US Financial Institutions

US Financial Institutions

May 31, 2012

US financial institutions may become subject to a new financial transactions tax in the European Union, starting in 2014, if plans to extend the proposed tax are agreed by the European parliament later in May.

However, it is equally possible that the tax may never be introduced and its planned introduction shelved.

A quiet battle has been raging in Europe since September 2011 when the European Commission presented draft legislation to introduce a financial transactions tax or FTT. While the majority of EU member states, led by Germany and France, support the introduction of an FTT, others, particularly the United Kingdom, have been vocal in their opposition. Earlier this month, the EU committee in the upper house of the British parliament, the House of Lords, warned that 70% of the tax raised would come from UK financial institutions.

While it is theoretically possible that the UK and certain other member states might opt out from the FTT, such an opt-out may not be practical if the FTT is introduced throughout the euro zone. Findings of a report from one of the big four accountancy firms suggested that the significance of the City of London within EU financial markets is such that even if the UK opted out, 50% of the cash would still come from UK trades. With that level of UK-based collections, it is perhaps unlikely that the UK would forgo the right to share in the income from the tax that would, presumably, be a consequence of opting out.

Under the 2011 proposals, tax will be due on qualifying transactions, excluding primary issuance, in certain financial instruments, including shares, bonds and derivatives. Share and bond transactions are expected be taxed at 0.1% of the higher of the payable consideration and market value, and derivatives at 0.01% of notional amount. Bank loans, mortgages and “day-to-day” financial activity would be outside the scope of the FTT.

The FTT was originally planned to apply only where at least one party to the chargeable transaction is a financial institution established, or deemed to be established, in the European Union. However, at the end of April, the EU Economic and Monetary Affairs Committee proposed that the charge be expanded to include transactions between non-EU parties if the securities being traded are issued by a company in a member state that has opted for FTT. So, by way of example, a securities trade between a US institution and one established in, say, Japan would be subject to the FTT if the traded securities were issued in France. Support for the new proposal within the committee was far from unanimous, but the resolution was eventually passed by 30 votes to 11.

The picture remains confused. Prior to the French elections, Mr. Sarkozy indicated that France might go it alone in introducing a form of FTT later this year, and EU policy makers have been looking to expand the 2011 original proposals.

At the same time, there has been significant lobbying from the financial sector against any form of FTT, and the EU member states with most to lose continue to oppose it.

What is certain is that even if it does go ahead there are many problems still to be resolved: not least the question of how the tax would be enforced where neither party is established in an EU state that has introduced the FTT.

The 2011 proposals provide for joint and several liability so that the EU party to a trade would be liable for the non-EU party’s failure to account for FTT, but if neither party is established in a state that has elected to charge FTT, it is difficult to see how the tax could be effectively collected.

Keith Martin