making the markets more volatile in recent times but proponents of high-frequency trading say that it increases liquidity.

Steps are already being taken to curtail the practice, with Italy looking to introduce a special fee to rein in traders who bombard the market with huge orders but actually complete few deals – a strategy favoured by some high-frequency traders.

France is to impose a 0.01% tax on high-frequency trading activities from August while the Deutsche Börse is set to implement a charge from next month if many orders from a single trader are not completed.

The UK has said that it will veto an EU-wide transaction tax, which requires unanimity to become law among the 27 member countries. Sweden and the Czech Republic also oppose the move but it is possible that it could be adopted by the 17-nation eurozone.

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