Transaction Costs To Soar Under EU FTT

by Ulrika Lomas, Tax-News.com, Brussels

18 January 2012

Transaction costs in the foreign exchange markets would soar under a European financial transactions tax (FTT) and could potentially result in three quarters of taxable transactions relocating to other jurisdictions to avoid the tax, a new report has warned.

According to the report, entitled 'Proposed EU Commission Financial Transaction Tax; Impact Analysis of Foreign Exchange Markets', complied by consulting firm Oliver Wyman for the Global Financial Markets Association, European Commission proposals for an FTT would increase foreign exchange market transaction costs by up to 18 times.

The report concludes that the tax would lead to wider bid/offer spreads (the prices at which financial institutions buy and sell currencies) reduce transaction volumes and liquidity and would ultimately lead to higher costs for end users such as pension funds, asset managers, insurers and corporates. It is also suggested that 70-75% of tax eligible transactions would relocate outside of the EU tax jurisdiction.

Furthermore, the report warns that an FTT will act as a drag on the wider European economy because EUR1 raised in tax would likely cost the economy more than EUR1 because of the higher costs associated with reduced liquidity.

In a letter to G20 finance ministers ahead of last September's G20 summit, the GFMA stated that the case against a financial transaction tax is "strong", and the arguments "well known".

"A transaction tax will cycle through the economy, harming both investors and businesses. The negative effects of such an initiative will be felt most strongly in the region where the FTT is imposed, as essential business moves to other jurisdictions," the letter states.

"It is important also to be clear about the likely economic and financial impact of a global FTT," the letter continues. "A number of studies have shown that a FTT will impede the efficiency of markets; impair depth and liquidity; raise costs to issuers, investors, and pensioners; and distort capital flows by discriminating against asset classes. Major economies that have adopted FTTs and FTT-like initiatives have had overwhelmingly negative results, including reduced asset prices, trading moving to other venues, market dislocation, and decreased liquidity. In light of the current fragile state of global markets and the economy, and with many economies experiencing high levels of unemployment and sluggish recoveries, the imposition of such a tax would be particularly harmful."

Under plans outlined by the European Commission in September a 0.1% tax would be imposed on the trading of shares and bonds, while a 0.01% rate would apply to other products. To mitigate the risk of relocation, the levy would be imposed on the financial institution at their place of residence.

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