THE CITY was shocked yesterday by a surprise extension of the planned EU financial transactions tax (FTT) as the 11 countries implementing the charge launched plans to levy the tax across the whole world.
Under the scheme trades of shares, bonds or derivatives will be taxed regardless of where the transaction takes place as long as there is “sufficient link between the transaction and the territory of the FTT jurisdiction” – for instance if one of the parties is based in the 11 states, has a licence to deal in those states, or if the instruments being traded originated in the countries.
That means a great deal of London’s business could be affected, with cash flowing from the City into the coffers of foreign states including France, Germany and Italy.
Lawyers hope the powers can be watered down before coming into force in January 2014, potentially as it interferes with the single market.
“This proposal rides roughshod over the rights of the 16 member states who have opted out of the tax,” said Mayer Brown’s Alexandria Carr. “It will be paid by their firms and even those outside of the EU simply because a party to the transaction is located in one of the 11 states.”
The tax is intended to appear modest – a charge of 0.1 per cent on stock and bond trades and 0.01 per cent on derivatives transactions – but by applying the charge to every stage of a transaction the bills will quickly add up.
“This tax cascades – it applies separately to each leg of a financial transaction. For example, when a pension fund buys a corporate bond it will often clear through brokers and other institutions in the FTT zone,” said Dan Neidle from Clifford Chance.
“So whilst the headline rate is 0.1 per cent, the effective rate in many cases will be closer to one per cent.”
And although the stated aim is to hit banks, the fee will hurt investors like pension funds and individuals.
“This makes the cost base higher and that additional cost will have to pass through to investors,” said investment manager Jonathan Clatworthy from Arbuthnot Latham, who added the tax will drive investors away from Europe.
“The tax will certainly have an impact when looking at which markets to invest in. The extra frictions and transaction costs will make the markets less efficient and create more opportunity for mispricing.”
HOW THE FTT WORKS
■ Derivatives transactions will be taxed at a rate of 0.01 per cent
■ Equities and bonds deals will face a 0.1 per cent charge
■ The Commission hopes to raise €30bn (£25.9bn) per year from the tax
■ That would be split between the EU budget and the 11 states behind the tax
■ But sceptics point to previous experience in countries like Sweden where the tax drove transactions to other markets and raised next to nothing
■ To combat that, the Commission wants the tax to apply across the world
■ If any participant in the trade is based in the 11 states, or is trading on behalf of someone who is, all participants will pay the tax
■ Even if none of the participants are based in the 11 countries, they will all pay if the instrument being traded was issued in the bloc
■ That could lead to major rows over the impact on the single market, which is protected by treaties and highly valued by countries like the UK
■ How ever it is implemented in the end, the tax will harm savers because the charge will reduce the returns on their investments
■ And businesses should expect to take a hit to – firms trying to hedge their exposure to exchange rates fluctuations or changes in interest rates will see those derivative purchases hit by the tax
■ The countries involved are: Germany, France, Italy, Spain, Greece, Portugal, Belgium, Austria, Slovakia, Slovenia and Estonia
■ The UK opposes the charge and wants to make sure it does not affect investors here