Our detailed analysis (PDF 319 KB) is based on expectations after the ECOFIN Committee meeting of 22 January, which are consistent with the documents issued by the European Commission on 14 February. We highlight in this article some of the key aspects of FTT for insurers.
Participating Countries: France, Germany, Italy, Spain, Austria, Belgium, Estonia, Greece, Portugal, Slovakia and Slovenia.
Entities in scope: all financial institutions (FIs) including insurance and reinsurance companies, pension funds and certain SPVs. One of the parties to the transaction must be an FI for FTT to be triggered.
Rates of tax: no lower than 0.1% for instruments other than derivatives; 0.01% for derivatives; payable by all FIs party to the transaction.
What transactions? Most financial transactions, but excluded are primary market transactions such as entry into an insurance contract, share issues, initial lending, issues of units in UCITs and AIFs.
The complexities really start to arise as we look at who is liable for the tax. Implementing this new tax is going to be a major challenge for banks, but insurers need to be aware of the pitfalls. The Commission expects that there will be significant changes in behaviour as FTT changes the economics of certain transactions.
- Any FI that is established in a participating state and is a party to an in scope transaction. For example, a Spanish insurer buys shares in a US company or a Spanish branch of an Irish insurer sells Japanese shares.
- Any FI, wherever in the world it is established, that is a party to a transaction in a financial instrument issued within a participating Member State. For example, a US insurer buys shares in a Spanish company from a UK bank. It is not clear how the tax will be collected.
- A reverse charge applies where an FI in a participating State transacts with an FI outside those States. A UK insurer transacting with a Portuguese bank would be deemed established in Portugal and the reserve charge applied.
- Branches in participating Member States, for example the Spanish branch of an Irish insurer. The branch will be subject to FTT, but it is not clear what evidence is required to demonstrate attribution to the branch or between branches or to demonstrate absence of any connection to the branch in the participating Member State.
- Joint and several liability: any participant to a transaction may be charged with the liability of any other party if the FTT due remains unpaid. Contracts will need to be revised. It may be necessary to know more about the other parties to a transaction.
- Some transactions, such as hedging, may generate multiple layers of tax eg for rolling swaps. Repos and stock lending transactions are both subject to the FTT. Use of brokers may generate multiple layers of FTT, even on a simple purchase.
- For life insurers, the cost of the new tax will need to be captured by the firm’s systems such as unit pricing. Modelling, for example, in designing new products, will need to be adapted.
The difficulties of implementing this new tax on today’s complex financial systems should not be underestimated – trying to do this by 2014 when the rules are not yet agreed seems unrealistic. Insurers should continue to monitor as the story unfolds....