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ICAP Sounds Warning On EU Tobin Tax

by Ulrika Lomas,, Brussels

09 April 2013

The European Commission's proposed financial transactions tax (FTT) "is a misguided policy which would be severely detrimental to both European Union (EU) economies and businesses," ICAP CEO Michael Spencer has said.

ICAP, the world's largest inter-dealer broker, has warned in a new report that the tax will have a negative effect on the real economies of the eleven EU member states involved in its application.

Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia are progressing with plans for an FTT along the lines of "enhanced cooperation." This procedure, which enables those states wishing to work more closely together to do so, was authorized with the European Council of Economic and Financial Affairs (Ecofin) in January. Under the European Commission's plans, all share and bond transactions will be taxed at a rate of 0.1%, and derivatives transactions at 0.01%. The tax is intended to apply from from January, 2014.

According to ICAP, the Commission's failure to safeguard secondary market trading in public debt from its proposals will increase the cost of funding for and capital burden on governments. The UK Government will also be hit, in spite of its seeking to distance itself from any FTT implementation. ICAP calculates that UK-based economic activity will be one of the largest generators of FTT revenue. However, the UK will lose out on any associated financial benefits because the revenue will be paid to tax authorities in the FTT zone.

"It is particularly ironic that London, as one of world’s leading financial centers, will generate the lion's share of this revenue and act as collection agent despite the UK being outside the FTT zone and our Government being vehemently opposed to the introduction of this tax. The impact on the City if the FTT is adopted in anything like the manner advocated would be devastating," Spencer stressed.

Corporates will likewise feel the force of the FTT. ICAP believes that businesses will find it more expensive to issue debt and equity, and face higher costs if they wish to modify their risk exposure. Major systems changes will be required to enable companies to collect the tax, as there is no collection mechanism in place. Finally, as repo is within the FTT's scope, banks' short term funding costs will rise. These costs will then be largely transmitted to the private sector. This will in turn impact on investment, employment, and output, the report points out.

"According to our research, if implemented, it would severely damage the functioning of debt markets which are essential for governments and companies to raise finance. It would increase both their borrowing and operational costs and lead to a flood of financial activity being moved outside the FTT zone," Spencer explained.

TAGS: tax | investment | business | European Commission | Belgium | Portugal | Slovenia | financial services | tobin tax | Estonia | Slovakia | United Kingdom | tax rates | Austria | France | Germany | Greece | Italy | Spain | tax reform | European Union (EU) | services | Europe

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