02.28.2012
By Terry Flanagan

Transaction Tax Set To Hold Europe Back

Europe’s financial services sector faces losing a large proportion of its global market share to the U.S. and Asia if the proposed Financial Transaction Tax is put in place, a trade body has warned.

The controversial tax scheme, which the European Commission is hoping to introduce by 2014 within the 27 member states of the European Union, plans to levy a charge of 0.1% on all equity and bond transactions and a 0.01% fee across derivatives contracts.

The low risk money markets, where investors look to make profits by dealing in high volumes of short-dated interest-bearing products and hedging instruments with low margins, are expected to be the worst affected with the report by Efama, the European Fund and Asset Management Association, calculating that annual returns would be reduced by at least 1% if the levy had been introduced last year.

Peter de Proft, director general of Efama, said: “It is clear that the Financial Transaction Tax would put money market funds out of business and reduce the attractiveness of savings in equity, bond and balanced funds, thereby reducing an important source of long-term financing for the European economy.”

He added: “All transactions would be affected, though. Eventually, you could see a lot of transactions moving away from Europe because of the tax. Institutional investors who use derivatives and long term saving strategies would be particularly hard hit.”

Efama says that the proposed Financial Transaction Tax would have cost the asset management industry €38bn ($50.9bn) in total last year, significantly more than European Commission estimates. Money markets funds would have borne the brunt of the levy, incurring 67% of all charges due to their high turnover.

Investors buying and selling Ucits funds – that allow collective investment schemes to operate freely throughout the EU – would have been charged €15bn, while fund managers would have paid out €23bn. The figures err on the conservative side as no account is taken of the multiple taxation effects due to the use of fund of funds structures or the 0.01% levy on derivatives contracts.

Resistance from some non-eurozone countries to the Financial Transaction Tax is growing. The British prime minister, David Cameron, has said that he would veto any proposal as he believes that over 500,000 UK jobs would be lost. French president Nicolas Sarkozy, meanwhile, is pushing ahead with plans to introduce a Financial Transaction Tax in France by August. However, this will not include a levy on money market trades.

Efama also suggests that institutional investors would be forced to switch their savings away from Ucits investments and into savings deposits and life insurance products not covered by the Financial Transaction Tax.

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