Controversial European Tax to be Watered Down

European Commission concedes compromise on Financial Transaction Tax is inevitable.

(May 31, 2013) – After weeks of foot-stomping and political posturing, the Financial Transaction Tax (FTT) looks set to be severely watered down ahead of its implementation.

The original proposals, to impose a 0.1% tax of the value of share and bond transactions and 0.01% on derivatives where any of the transaction is made in the 11 participating European countries, were widely derided by lobbying groups, the UK government, the US Fed and most recently France’s central bank governor Christian Noyer. Today it looks as though their prayers have been answered.

The complete overhaul of the controversial tax would see it rolled out more slowly than scheduled, its annual levy reduced, and even exempt derivatives completely. The result of all these changes would be a drastically reduced haul of cash – the FTT could end up raising just a tenth of the €35 billion.

The standard rate of tax for trading bonds and shares could drop to just 0.01% of the value of a deal, from 0.1% in an original blueprint drafted by Brussels, and the tax would be rolled out in a staggered basis, applying to stocks only initially, before being applied to bonds in two years’ time, and derivatives at a later date.

But derivatives could escape being taxed at all under the FTT if the initial bond/share taxations result in traders avoiding the 11 affected countries.

Speaking to aiCIO‘s sister title The Trade, Natasja Bohez Rubiano, press officer for taxation, customs, statistics, anti-fraud and audit at the European Commission, insisted the original proposal was still “solid”, but was forced to admit a compromise now looked likely.

“Of course we are not naïve enough to believe that the proposal will be adopted word and letter as we tabled it-this is rarely (if ever) the case in European Union negotiations. But member states need to weigh up very carefully the pros and cons of changes they may want to make, and understand fully the impact this will have,” she said.

“It is futile at this point to start speculating on what the final outcome will be, or how the design of the tax might or might not change. We are not there yet. The 11 Member States specifically requested the Commission’s proposal as the starting point for their negotiations. They will, on this basis, now need to agree on a compromise that is acceptable to all 11 of them.”

There is a lot of technical work to be done still on the proposal; the last working group at technical level took place on 22 May. And once this work is over, it has to be discussed at a political level by the EU finance ministers in the council.

Even then, it’s not on the Economic and Financial Affairs Council agenda under the IE Presidency, and remains to be seen if and when Lithuanian Presidency would table it.

Given the number of hurdles, the original implementation deadline of January 2014 is all but dead in the water.

Sandy Bhogal, head of tax at law firm Mayer Brown International, said he fully expected the FTT to be scaled back due to the macro-economic impact such a punitive tax would’ve had across the financial services sector.

The original proposals raised lots of questions and concerns about the impact of the FTT on the cost of sovereign and corporate debt, liquidity in the EU and beyond, and the potential relocation and displacement effect in the financial markets,” he said.

“In its proposed form, the FTT could also be viewed as being inconsistent with regulatory changes like EMIR and the general direction of travel of the EU, particularly at a time when there is a need to encourage EU economic growth and competitiveness.

“With the issue of enforcement and practical problems in collecting FTT revenue still remaining unresolved, particularly where financial institutions are outside the FTT-zone, the scaled back plans and step-by-step approach may be more sensible.”

The news is likely to be welcomed by fund managers and institutional investors across the world. In April, ATP’s co-CIO Anders Hjaelmse Svennesen criticised the FTT for damaging illiquidity in the markets and for doing the “exact opposite” of what its introduction is trying to achieve.

Related News: The Deafening Silence on the FTT and Actively Managed Pension Funds Could Be Reduced By 8% Under FTT Proposals