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Wednesday, January 30, 2013

The FTT debate rumbles on...

The FT reported today on the latest draft proposals for the EU financial transactions tax (FTT), which is proceeding under enhanced cooperation with 11 countries taking part. These are the highlights from the FT's report (since we are yet to get our hands on the draft proposal):
  • The FTT is expected to raise up to €35bn.
  • It will apply to any share, bond or derivative issued within the participating area or "with a clear connection to a participating member state" in an attempt to restrict relocation to avoid the tax.
  • Target introduction date of January 2014.
Although the basic structure is the same, the most potentially controversial element is the extension of the scope of the FTT to apply to any share, bond or derivative "with a clear connection to a participating member state." This means that financial instruments which are traded outside of the participating countries could still be caught by the tax. This throws up a number of important questions and potential problems:
  • This could ultimately result in participating governments imposing taxes within other government’s jurisdictions. This goes further than just other EU countries.
  • It is not clear to where the revenue would flow (to the government where the trade is located or back to the FTT participants?) or how it would be enforced at a global or EU level. (This also seems to add massively to the complexity, a reduction of which is a cited benefit of the FTT).
  • Surely, there are questions regarding how this cuts across the single market. As the press release on enhanced cooperation notes, the FTT will “respect the rights, competences and obligations of non-participating Member States” – stepping on the rights of non-participating government to determine which taxes are applied in their sovereign territory does not seem to fit this description. Some of the non-participating members could certainly be unpleasantly surprised and may well have some complaints to lodge.
  • The new clause (to stop capital from flowing outside the FTT zone) seems to go against the key EU principle of free movement of capital in spirit, if not in law.
  • For those involved, the tax will likely have some impact on their borrowing costs (for both governments and firms based in these countries). It will also increase the cost of instruments used to hedge against risk in these countries (certain derivatives). This may not be massive but will come at a time when it is not needed.
We do not know what form the final proposal will take but, if the reports are accurate, this FTT could not only pose practical difficulties of enforcement but also cut across the single market.

Update - 18:07 30/01/13:
 The FT has flagged up to us that, under latest proposal, the rules will only apply to exchange traded derivatives rather than all (over the counter) derivatives. This certainly makes the collection and policing of the tax easier and may limit any distortion on derivatives market somewhat. We'd note though that the general enforcement of the tax across borders and particularly outside the EU will remain tricky.


Denis Cooper said...

"Some of the non-participating members could certainly be unpleasantly surprised and may well have some complaints to lodge."

And where could they lodge those complaints with any realistic prospect of obtaining redress?

The UK government has made strategic mistakes by colluding with breaches of the EU treaties, firstly over the brazenly illegal bailouts of Greece and Ireland and later over the "fiscal pact", and if there was ever any point in the UK taking cases to the ECJ it's too late to attempt any such thing now that the German government has learnt that if necessary it can get away with more or less anything that it wants.

So as any plan to impose a FTT on the UK would very clearly be a hostile act, a deliberate attack on what is, for all its faults, one of the important sectors of our economy, the UK government needs to start making its own contingency plans for retaliation.

Just blocking every EU proposal wherever possible would be a start.

Then special taxes on the major imports from the 11 participating EU member states into the UK would reveal how much the French liked it when we attacked their wine industry, and how much the Germans liked it when we attacked their car industry, and so on.

And as for handing over any more of our money to the EU budget, let alone for fines - forget that, and see how the self-aggrandising bureaucrats on the Commission react to that cut in their funding stream.

jon livesey said...

I doubt there is very much to worry about here. Eleven members can't impose taxes on the non-eleven. the best they will be able to do is collect taxes within their own jurisdiction.

As the FT pointed out today, the UK has a stamp duty on stock transactions which it *cannot* collect on transactions in UK stocks trading as ADR on the, for example, NYSE. So it simply imposes a "goodbye" tax when a UK stock certificate becomes an ADR, and after that it basically ignores them.

The eleven can't unilaterally impose a tax on the non-eleven any more than they can impose a tax on China.

Anonymous said...

As usual the EU turns into a snake oil salesman once the detail is announced.

I have spent December undertaking market research looking at the impact of EMIR on asset managers in London. My opinion is that EMIR is nothing short of disproportionate and badly thought out. How come the cost of trading bilateral OTC contracts will be much more expensive even with a Central Counterparty (CCP) effectively de-risking large parts of the market?

OTC derivative users, such as industry and LDI asset managers, who use the products for purely hedging purposes are being forgotten. LDI was invented in London and is a socially useful UK financial services product but faces extinction under EU rules.

This is not regulation it is clearly a trade war. Wake up everyone. We need to exit this rule-making nanny state entity called the EU.

Average Englishman said...

Anonymous. Some of us woke up a long time ago. Let us hope that Cameron and others with the power to get us out finally get the message.

Rollo said...

It does mean that anyone within the 11 would have to pay the tax if they traded through London. How would they collect it? Via the broker in the UK? Or by the trader in the 11 volunteering the information and lobbing out the tax to his government? Tricky situation.

Anonymous said...

a tax rise of 35 000 000 000 euros that will help

Jesper said...

My other post might be too long, this is how I see the FTT:

Made up issue to avoid working on real problems.

Jesper said...

Who'd get the collected tax?

Just read up on the Swedish parliamentary committee dealing with the FTT and they didn't know (their discussions took place Jan 18). Some concerns were raised about the possibility of it going to be a tax where the proceeds went straight to EU institutional coffers whereby in return the participating countries were to be given a reduction of their membership fees.

Hopefully those concerns has since been addressed, however, I find it a bit surprising that it hadn't been clarified already. There should not be a precedent for giving EU institutions direct taxation capabilities.

Still, even though 'the devil is in the details' and the details are not yet specified, the decision seems to be that the FTT will happen.