April 2014

ASSOCIATION COLUMN: Preparing to live with the FTT

James WalshAs new ideas go, the Financial Transaction Tax has been around for an awfully long time. It is 42 years since the Yale economist, professor James Tobin, first came up with his idea for a tax on currency transactions, and ever since there has been an on-off debate about introducing the “Tobin Tax” or “Robin Hood Tax” in one form or another. The Financial Transaction Tax (FTT) will likely be introduced in the European Union; implementation is likely to be phased and it will only be introduced in a selection of the member states. But there is a serious risk that the FTT’s effects will be felt by pension funds and other institutional investors across the rest of the market – including in countries, such as the UK, that have no plans to take part. Originally proposed on an EU-wide basis by the European Commission in 2011, the FTT would apply to every financial market transaction, and would be charged at a rate of 0.01% on derivatives trades and 0.1% on everything else. With unanimity required for tax proposals, a veto from the UK stopped this plan in its tracks. The revised plan is for the FTT to be implemented in 11 member states under a procedure that allows policies to be taken forward in a group of EU members if there are at least nine participants.  The 11 countries include France, Germany and Italy. The FTT’s impact will be felt well beyond. Under the issuance principle, the FTT would apply to transactions in securities originally issued in one of the FTT-zone countries. A UK pension fund transacting in German equities or French bonds would pay the tax. Under the residence principle, the FTT would apply to transactions involving a counterparty based in one of the participating nations. If a UK pension fund were to transact with the London branch of a German bank, then the deal would be deemed to take place in Germany, and the FTT would apply. A new tax along these lines would be hugely costly, with the damage falling squarely on the workers and pensioners whose savings are managed by institutions such as the National Association of Pension Funds’ own members. Beyond the original proposal, everything becomes much less clear. On issues such as exemptions and other points, the 11 countries have been failing to agree among themselves for well over a year.
The situation has been further clouded by a wrangle between competing groups of EU lawyers about whether the plan could breach EU competition law. Meanwhile, the UK is challenging the FTT’s legality in the European Court of Justice. Despite this unpromising backdrop, the political forces still point towards adoption of the FTT. German chancellor Merkel’s new grand coalition has made the FTT a key plank of its programme for government. Meanwhile, the Greek presidency of the Council of Ministers is pressing for agreement at the meeting on May 6.   This meeting will likely endorse a plan for phasing in, with the FTT to apply initially to equities and equity-based derivatives. Exemptions are likely as a means of buying off opposition, but I fear they will be of little value in practice. With a new European Parliament to be elected at the end of May and a new European Commission taking office in November, the legislative machine will be slow to click in to gear, but it will do so in 2015, and I can envisage the FTT legislation being approved at some point in 2016, with implementation to start from - perhaps – 2018. Behind schedule, details unclear and no plan for implementation? Yes indeed. But still advancing inexorably down the political track? You bet. Half a century on, professor Tobin’s idea is on its way to becoming reality. We need to prepare to live with it. ©2014 funds europe

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