The latest European financial transaction tax (FTT) proposal has raised further questions about the scope of the levy and left market participants facing the prospect of multiple taxes for a single transaction.
A European Commission proposal for the FTT published today states the tax will now apply to financial instruments issued in one of the 11 member states backing the tax regardless of where they are traded or by whom.
This ‘issuance principle’ joins the ‘residence principle’ already embedded in the tax, which states that if one party to a transaction is based in the FTT zone it will be taxed, regardless of whether the transaction occurs within one of those states.
This addition of the issuance principle has fuelled concerns the tax will unfairly affect market participants and venues outside of the 11 member states. The FTT will tax equity transactions at 0.1% and derivatives at 0.01% of notional value and is expected to net €30-35 billion annually, according to the Commission.
Mark Stapleton, head of tax practice for law firm Dechert, believes the structure of the tax will force market participants to alter operations to avoid multiple exposures to the tax.
“A major concern for market participants will be the cascading effect where you could potentially have multiple levels of FTT when you deal through intermediaries. If exemptions aren’t introduced for intermediaries, firms will have to look at the chain of dealings with counterparties and try to structure that in a way to reduce the incidence of FTT,” Stapleton said.
Stapleton said the wide scope of the tax would reduce avoidance measures although the present lack of detail meant there might still be ways for participants to avoid the levy.
“The tax on derivatives is calculated on the notional amount of the derivative and there could be ways to artificially reduce that amount, but it appears that the Commission is aware of the need to take steps to counter such planning,” he said.
In the proposal released today, taxable items include instruments negotiated on the capital market, money market instruments, units and shares in funds including UCITS funds and derivatives contracts. Currency derivatives will also be caught.
Details are still lacking regarding products such as exchange-traded funds with underlying stocks from both inside and outside the taxable zone, which raises questions of fairness for venues, market participants and end investors who will absorb the tax, as well as issuers affected by the impact on reduced liquidity as participants avoid taxable instruments.
The proposal will now be discussed between the supporting member states with consultation from the European Parliament. Other EU member states can participate in debate over the tax although only the 11 may vote.
This latest proposal is a slightly amended version of the September 2011 proposal put forward by the Commission, which did not receive adequate support from all 27 member states. The 11 member states supporting the tax are pushing through the legislation under ‘enhanced cooperation’, which means only nine EU member states must support the tax for plans to move ahead.
Backers of the tax include France, Italy, Portugal and Spain, which have, or are developing, national FTTs ahead of this joint effort.
Other countries supporting the Europe-wide FTT are Austria, Belgium, Estonia, , Germany, Greece, Slovenia, and Slovakia.