Tax seems to spawn acronyms and we may, at least in a mainland European (if not the UK) context, soon have to get used to a new one – FTT, or financial transaction tax.
Following the onset of the global financial crisis, the European Commission proposed the introduction of FTT to:
- ensure that financial institutions make a substantial contribution to bolster public finances after the crisis; and
- create appropriate disincentives for transactions that do not enhance the efficiency of financial markets.
The tax would be charged on “financial institutions” (banks, insurers, unit trusts, pension funds and the like) based in the European Union in respect of “financial transactions” (dealings in shares, bonds, all kinds of financial derivatives and similar instruments). There are certain exemptions (including the provision of credit and insurance transactions). FTT would be levied at a minimum rate of 0.01% in respect of derivatives (calculated by reference to the nominal value) and 0.1% in respect of all other financial transactions (calculated by reference to market value).
The proposed introduction of FTT across the EU is opposed by certain member states, including the UK and Sweden. Accordingly, the 11 member states currently in favour of the new tax have provisionally agreed to go ahead on their own but within existing EU structures – the UK unsuccessfully attempted to challenge the use of such a procedure in the European Court of Justice, but the Court did hold that its ruling did not prevent a subsequent challenge to the legality of the tax itself as and when it was formally introduced. The original introduction date was intended to be in 2014 – this was recently pushed back to 1 January 2016.
Effect on the UK
The UK has had transaction taxes on certain financial instruments for many years – stamp duty and stamp duty reserve tax, charged at 0.5%. However, FTT would be a broader tax as, among other things, it includes derivatives. If the UK did not adopt FTT, there could be instances of certain transactions being subject to double tax (FTT and stamp duty).
Even if the UK does not adopt FTT, borrowers under hedged facilities may attempt to exclude any potential FTT from the usual increased costs provision, arguing that its possible application is known in advance. There is unlikely to be any settled market practice until FTT is formally introduced.
For more information, email firstname.lastname@example.org.