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Financial Markets Association Slams EU FTT Plans

by Ulrika Lomas,, Brussels

11 July 2013

The Global Financial Markets Association (GFMA) has urged the eleven European countries preparing to implement a financial transactions tax to reconsider its planned scope before proceeding.

France, Germany, Belgium, Spain, Portugal, Italy, Austria, Estonia, Greece, Slovakia, and Slovenia are the eleven countries to sign up to use the European Commission's "enhanced cooperation" procedure as a means of introducing the FTT. Enhanced cooperation allows those European Union (EU) member states that wish to work more closely together, to do so.

The GFMA believes that any proposed Tobin tax would have negative consequences for Europe's economy and have a serious impact on corporate and fund managers. This claim is based on analysis by the GFMA's Global FX Division (GFXD), which found that an FTT would typically increase transaction costs for users of the foreign exchange market. Corporates could expect to pay between 300 and 700 percent more than at present, meaning that businesses which use a single dealer and are located in the tax zone could be hit with additional bills of up to EUR15.7m (USD20.16m) a year.

Pension fund managers are likely to be even worse off. They could see their expenses rise by around 700-1,500 percent, a figure that could even go up to 4,700 in some cases. The GFMA also argues that the impact of an FTT on pension funds using FX would be compounded by the "double sided nature" of the proposed FTT. A pension fund accustomed to annual transactions costs, via a single dealer, of EUR1.2m, could see them rocket to more than EUR57.6m.

Although the European Commission, which is heading up the FTT drive, has excluded FX spot transactions from its plans, the GFMA says that imposing an FTT on other FX products risks discouraging companies and investors from carrying out international trades. Businesses would therefore either reduce the hedging of their international activities, or take on the additional tax costs where they could otherwise have concentrated on growth or delivering fund returns for investors.

Commenting on the findings, GFXD managing director James Kemp said: "The FX market is highly transparent, highly liquid and underpins international commerce and investment by providing corporates and fund managers with an efficient way of carrying out their business.

"Given the need for Europe to kick-start economic growth, it is crucial to ensure that European companies of all sizes are able to compete internationally. FX products are central to their ability to do this. In addition, the proposed tax risks becoming a disincentive for businesses to hedge risk which could increase their earnings volatility and business risk."

Last week Tax Commissioner Algirdas Šemeta signalled that the Commission is prepared to consider suggestions for a lower rate, after Members of the European Parliament recommended a phased introduction plan. A resolution prepared by lawmakers retained the recommended 0.1 percent tax on stocks and bonds, and 0.01 on derivatives trades, but only as an eventual goal rate. It instead suggested that trades in sovereign bonds should be taxed at just 0.05 percent, trades of pension funds at 0.05 percent for stocks and bonds, and at 0.005 percent for derivatives, until January 1, 2017. After that, the full rate could kick in.

Recent updates to the Commission's FTT webpage also hinted that a six-month postponement of the intended January, 2014 start date could be on the cards. Under a section titled "The way ahead," the Commission stated: "Once agreed upon at European level, participating Member States will have to transpose the [Commission's] Directive into national legislation. If agreement is found before the end of 2013, and there is a speedy transposition into national law by the participating Member States, this common framework for an FTT could still enter into force towards the middle of 2014."

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