EU's Proposed Financial Transaction Tax Draws Objection from Various Trade Associations
Raphael Rosenblatt | Bloomberg Law
As a result of the world financial crisis, public debt in all 27 European Union (EU) member countries rose from below 60 percent in 2007 to 80 percent for the foreseeable future. Although, according to the EU, the financial sector “played a role in the origins of the economic crisis,” to date, most costs of providing bailouts have come from EU member governments or taxpayers. Additionally, the EU noted that the financial sector enjoys reduced tax obligations, as compared to other sectors.
Financial Transaction Tax
As a result, the EU has proposed a financial transaction tax (FTT) that would take effect in January 2014. The FTT would be levied on all transactions involving financial instruments when at least one party to the transaction is located in the EU. Shares and bonds would be taxed at a rate of 0.1 percent, and derivatives contracts would be taxed at a rate of 0.01 percent. The EU estimated that the FTT could raise revenue of €57 billion each year. The FTT would be directed at the 85 percent of financial transactions that occur between financial institutions.
The EU outlined two main purposes for the FTT: (1) ensuring that the financial sector fairly contributes at a time of fiscal consolidation among EU member states; and (2) strengthening the EU single market by implementing a coordinated framework that will “reduce competitive distortions in the single market, discourage risky trading activities and complement regulatory measures aimed at avoiding future crises.”
Objections by Trade Associations
The EU’s proposed FTT has garnered strong objection from various trade associations.
In a letter addressed to Treasury Secretary Timothy Geithner, the Securities Industry and Financial Markets Association (SIFMA)—along with various other trade associations—objected to imposition of a global FTT. Although the United States is not currently contemplating its own FTT, SIFMA expressed concern that the FTT would make its way into the U.S. economy and affect investors and businesses. Moreover, “major economies that have adopted a financial transaction tax have had overwhelmingly negative results.”
The Financial Markets Association (ACI) also objected to the FTT. According to ACI, the FTT would lead to fiscal arbitrage, which could undermine the G20′s efforts at harmonizing regulation of global financial markets. “The ACI fears that rather than ensuring that the financial sector makes a fair contribution at a time of fiscal consolidation, the FTT would affect market behaviour and financial industry business models detrimentally.”
Additionally, ACI and its Foreign Exchange Committee expressed concern that the FTT ultimately would be passed on “through widening the current very fine spreads that benefit businesses and pension funds.” The FTT also would increase the cost of engaging in cross-border transactions and would become an obstacle to global trading, financing, and growth.
The International Swaps and Derivatives Association, Inc. (ISDA) expressed concern that the FTT would be equally harmful to the financial sector and to corporate entities. All types of corporate entities use derivatives products to manage interest rate, credit, currency, and counterparty risks, but, according to ISDA, the FTT will increase the costs of these important risk management tools.
Additionally, ISDA noted that “introducing new taxes on the financial sector also risks reducing the capital base of financial transactions at time when regulators are demanding higher capital buffers.” If the FTT merely passes costs along to customers, they will be restricted from accessing capital markets, and liquidity will be hampered.
The Global Financial Markets Association (GFMA) opposed the FTT, as well, and urged G20 member countries to reject it. GFMA described the EU’s proposed FTT as a “pre-cursor to a global approach,” the effects of which will be most felt in the region in which it is imposed when essential businesses move to jurisdictions without an FTT. Similar to SIFMA’s objections—SIFMA is a member association of GFMA—GFMA noted that those economies that have adopted an FTT “have had overwhelmingly negative results, including reduced asset prices, trading moving to other ventures, market dislocation, and decreased liquidity.” These concerns are ever more acute in view of the current global economy in which there is high unemployment and recoveries have been sluggish.
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