BDO: Is Tobin tax becoming a reality?

Angela Foyle 160 byline

On 23 October 2012 the European Commission gave their approval for 10 EU member states to proceed with a financial transaction tax by “enhanced cooperation procedure”, concluding that all legal conditions for the imposing the tax had been met.

Following the lead taken by France, the other member states that have agreed to adopt the FTT are Austria, Belgium, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain. Estonia is likely to join this list following the consultation with its parliament. The Netherlands may also join subject to a number of safeguards being adopted including, in particular, an exemption for pension funds and the return of FTT revenue generated to the member state to which it relates.

Europe’s tax commissioner, Algirdas Šemeta applauded the Member States for moving ahead with the common FTT and firmly believes the there are great benefits – such as reducing the fragmentiation of the Single Market – even if not applied by all Member States throughout Europe.

So as to enforce the views of Semeta above, I call upon the views on Jose Manuel Barroso, president of the European Union executive: “This tax can raise billions of euros of much needed revenue for member states in these difficult times. This is about fairness: we need to ensure the costs of the crisis are shared by the financial sector instead of shouldered by ordinary citizens.”

The Commission has estimated that, overall, the tax could raise as much as €57bn a year if applied across the EU. It seems likely that a Directive will be issued and the Commission’s proposal, which is likely to be similar to the original proposal of September 2011, [was] discussed at the Economic and Financial Affairs Council meeting on 13 November. The original proposal was for FTT to be levied at 0.1 per cent on transactions involving shares and bonds and 0.01 per cent on derivative transactions. In addition, it should be noted that under the proposal any financial institution which was party to a transaction or involved in a transaction would be liable for the tax. How the new proposal will compare to the exisiting FTT legislation imposed by France, remains to be seen.

It is rumoured that the proposal will also include measures to catch transactions linked to a country in the common FTT area even if the counterparties and traded instrument are outside the participating country. This could catch a larger range of transactions involving non-EU trading parties.

For now, Britain remains opposed to the FTT. The possible requirement for Britain to adopt the FTT and its perceived adverse effect was one of the reasons David Cameron gave for vetoing the EU treaty changes in December 2011. The British government’s concern was that London would lose its competitive advantage if the FTT was adopted and could lose its status as a global financial hub, resulting in the loss of jobs and lower tax revenues.

This stance, which is shared by a number of economists and leading industry bodies, is backed up by empirical evidence from the period between 1984 and 1991 when Sweden imposed a tax on stock trading. Evidence suggests that there was a dramatic reduction in home market liquidity and increased volatility after the tax was introduced.

There is a potential benefit for Britain and countries outside the EU by not implementing the FTT, as parties which would otherwise have been affected by the FTT could decide to move outside the FTT area. It is proposed that the Commission will seek to minimise this advantage by including rules to address evasive actions, market distortion and possible migration to other jurisidictions.

The concern for the financial services industry would be that the 11 member states who wish to implement the FTT decide not to adopt a ‘pan-EU model’ and instead tailor the proposal by the Commission to their country-specific needs. This would increase the complexity and the cost of compliance and for all parties involved in the financial transactions. Taxes of this nature are likely to increase the cost of compliance; much of the cost will be borne at least intially by brokers; however this is likely to ultimately flow to investors.. This could well catch the “ordinary citizens” that Mr Barroso says should not be bearing the costs of the financial crisis.

Overall, the so-called ‘Tobin tax’ is a step closer to becoming a reality in the EU and the affect of the tax is certainly something for funds to consider for both their projected returns and investment profile when marketing to investors both inside and outside the EU.

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Angela Foyle is tax partner, Financial Services Practice at BDO LLP