MEPs Emboldened as Transaction Tax Looms Large

Terry Flanagan

Despite the protestations from many market practitioners over the looming introduction of a financial transaction tax across parts of Europe, policymakers in the region appear to be taking little notice over its ability to stunt volumes.

The levy, projected by the European Commission to raise up to €35 billion a year in trading taxes, is set to be imposed in 11 of the 27 European Union member states from early next year including the four biggest eurozone nations—Germany, France, Italy and Spain­—although the U.K. has remained out of its remit. The levy is aimed squarely at making the financial services sector pay for the global financial crisis. However, many in the market believe that it will, in fact, reduce volumes and hamper certain trading strategies.

The controversial tax will see a 0.1% levy on all share and bond transactions and 0.01% charge for derivatives trades. It will be issued on both the buyer and seller and the tax will be due regardless of where it has been traded if the trade has originally been issued in one of the 11 participating countries.

It is expected that high-frequency traders, who perform millions of rapid-fire trades every day, and who make up around 40% of volumes on listed European markets, will be hardest hit by the levy as their small profit margins will be significantly eroded.

However, many politicians still see kicking traders in the teeth as an easy vote-winner as the public mood is still very much against the financial services sector following the financial crisis.

“The European Commission has outlined solid provisions on the ‘issuance principle’, whereby financial institutions located outside of the participating states would also be obliged to pay the FTT if they traded securities originally issued within the EU,” said said Emilie Turunen, a Danish MEP and member of the Greens-European Free Alliance party, the fourth largest grouping in Brussels.

“This will make the tax much more difficult to circumvent.”

Turunen added: “We hope that the participating member states will expand the scope to include currency spot transactions, as foreseen in the original ‘Tobin’ tax proposals. This would provide a truly robust basis for a financial transaction tax.”

However, the MEP who was tasked with writing the report on the financial transaction task to the European parliament appears to be now having some second thoughts over certain aspects of the levy. Although still firmly behind the tax, it has been reported that Anni Podimata wants to see certain pension fund activities exempt.

The original Commission document in 2011 called for a potential exemption for pension funds. Podimata also sees the levy being introduced in less than a year’s time, although the 11 countries involved have still yet to agree the finer points of the directive.

“We will now work to further strengthen the proposal by making FTT evasion a low return,
high-risk venture,” said Podimata, who is part of the Progressive Alliance of Socialists and Democrats group, the second largest in Brussels. “We urge the 11 member states to turn their words into action and agree swiftly on a watertight FTT so that the revenue can start flowing as of January 1, 2014.”

Market participants, though, point to France as a case in point. France has had its own financial transaction tax in play since August, and asset managers there have recently come out fighting against the levy, citing the devastating consequences that it has brought. Trading volumes have fallen since its introduction.

“The enhanced co-operation [of the FTT] in 11 countries seriously undermines the very existence of the industry,” said AFG, the French fund association. “While the original purpose of the FTT was to fight against the financial activities of a speculative nature, the project has a very broad scope, taxing all securities transactions.”

The Association for Financial Markets in Europe (AFME), a pan-European sell side trade body, has also come out fighting against the tax and its implications for capital markets. “The Commission’s proposal for a financial transaction tax in 11 EU member states is regrettable and likely to serve as another brake on economic growth,” said Simon Lewis, chief executive of AFME.

“This tax will have a negative impact on business in several ways. The tax on equities will increase the cost of raising capital for Europe’s businesses—and the tax on bonds increases the cost of debt funding for both businesses and governments. The tax on derivatives will also have a negative impact on hedging transactions undertaken by the real economy in order to manage risk.

“AFME will continue to analyze the Commission’s proposals not least with regard to their extraterritorial impact, at this time when the EU and U.S. have launched important and timely free trade negotiations. As participants in the G20, the EU and its members have committed to work together to support policies that will lead to sustainable and balanced growth—the imposition of an FTT with extra-territorial reach runs counter to that important objective. It is essential that the economic evidence is fully taken into account as the negotiations are taken forward.”

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