The FTT is causing a bit of a stir in the City of London and across the English Channel and the Atlantic. The circumstances in which the FTT may apply (if it ever comes into force!) have been written about at length by various commentators. A thumbnail sketch of the breadth of the FTT is shown in the flowchart appended but, in broad summary, the tax (at a rate of 0.01% for derivatives and 0.1% for other transactions) is intended to be paid by financial institutions on transactions in financial instruments such as shares, bonds, repos, and units of UCITS and AIFs. The devil is in the detail but the uncertainty and concern caused by the FTT proposals have seen us advise a number of clients on concerns they have had about its scope, including:
- What will the cross-border impact be of the broad definition of ‘financial institution’? This definition includes banks, investment firms, pension funds and their managers, alternative investment funds and their managers, securitisation special purpose entities, and certain other persons carrying out a material level of prescribed financial activities.
- How will double/multiple taxation be dealt with and how will the cascading charges encountered in clearing systems become priced into deals?
- Whether and how to draft for appropriate risk allocation in existing deals (bearing in mind that the FTT liability for the parties to the relevant transaction is joint and several)?
- Can any exemptions/carve-outs be used to mitigate the impact of the FTT – for example, using multi-currency loans instead of hedging, re-locating operations and using local subsidiaries based outside of the FTT zone? What will be the impact on the repo market?
Two Paul Hastings attorneys share their views on the FTT in their country:
Uwe Halbig, Germany
"In contrast to Italy and France, who have both recently implemented a national FTT, the German government (together with other EU member states including Belgium, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia, Slovakia) strongly supports the implementation of a supranational FTT under the EU enhanced corporation procedure. The latest proposal for a Council Directive for the implementation of the FTT by the Council of the European Union as of 14 February 2013 has encountered strong criticism. In particular, Germany’s concerns regarding the latest FTT proposal centre on economic implications such as:
- Market destabilisation instead of market stabilisation.
- Passing on of the costs of the FTT by financial institutions to underlying consumers.
- Decreasing liquidity for certain transactions due to increased costs.
- Increased ineffectiveness of hedges.
In the light of the strong political desire to implement the FTT, different lobbying groups in Germany are seeking to mitigate the negative impact of the FTT:
- Some have sought to request extended exemption clauses for "economically desired" transactions such as intragroup transactions.
- Others have sought to focus on alternatives to the FTT, such as the introduction of a stamp duty reserve tax regime similar to the UK, or the removal of the VAT exemption for financial institutions.
Considering the numerous unsolved issues and the polarising discussions over the FTT, it is considered that the debate surrounding further implementation by Germany of the FTT will only be progressed after the elections for the German parliament in September 2013."
Patrizio Braccioni, Italy
"The FTT in Italy was set up for reasons which are not clear. The tax is complex to apply and the revenue generated is extremely low. Given concerns surrounding the underlying Italian economy, the falling Italian Stock Exchange and the poor level of inbound foreign investments, it is not a remote possibility that the national FTT will be abolished, while the general sentiment is that the ‘European FTT’ will not progress."
Other European Developments
The European Union ("EU") Leaders met on May 22 and agreed on a number of initiatives. These include the adoption of the revised EU Savings Directive and Parent-Subsidiary Directive and an increasing focus on a global standard for information exchange. Of particular interest to the press are the reports that the tax affairs of large companies in Europe are to be opened up to increased scrutiny (stretching to obligations to reveal corporate profits and taxes on a country-by-country basis). Whether this leads to taxation on the basis of ‘formulaic apportionment’ or ‘unitary taxation’ is debatable given the practical difficulties. It is a case of watch this space.
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