Financial Transaction Tax Weighs Heavily on Markets
The Financial Transaction Tax represent an operational challenge for financial institutions due to the complexities of identifying securities in scope and determining the level of tax on those instruments.
Financial organizations may be required to determine and collect applicable transaction taxes under the French and Italian FTTs.
“From a data perspective, trying to ascertain which instruments fall under the scope of FTT is challenging, before you then consider changes or affects such as those that occur as a result of corporate actions,” said Colin Smart, business manager, reference and pricing data at Interactive Data Corp. “There is also the issue of what occurs when the EC publishes the European FTT rules later this year, as the French and Italian authorities may have to amend their rules, causing further operational complications.”
Most reference and market data systems provide links between an issuer and their associated securities, as well as the markets where they are traded. While these links can provide a view into the capital structure of an individual issuer, by themselves they fail to identify the universe of issuers related by ownership.
“We go through a number of processes in order to determine the liability for tax at the individual instrument level,” Smart said. “We use issuer-to-issue entities to identify securities, and we then spread that data across every listing of that security globally. We then add or remove any securities as a result of corporate actions, such as mergers and acquisitions.”
Interactive Data been working with clients since the initial French FTT went live last year and then the subsequent Italian equities FTT this year. “Although on the surface both sets of rules are looking to achieve a similar aim, their implementation is quite different,” said Smart.
In France, which has been up and running with FTTs and the Interactive Data service since August 2012, the tax applies to around 700 equity and equity-type instruments. Italy introduced FTTs on March 1, 2013, initially covering securities transactions and extending to derivatives transactions on July 1, 2013. The cost of tax on securities transactions is borne by the purchaser in France and Italy, with the cost on derivatives in Italy to be borne by both parties to the transaction.
Any proposed FTT levied across 11 European Union member states would be negative for Europe’s economy and have a serious impact on corporate and fund managers. According to the latest figures from the GFMA’s Global FX Division (GFXD), the FTT would typically increase transaction costs for users of the foreign exchange market by between 300 and 700 percent in the case of corporates and between 700 and 1,500 percent for pension fund managers.
“Given the need for Europe to kick-start economic growth, it is crucial to ensure that European companies of all sizes are able to compete internationally. FX products are central to their ability to do this,” said James Kemp, managing director of the Global Financial Markets Association’s Global FX Division.
“The effect of the proposed tax on pension funds is even worse than on corporates, as it will be taxed on both sides,” he said. “The result will be reduced fund performance to the detriment of institutional and individual investors.”
Interactive Data, a provider of global pricing, reference and corporate actions data, recently launched a service to support the identification of instruments subject to the French and Italian FTTs
The service compiles a list of instruments meeting the market capitalization, location of issuer and other criteria specified in the French and Italian FTTs. This information is updated on a daily basis to reflect instrument level changes and additions, including those arising from corporate actions such as rights issues.
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The analysis is based on transactions publicly reported by 30 European APAs and venues.
A similar service is available on the BIDS platform in the US equity market.