Opposition flares to proposed FTT as deadline edges closer

The encroachment of the proposed European Financial Transaction Tax has sparked significant and growing concern among asset managers based in the 11 EU member states set to be hit by the measure in 2014.

The Financial Transactions Tax (FTT) is aimed at ‘speculators’ churning holdings and undermining legitimate businesses, with the handy side-effect of raising revenue. But, as the investment industry closely examines the measure, it has managed to generate only opposition, not support.

The AFG, the French fund association, last month issued a scathing statement describing the “devastating consequences” of the proposed tax. It could “seriously compromise the very existence” of the French investment industry, which “not only sits near the top of world rankings, but has been instrumental in helping France through the financial crisis”, the AFG said.

The association warned of the “grave consequences” of implementation, including penalising savers rather than speculators, the reduction of the number of funds on offer to investors, and the imposition of what is effectively double taxation on investments.

Action urgently needed

In Germany, Union Investment, the asset manager which reported €9.9bn of new inflows in the last year, cited the FTT as one of three critical problems local regulators had to tackle immediately, as a “flood” of 30 pieces of legislation threaten to overwhelm the industry.

In a press conference, CEO Hans Joachim Reinke said action is urgently needed.

“The financial transaction tax is aimed at the wrong target; it will hit small savers rather than those responsible for the crisis,” he charged. “It is simply an additional levy for people who already have to pay enough tax for the woes of the eurozone debt crisis.”

The initiator itself, the European Commission, computed a reduction of 8% in maturity value based on the example of a Dutch pension fund. “The theory the financial transaction tax would force banks to share in the cost of the crisis, which some politicians bring up time after time, is a fallacy too many people are still believing,” added Reinke.

He noted the German government had promised, when negotiating the current fiscal package, that small savers and those saving for pensions would be exempt from the FTT. “But so far we have yet to see any evidence of this.”

France’s AFG charged the FTT risks undermining local employment and failing to raise the revenue expected, as financial transactions move outside the jurisdiction.

“To preserve its international client base, the French manager would have no choice but to domicile his funds and mandates in European countries not subject to the tax,” the AFG said.

It also suggested a lack of proper consultation, noting the declared goal of EU member unanimity of support, first identified in September 2011, “has not yet been achieved”. “The French asset management industry wishes the discussions at the European Council, in consultation with the European parliament, will result in a framework free from these constraints,” the AFG added.

Bad news for the eurozone

Kevin Cummings, a London-based tax partner at BDO LLP, said the release of the draft directive before EU leaders had even met to discuss it was “sure to distort economic activity, [and] probably not in the EU’s favour”.

The directive is intended to apply to a range of financial transactions involving securities, equities and derivatives trades where, broadly, an FTT zone financial institution is involved, or the instrument is issued in the FTT zone, Cummings explained.

“[But] as the dust settles on the draft directive, a number of undesirable economic trends are poised to play out if the Directive becomes law in ten months’ time,” he said.

Firstly, any mobile FTT zone-headquartered investment bank or securities dealer would now have to put migration to the non-FTT Zone on the boardroom agenda. “Securities dealing works on notoriously small margins and it will not be enough to move the business to, say, an Asian or North American branch operation,” added Cummings.

Secondly, other things being equal, would a non-FTT zone fund or institution buy stock from or look to hedge with an institution within the zone? Who would buy FTT zone-issued securities, if a similar stock not hit by the tax would give the desired exposure ?

Thirdly, given the choice of raising finance on an international exchange, or though the international capital markets, “there must now be a disincentive to a eurozone listing, a benefit to be enjoyed instead by New York, Hong Kong or Singapore”, Cummings added.

“If the EU is serious about stopping profits being shifted outside the eurozone, it very quickly needs to re-think the FTT. The current design is sure to push business, jobs and profit outside the EU.” 

 

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