February 15, 2013
|The FTT: Who will pay?|
The European Commission has now tabled its proposal for a Financial Transaction Tax (FTT) applying to the eleven EU states who so far have said they’re willing to go ahead. Arguably, the proposal throws up more questions than answers – here are some of the main ones:
Q: Will non-FTT states get caught up in the tax?
This is a crucial question and one the proposal does not shed that much light on. The proposal says the FTT will apply
“on the condition that at least one party to the transaction is established in the territory of a participating Member State and that a financial institution established in the territory of a participating Member State is party to the transaction.”
So if one party is not in a FTT state they would still have to pay if their partner in the trade is. This could mean occasions where people end up paying twice, i.e UK stamp Duty and the FTT. But what does “established” mean? Particularly since most large financial institutions have multiple subsidiaries and passports.
Q: Is that why some in the US are concerned?
A group of US business groups, including the US Chamber of Commerce, has written to the European Commission objecting to its proposal raising similar questions. The letter claims the tax overreaches borders, breaks international treaties and amounts to a “unilateral” imposition of a global FTT. A spokeswoman for the US Treasury also warned that the current plans would “harm” US investors.
Q: Who will collect it?
One of the major omissions in the proposal is an explanation as to who will collect the tax if the transaction takes place outside the FTT area. In the FTT states the exchanges will undoubtedly be expected to collect it (which is why some are upset), but what if a security is traded on an exchange outside the FTT area? There is a provision to make each party “jointly and severally liable” but how would it be collected and how would they pay?
Q: Would it be possible to avoid it?
The Commission has come up with a number of anti-avoidance measures including its own brand of extra-territoriality – the “issuance principle” – that would allow it to tax all transactions of instruments originating in an FTT state. For example, a government bond issued by an FTT country would be taxed no matter where it was traded or by whom. Another issue tackled is “depository receipts”, again there is an anti-avoidance measure but how in practice would you outlaw the creation of UK depository receipts or for that matter already existing American Depository Receipts (which have previously been used to avoid paying UK stamp duty).
Q: Is it legal?
According to a study by Clifford Chance there is a danger that the FTT could violate the single market by distorting the free movement of capital and competition between states – though the Commission will have gone to great lengths to make sure the proposal stand up at a potential case at the ECJ. There are also questions about the compatibility with international tax agreements and a range of complex issues surrounding extra-territoriality. Whatever the final answer it could potentially lead to years of litigation.
Q: Will it have a knock on effect on ordinary individuals?
Those in favour of the tax hope this will be seen as a tax on the financial services industry. However it is difficult to see how this will not affect the wider economy or individuals. Every security bought by a pension fund will be taxed and so will reduce someone’s pension, likewise taking funds out of the economy through taxation is often inefficient and could hamper economic growth. But the tax is pretty minor in terms of absolute amounts.
Q: Will companies be forced to leave FTT-land?
|FTT states in red|
The Commission hopes that they have cast the net so wide and set the tax at such a low level that it would not be worth an organisation leaving the FTT states. This seems optimistic as the proposal seems to create incentives not to issue securities within the FTT states. The Commission itself accepts that derivatives trade will likely fall by 75% in the FTT area – it is not clear if this trade is expected to be eradicated or simply move elsewhere.
Q: Will it ever be brought in?
The Commission is hopeful saying:
“The proposed Directive will now be discussed by Member States, with a view to its implementation under enhanced cooperation. All 27 Member States may participate in the discussions on this proposal. However, only the Member States participating in enhanced cooperation will have a vote.”
Under the treaties the measure will need at least nine states to agree the final proposal and there is still a possibility that some of the eleven states will read the detail and change their minds. Interestingly it also remains unclear at what stage a state can still decide to drop out.