At the start of 2013 questions of tax are preoccupying Europe’s financial market participants, and for good reason.
Just as one area of previous tax disharmony—withholding taxes on share dividends—promises to be ironed out, proposals for levies on Europe’s financial transactions are creating new uncertainty.
A Chaotic Start For FTT
Ballooning fiscal deficits and a desire to claw back the costs of previous bailouts mean that the region’s governments are targeting the financial sector for extra revenue.
“There’s a desire at the European country level to raise taxes, and also a sense that there’s unfinished business when taxing the [financial] sector,” says Rod Roman, tax partner at professional services firm Ernst &Young.
The European Commission, the European Union’s executive arm, first put forward a proposal for a region-wide financial transaction tax (FTT) in September 2011.
Since then, the introduction of FTT has proceeded chaotically.
Last spring, France’s then-President Sarkozy decided to go it alone in a move widely seen as a pre-election ploy. Sarkozy’s government introduced a “skinny” version of the FTT, applicable to trades in French shares and credit default swaps on European sovereign debt. The tax—0.2 percent of the transaction amount—took effect in August.
Other countries are now following suit, though at different speeds and in different ways. Italy is now on course to tax all trades in equities and equity derivatives from 1 March and 1 July 2013, respectively. The Portuguese plan a tax that’s broader in scope, applying to trades in fixed income securities, equities and derivatives. Spain has also mooted plans for an FTT.
The principles behind Europe’s proposals for an FTT are not uniform, according to one expert.
In effect, there are now two distinct types of FTT, either active or under consideration, says Roger Exwood, head of tax at fund manager BlackRock: one issuance-based and one residence-based.
Tax By Type Of Trade
“The first version of FTT is already live in France,” says Exwood, “and looks like the UK’s stamp duty—you pay the FTT not because you’re doing the trade in France, but because you’re trading French stocks.”
There are operational differences between the French FTT and the UK’s stamp duty, however.
While stamp duty is collected automatically through the UK’s Crest share settlement system, French FTT is collected via self-assessment. Any institution, anywhere in the world, that trades in French stocks is now supposed to report its activities to Euroclear, the collection agent for the French authorities.
And in France the details of tax exemptions, commonly granted to market makers and intermediaries involved in other financial transactions, such as securities lending, are still being worked out. In the UK, for example, market makers are exempt from stamp duty on their own share transactions.
For ETFs investing in large-capitalisation French stocks, the existence of the new tax is likely to lead to more frequent premiums to net asset value (NAV) in the funds concerned.
In a similar way, ETFs investing in UK equities have long been subject to regular premiums of up to 0.5 percent of NAV as a result of the stamp duty payable when shares are transferred into the fund to create new units.
