The financial services industry has been warned not to be complacent about the possible demise of the pan-European financial transaction tax (FTT), despite a leaked European Council legal advice document stating it would be illegal.
Rebecca Healey, senior analyst at research consultancy TABB Group, said market participants should not rest on their laurels over the FTT following the latest revelations.
“The industry needs to remain focused not on whether the FTT is legal or illegal, but on the fact that it isn’t going to work as we’ve already seen from the experience in France and Italy.”
Both France and Italy, which introduced financial transaction taxes in the past 18 months, have seen their share of European equity trading volumes fall significantly. Italian market share has dipped below 5% for the first time according to Thomson Reuters Equity Market Share Reporter and TABB research, while France’s share has dropped from a peak of 23% in 2011 to just 12.8% today.
“We shouldn’t become complacent on this as the European Commission has already said it disagrees with the legal advice. Politicians need to understand how damaging this could be for pensions,” added Healey.
She said the financial services industry should continue lobbying for a more viable alternative to the current FTT proposals that will be less damaging to markets and investors.
A leaked document from EU legal advisers suggests the tax infringes EU treaties and would be unfair to member states that have not signed up for the FTT.
Firms based in non-supporting EU countries would be affected if dealing with counterparties based in supporting EU states.
Supporting states are pushing the FTT through Brussels using the ‘enhanced cooperation’ legislative tool, which lets a block of at least 9 countries move ahead with an EU law with consent from the Commission.
The issue of residency, where a transaction is taxed based on the residence of the parties involved, has been a major point of contention between policy makers and the financial services industry. By removing this aspect of the tax, it would be significantly watered down.
“Many countries around the world have financial transaction taxes that are based on the residence of the issuer, such as UK stamp duty or the FTTs already in place in France and Italy,” said Keith Lawson, senior counsel on tax law for the Investment Company Institute (ICI), a buy-side trade body.
“However, if the FTT is no longer based on residency and only the issuance of securities then some of the 11 enhanced co-operation countries have such small capital markets that they won’t have viable tax collections from this.”
Lawson said that a residency-based approach would still not be ideal for investors, but would be a significant improvement on the original pan-European FTT proposals.
He is hopeful that the move away from a residency-based approach could lead to the current FTT proposal evolving into a system more akin to the UK’s stamp duty, which would raise tax revenue without adversely affecting markets.