The issue has been particularly high on the agenda of many EU Member States’ governments. Eleven Member States have expressed their willingness to move forward to adopt an FTT between themselves. Although it seems almost inevitable that some sort of unified FTT will be introduced, its timing and shape are still under debate.
The FTT originally proposed in September 2011 by the EC for all 27 Member States was to be levied on financial institutions carrying out transactions in securities and derivatives. In general, the proposed rate of tax would be 0.1 per cent for shares and bonds and 0.01 per cent for derivatives. This proposed FTT would take effect as of 1 January 2014.
Eleven Member States agreed to move forward with the FTT under the enhanced cooperation procedure. The European Parliament approved the procedure on 12 December 2012, and the Economic and Financial Affairs (ECOFIN) Council gave its approval on 22 January 2013.
Accordingly, on 14 February 2013, the EC proposed for an FTT to be implemented by the 11 Member States. The EC’s proposal was based on the original proposal for all 27 Member States, yet amended to reflect that not all Member States would apply the tax.
On 3 July 2013, the European Parliament (EP) approved the EC’s proposal but also proposed a number of amendments. The EP only plays a consultative role in this legislative procedure and its proposed amendments are not binding. The final say lies with the ECOFIN Council that is representing the 11 participating Member States.
Since some of the EP’s proposals could still find their way into the FTT’s implementing directive, financial services companies doing business in the EU should weigh the potential impact of these possible amendments. Some of the EP’s key proposals would:
- extend the FTT’s scope to cover currency spots on foreign exchange markets
- introduce a legal title principle (i.e., no transfer of legal title without payment of FTT due)
- permanently reduce rates on repurchase agreements and temporarily reduce rates on trades in sovereign bonds and trades of pension funds
- provide an exemption for market makers.
In addition to the EP, many industry lobby groups are pushing for amendments to the current proposals. The UK has even launched proceedings to persuade the EU Court of Justice to declare the proposals illegal. Whether or how these debates will influence the final outcome remains to be seen. Some other proposals under discussion would:
- restrict the FTT’s territorial scope to participating Member States only
- exempt pension funds and sovereign bonds
- limit the FTT’s application so that it operates more like a stamp duty (shares only)
- introduce the FTT in phases.
The introduction of an FTT in 11 Member States will likely have practical implications for financial sector businesses, whether or not they are based in one. The biggest impact is likely to be on systems, products and processes.
KPMG’s EU Member State Comparative Financial Transaction Tax Survey demonstrates that the proposed FTT may at best require changes to business models. At worst, it could make them no longer viable. For example, the FTT could affect processes, such as securities settlement, intermediation functions, or access to market liquidity. Given the operations of financial services businesses, complying with an FTT and meeting its reporting and payment obligations raises some of the biggest concerns.
Although it looks like the FTT’s planned introduction date of 1 January 2014 will not be met, financial services businesses need to keep up with developments and prepare for potential impacts.
The 11 Member States moving forward with the Financial Transaction Tax (FTT) are: