The EU’s FTT or Financial Transaction Tax will soon be upon us. By coincidence, the same initials – FTT – in medicine stand for ‘Failure To Thrive’. What are the probable impacts of this measure? And how can financial institutions best understand, and then prepare to withstand, them?
FTT is a levy placed on the ownership transfer, purchase and sale of securities covering repo, securities lending and borrowing (0.1%) - as well as conclusion, modification and trading of derivatives (0.01%). On 14 February 2013, after more than two years of discussions, the European Union agreed on ‘enhanced cooperation’ in moves towards implementation of FTT on January 1, 2014. However, to date only 11 member states have committed to the introduction of FTT.
According to the relevant EU Council Directive, all negotiable instruments on the on-exchange and OTC capital and money markets, including securities, units or shares of collective investments, as well as derivatives are in scope. Chargeability of FTT will begin at the moment of purchase, sale or delivery of the financial instruments. Figure 1 in the PDF illustrates the taxable and non-taxable instruments.
In accordance with the principle of tax harmonization, tax arbitrage is to be avoided, along with potential double or non-taxation. However, the current wording of the Council Directive does not make it clear whether and how settlement of securities will be handled. The status quo implies that a matured bond with cash settlement is not taxable (as payments are explicitly exempted) while a matured (convertible) bond with a physical delivery could be taxable. Based on the limited information available on derivatives markets, it can be also assumed that FTT is not applicable to cash settlement. This leads to a disadvantage for physically settled products (for example when delivering the underlying share).
In order to avoid negative impacts on refinancing of both financial institutions and corporates, any transactions with a National Central Bank or the ECB, as well as any purchases or sales of securities on the primary markets, will not be affected by the FTT provisions.