True Nature of Europe’s Financial Transaction Tax Revealed

Terry Flanagan

The true nature of the proposed European financial transaction tax is beginning to be ascertained by market practitioners across the region.

The tax is set to be imposed in 11 of the 27 European Union member states including the four biggest eurozone nations—Germany, France, Italy and Spain—with implementation expected some time in 2014 and is aimed squarely at making the financial services sector pay for the global financial crisis.

Subject to final ratification by the 11 participating nations, there is likely to be a 0.1% tax imposed on all buyers and sellers of share and bond transactions issued in the participating areas and a 0.01% levy on derivatives trades. The other nations to support the financial transaction tax are Austria, Belgium, Greece, Portugal, Slovenia, Slovakia and Estonia.

Dr Christian Voigt, business solutions architect, Fidessa

Dr Christian Voigt, business solutions architect, Fidessa

“After reading the text in detail, one thing that is quite odd is the issuer principle,” said Dr Christian Voigt, business solutions architect at trading and technology company Fidessa.

This means that if a trade has been issued in one of the 11 participating countries then regardless of where it is then traded—be that in London, New York or Tokyo, for instance, all places that were not meant to be covered by its remit—the trade will be still hit by the tax.

The levy is also being introduced as a directive and not as a regulation. This means that the participating countries will have to implement their own laws, which opens up the possibility of 11 slightly different tax regimes.

“The only thing we can hope for is that the directive is strong and detailed enough so that they are very much alike,” said Voigt.

France has already had its own transaction tax up and running since August 2012 to front-run the 11-nation proposals, with Italy set to follow suit from March 1. Although both of these countries will have to step back into line to some extent and modify their national law to fit with the 11-nation version when it is finally in place. Italy’s new levy, though, is expected to be more onerous than the French version.

“We’ve seen with the French version, that trading volumes dipped only slightly,” said Voigt. “But I expect it will be different again with the Italian version coming up. It is more significant and different to the French FTT as, for example, the Italian version affects on-exchange and also off-exchange trading.

“Then there is the risk of order flow going into different countries or the risk that certain strategies are not traded at all. Thus, it is questionable whether it is beneficial overall or whether we will shoot ourselves in the foot and end up with less liquid markets.”

Other European market participants in Europe, especially in London—even though Europe’s premier trading hub thought it had avoided its clutches—have also been objecting to the transaction tax plans.

“The U.K. is not one of the 11 countries which have signed up to adopt the tax,” said Julie Patterson, director of authorized funds and tax at the Investment Management Association, a U.K. buy-side trade body representing around £4.2 trillion funds under management.

“However, U.K. investors, pensions and funds will suffer the effects of the tax if they invest in securities from those countries, or if they undertake transactions with counterparts in those countries.

“Moreover, unlike the stamp duty on U.K. equities, the tax will apply twice to every transaction—for the seller and for the buyer.

“It is important to ensure that the tax doesn’t hit every transaction multiple times where intermediaries are involved. It is not uncommon for there to be four or more intermediaries involved in a transaction, making what appears on the surface to be a 0.1% tax significantly more substantial.”

Although it is firms inside the transaction tax zone that appear even more alarmed by the plans.

“On the one hand, the European Union wants to improve transparency and stability and wants the financial sector to make a contribution to the costs of the crisis,” said Deutsche Börse, operator of Germany’s main exchange based in Frankfurt, in a statement.

“On the other hand, such a very tax will lead to a situation in which financial transactions will migrate to less regulated and non-transparent markets. Potential systemic risks will remain unchanged, but they will merely be detracted from the influence and control of the supervision.

“By introducing the tax in only 11 member states of the European Union these negative impacts will only play out more strongly. Especially because important financial centers like London and Luxembourg will not take part in enhanced co-operation. This will mean a further weakening of the financial center in Germany with massive economic effects to follow.

“A tax on financial transactions according to the draft law of the EU Commission would be a gift for the less regulated and less transparent financial markets. Countries introducing such a tax would import those very risks for customers and clients that they were striving to wipe out. Thus, such tax would counter the G20 [group of nations] efforts to foster the regulated and transparent markets.

“Furthermore, those who would pay the tax are those who are commonly are not seen as the originator of the crisis. In fact, the opposite is true; small and medium-sized companies in particular will face higher capital-raising costs as a result of rising transaction costs. Savers and private households would also suffer greater financial losses as the tax would directly hit their retirement provision products.”

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