Forget Brexit — Banks Need to Retake Control of Tax in 2019
By Daniel Carpenter, Head of Regulation at Meritsoft
Never ending deliberation and dithering with no sign of a clear outcome – Brexit is by no means the only political can being kicked endlessly down the road. Lurking deep beneath the weeds of Brexit uncertainty is the latest threat about an EU-wide financial transaction tax (FTT) on the buying and selling of securities.
Both French and Italian transaction taxes may soon be joined by Spanish and German equivalents. Unfortunately, these taxes were typically, until now, addressed tactically by banks. With initial solutions deployed by now disbanded project teams, and with limited subsequent reviews or improvements, as there has been the lack of day to day oversight and ownership, handling new requirements on existing temporary solutions would be ill advised. Quite simply, continuing down this path is not fit for purpose, and also fails in that all-important goal of minimising tax bills.
There is, however, somewhat of a disconcerting sound to the mood music surrounding this latest push from Merkel and Macron that may force banks to change course. Spain’s decision to implement its own FTT, on top of an already relentlessly punishing corporate tax landscape, should mean that tax is pushed to the top of the boardroom agenda. According to a year-end report by Thomson Reuters, UK Banks already pay nearly double the amount of tax compared with the rest of the FTSE 100. The five biggest banks paid an effective tax rate – the rate at which a corporation’s profits are taxed – of 42% last year. This frankly eye watering amount should be enough to spur banks to get their operational tax houses in order. After all, no bank wants to be shelling out additional tax for derivatives transactions in addition to corporation tax surcharges on profits.
The trouble is that every time the FTT, or other rules such a tax on the value of dividends have been muted, banks have brushed the issue underneath the carpet to prioritise other regulations that have actually been enforced. Unfortunately, this has left many chronically underprepared for the complexities that lie ahead whatever the precise nature of the next tax rules introduced. Take Italian derivatives as a prime case in point, which have a mind-boggling 45 different tax rates. This means, in theory, banks, particularly those using 6-year-old interim systems, need to wade through thousands of different derivative transactions, both on and off market to establish volume weighted average price (VWAP), and establish which rate applies. Extrapolate this effort and associated cost, not to mention the amount of tax being paid, all before adding them to the huge costs absorbed at a corporate tax level, and a banks bottom line starts to take a significant hit.
Brexit will of course still be the primary focus between now and March. However, there is no denying that different, albeit similar challenges, also arise in the form of multiple tax rules. Tax rules are like buses (minus the political slogans). You can wait ages for one, only for a load to then all come at once. With this in mind, banks should ensure they minimise huge costs that result from continuing to manage tax rules individually. Simply getting a project team to put a tax solution in place to address single rules, with nobody accountable for ongoing maintenance and improvements, will not cut the mustard. It is important to be ready for any eventuality now to get ahead of the game. The FTT is not the first, and certainly won’t be the last tax headache banks face this year. We are, of course, also in the midst of perhaps the biggest ever shake up of the U.S. tax code, so who knows what is in store for financial institutions. For any global bank that thinks it has planned fully for any European tax changes, there is always the next operational upheaval of Trump’s tax reforms.
Initial focus has been fixed income in the front office.
The banks made 135.8m errors in transaction reporting over nine and a half years.
Brexit will make UK companies less attractive acquisition targets.
There is no certainty that any transaction will materialise.
The bank is SIX's first new member in 2019.