EU transaction tax likely to cause distortion in the financial sector

If the proposals for a financial transaction tax (FTT) are implemented as proposed by the European Commission, the FTT is likely to cause distortion in the financial sector, both within the EU and outside, and will almost certainly change the way we do business. The FTT will apply to securities and derivatives transactions by financial institutions that are established in a participating member state — that is Belgium, Germany, Greece, France, Austria, Portugal, Slovenia, Estonia, Spain, Italy and Slovakia (the FTT zone).

However, the FTT will also apply to financial institutions established outside the zone. This will be the case if they operate within the FTT zone, transact with a counterparty in the zone or (following changes to the Commission’s proposals) transact in securities issued by entities incorporated or registered in the FTT zone. This means that a transaction between a UK and a U.S. entity relating to, for example, German bonds could give rise to an FTT charge.

The FTT will be charged at a minimum rate of 0.1% on buying and selling securities and 0.01% on concluding derivatives. In practice, a transaction could attract a much larger effective rate because the tax applies to both parties (if they are both financial institutions) and there is no wide market-maker exemption. A subsequent charge could apply to a material modification of the transaction (even an existing transaction), which is of particular concern for derivative transactions.

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