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The draft directive released by the EU Commission on the 28th September 2011 provides for a financial transactions tax (FTT) within the EU with effect from the 1 January 2014. The EU has an even more ambitous plan to seek global consenus for the intruduction of such tax at a global level. Below are the salient features of the proposed tax.
Background
Despite the IMF's opinion that a FTT is not well suited to ensure that the financial sector pays its fair share towards the crisis costs, the EU insisted on the introduction of such tax and considers it an important revenue raising mechanism with the EU. Unanimity between Member States (about the introduction of the FTT) appears remote, at least at this stage. The EU's plan B is to limit the introduction of the FTT to the Euro-Zone thus 'saving' the London market from the scope of the tax and avoid reliance on London's go ahead.
Scope of FTT
The proposed range of transactions covered by the FTT regime is wide and includes all transactions in financial instruments including equities, bonds, foreign currency (excluding spot contracts) and derivatives. The transactions covered will include purchases and sales of financial instruments as well as securities lending transactions. The FTT will apply to both transactions between third parties and transactions between related entities.
Tax rate and tax base
The rate of FTT will be fixed by each Member State subject to a minimum rate 0.1% for financial transactions (other than derivatives) and 0.01% for derivatives. In the case of financial transactions other than derivatives, the taxable amount will be the consideration paid for the transfer of the financial instruments within a given transaction. In the case of derivative transactions, the tax will be charged on the notional principal amount specified in the contract at the time the derivative is entered into.
Territorial application
The FTT will apply to financial transactions undertaken by financial institutions established within the EU. The definition of “financial institution” includes credit institutions, investment firms, organised markets, insurance companies, CISs and fund managers, pension funds and pension fund managers, holding companies, leasing companies and SPVs. A financial institution will be treated to be established in a Member State if it is authorised in that state, has it registered office in that state, is resident in the state or is acting through a branch located in that state. Where a financial institution established in a MS is party to a financial transaction it will be subject to FTT irrespective of the place of establishment of the other party/ies or the place of execution of the transaction.
Excluded entities.
Certain entities will be exlcuded from the scope of the FTT. Transactions with the ECB and national central banks will also be excluded from the scope of the tax.
Compliance
The chargeable financial institution will be responsible to account for tax to the tax authorities of its Member State. Member States will be required to ensure that FTT charged on financial transactions carried out electronically will be paid immediately. In the case of transactions not carried out electronically, the tax must be paid within 3 working days.
Member States will also be required to adopt measures to prevent evasion or avoidance of the FTT.
Will the FTT directive go through ?
The implementation of the FTT requires unanimity amongst EU Member States. At the same time, it is EU Commission's intention to discuss the FTT at G-20 level with a view to introducing the tax beyond the EU's territory. EU-wide unanimity and a global roll-out appear to be remote and the EU might have to outline alternative plans for the introdcution of the tax. One such plan is to limit the introduction of the FTT to Eurozone - this would, amongst other things, 'spare' the London financial market from a potential disproportionate effect of the FTT in the case of an EU-wide application (given the size of the London's market).
The introduction of the FTT regime will give rise to a number of issues including additional compliance costs (with a potential cascading effect onto final customers), possible shifting of trade to non-EU jurisdictions (or non-Eurozone jurisdictions in the case of Plan B) and consequential distortion in financial markets as well as possible lack of harmonisation of the FTT regime within the EU.
We will monitor developments and post updates as they become available. For further information, please contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .