‘Reactive’ Italian Transaction Tax Provokes Anger

Terry Flanagan

Italy’s new financial transaction tax (FTT) law, which is being introduced ahead of plans by 11 European Union countries to pioneer a harmonized FTT that will likely start some time in 2014, is causing some consternation among market participants.

Italy’s own FTT law, which passed into the statute books over Christmas and will focus on equities and equity derivatives, generally goes beyond what has been suggested for the 11-nation FTT.

“The latest thing to hit is the Italian transaction tax and some of it feels quite reactive,” a London-based market source told Markets Media.

“It is a very complicated business we are in here and to make a broad statement about a transaction tax that people are imposing on various different parts of the business with various different exceptions without a through understanding about how all of that is going to actually work in practice and be collected, as well as various jurisdictional pressures, needs to be answered.”

The tax rate for equity transactions under the Italian law will be set at 0.12% for 2013 before decreasing to 0.1% from 2014. Over-the-counter equity transactions will be taxed at 0.22% in 2013, decreasing to 0.2% in 2014 The tax will be applicable from March 1. Equity derivatives transactions will also be subject to various fixed charges, with taxes on these instruments becoming applicable from July 1.

High-frequency trading also comes under fire from the new Italian law. Order amendments and cancellations will be taxed when they take place within 500 milliseconds, although the final time interval has yet to be finalized by the Italian parliament. Again, the start date for this will be March 1 for equities and July 1 for derivatives.

“The Italian FTT [has] shocked market participants around the world,” said Dr Christian Voigt, business solutions architect at trading and technology company Fidessa, in a recent blog.

“Quite apart from the increase in tax levels compared to earlier drafts, the Italian government has invented an additional HFT tax based on the value of amended or cancelled orders.”

There are, however, some notable exceptions to the Italian FTT, including market makers and liquidity providers, as defined by EU regulations. No tax is also applicable when the counterparty is a national government, the EU or any central bank. While pension funds are also excluded from the tax.

The continent-wide tax, meanwhile, that is set to be introduced in 11 of the 27 member states from 2014 subject to final approval by the Council of Ministers—which could be as early as next week—and which received the resounding go-ahead from the European parliament last month, is expected to impose a 0.1% tax on all share and bond transactions and a 0.01% levy on derivatives trades.

The French and German backed initiative is expected to create a two-speed Europe in which many of Europe’s biggest stock markets—including Frankfurt, Paris, Milan and Madrid—will be affected by the tax, while others, such as London and Warsaw, will not.

France was the first to forge ahead with its own plans for a FTT, when it introduced a 0.2% tax on the purchase of shares in French firms with a market capitalization of over €1 billion. Although French equity volumes dipped immediately after the introduction, it has not been hugely detrimental to activity.

“The French markets, luckily, didn’t fall of the cliff when their government introduced its own tax in August 2012, but they did experience a dip in trading volumes,” said Voigt. “Will the Italian markets be teetering on the edge of their own FTT cliff on the eve of March 1? Certainly, the Italian FTT looks somewhat more complicated.”

Once the 11-nation proposal becomes law by Brussels, it will supersede the national laws of Italy, France and possibly others who have, or will, introduce FTT plans early.

The 11 countries to support the financial transaction tax are France, Germany, Italy, Spain, Austria, Belgium, Greece, Portugal, Slovenia, Slovakia and Estonia. Netherlands, too, could also join up as it may be in favor of the tax under certain conditions.

The original European Commission proposal in June for an EU-wide tax was vetoed by the U.K., Sweden and the Netherlands among others. However, the European Commission hopes that its 11-member scheme, if adopted, will prove to be a success and pave the way for the initiative being adopted globally.

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