Alternative Investment Management Association Representing the global hedge fund industry
The Financial Transactions Tax (FTT) is not a new concept by any means. It is over 300 years since the introduction of an FTT in the form of a stamp duty at the London Stock Exchange and it is now the oldest tax still in existence in Great Britain. Tobin Tax, Robin Hood Tax, Anti-Speculation Tax... Call it what you will, the FTT, in one form or another, has been gathering momentum in recent months.
In the wake of the global financial crisis in 2008 there were widespread calls for the introduction of additional taxes on the financial sector to ensure that the sector makes a fair and substantial contribution toward paying for the costs of the crisis and for any burden associated with future government interventions in the sector. In September 2011, the European Commission (“the Commission”) released proposals for the introduction of an FTT within the EU by 1 January 2014. The Commission estimated that its version of the tax could raise €57 billion ($75 billion) annually while also discouraging transactions like high frequency trading that it considers more risky for the financial system.
Draft EU proposals
The draft provisions were very broad in scope and brought a wide range of transactions and financial institutions within the charge to tax. The absence of a look through approach and the lack of a market maker exemption also gave rise to a cascading effect. This meant that a single transaction could lead to multiple FTT charges with the result that the overall level of tax cost associated with the transaction may be well in excess of the 0.1% and 0.01% headline rates for transactions other than derivatives and derivative transactions respectively.
This issue is of particular relevance to the asset management industry, due to the highly intermediated nature of the funds industry and the number of parties involved in any one transaction. A high level study carried out by PwC Luxembourg suggested that the Luxembourg asset management market would have paid €13 billion on inflows and outflows had the proposed EU FTT been in place from 2009 to 2011, representing a cumulative impact of greater than 1% of NAV. AIMA carried out a comprehensive analysis of the proposed FTT and concluded that there would be a significant slowdown in cross-border trading of financial instruments like shares, bonds and derivatives in the EU.
There was mixed reaction from countries across the EU to the Commission’s draft proposals. The UK was strongly opposed to the introduction of an FTT unless it was introduced globally or at least across the G-20. Sweden and Malta were also opposed. Several other countries including Luxembourg and Ireland did not express formal opposition to the Commission’s proposals, but noted that they would only support the proposals if they were undertaken by all EU countries or at a global level. The President of the European Central Bank, Mario Draghi, agreed with this view and told members of the European Parliament’s Economic and Monetary Affairs Committee: “To be practical, an FTT would have to be undertaken by all countries, otherwise you will have a displacement of industry towards countries that don’t have this tax.”
At an EU Summit in June 2012, EU leaders agreed that support for the FTT as proposed by the Commission was not unanimous and the Commission’s view of a common FTT in place across all 27 EU Member States had reached a dead end.
A breakaway group – recent developments
Given the lack of consensus among the EU Member States, a number of EU countries have pushed ahead with the introduction of their own unilateral FTT provisions. France was the first mover, and in February of this year the French Parliament voted on an Amended Finance Bill for 2012 introducing a French FTT effective from 1 August 2012. The Bill also included provisions for two additional taxes designed to discourage certain behaviours related to high frequency trading and speculation on sovereign debt. The provisions are much narrower in scope than the Commission’s FTT proposals, and importantly they also include a market maker exemption.
Other countries were quick to follow France’s lead. In September, the Spanish government introduced proposals for a Spanish FTT which bears many similarities to the French model. Italy and Portugal are both forging ahead to introduce national legislation for an FTT, with the view of enforceability by January 2013 for Italy and 2013/2014 for Portugal. The Hungarian Parliament has also voted for the introduction of an FTT from 2013.
Possibility of an “Enhanced Co-operation Procedure”
Recent weeks have also seen increased likelihood of the introduction of an FTT under the EU's “Enhanced Co-operation Procedure” (ECP). The ECP can apply where a unanimous decision cannot be reached among the 27 EU Member States, and it allows a lesser number of EU Member States to introduce provisions among that sub-set of countries. This procedure has never before been used to introduce tax measures, and has only been implemented twice in recent years – relating to EU divorce law and EU patent law respectively.
Under the ECP, only the participating Member States would be bound by the provisions, and the detail of those provisions would be decided by unanimity. The ECP requires a qualified majority consisting of (i) at least 9 Member States representing (ii) at least 74% of Member States’ votes and (iii) at least 62% of the EU’s total population.
So far 10 Member States have sent formal letters to the Commission indicating a willingness to pursue the introduction of an FTT through an ECP, namely Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain. Estonia had also pledged its support verbally, however this would appear to have been withdrawn in recent weeks. On 29 October, the incoming Dutch coalition government announced that the Netherlands will join the ECP provided that Dutch pension funds are exempt, that the provisions of the existing Dutch bank levy are taken into account and that the proceeds of an FTT will be allocated to the Member States in which the tax arose.
As a next step, the participating countries will need to submit formal requests to the Commission specifying the scope and objectives of the ECP. EU Tax Commissioner Algirdas Semeta is aiming to present the Commission’s assessment of the participating Member States’ requests as well as a draft Council decision for discussion at the next ECOFIN Council on 13 November 2012. The aim will be to receive authorisation from the Council for the participating Member States to go ahead under an ECP by December 2012.
It is as yet unclear what form the ECP proposals will take, although there are strong signals that the FTT adopted by the participating countries will be based on the Commission’s original broad proposal for an EU-wide FTT. The entry date for any such FTT under ECP is likely to be 1 January 2014. There are a number of important questions to be addressed in the meantime including:
As it stands, we are already facing a collage of transaction taxes across EU Member States with the introduction of several unilateral FTTs this year and next, but remember the FTT is not just an EU issue. Much of the debate in this area arose from a decision by the G-20 leaders to examine potential additional taxes which might be imposed on the financial sector including an FTT. Multiple bills to introduce an FTT in the United States have been introduced in Congress, most recently, the proposed Inclusive Prosperity Act. President Obama is rumoured to be in favour of an FTT, although he has never publicly stated his view.
Despite the lack of global consensus on this topic, political will for the introduction of some form of FTT remains very strong, and the next 12 months are expected to bring a lot of developments in this area.