The ‘FTT zone’ includes Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.
It is important that financial institutions and wealth managers around the world familiarise themselves with FTT as it will be difficult to avoid, unless dealing solely with counterparties and financial instruments in their own jurisdiction. It needs to be clear who contractually should bear any of the tax that may arise.
Small but significant
While the rate of FTT on buying and selling securities is likely to be a modest 0.1% and 0.01% on concluding or modifying derivatives (financial transactions), such a small tax will have global ramifications. The predominant reason for this is that the tax will not be confined to transactions within the FTT zone. Pension and investment funds – both Ucits and non-Ucits – are subject to the FTT. The tax will occur when a party to a financial transaction is located in the FTT zone.
Those located anywhere else in the world are also liable to pay if a party involved in a financial transaction is located in the FTT zone. This is known as the “residency principle”. It will also levy the FTT on financial transactions related to an instrument issued by a party based in the FTT zone, known as the “issuance principle”.
While the rates of FTT might be modest they may mount up as each financial institution, unless acting as agent for another financial institution, is liable for FTT on each leg of a transaction. This means at the very least the buyer, seller and any intermediaries such as market makers will be liable to the “cascade effect”.
Fund groups need to consider FTT for a number of reasons. Firstly, trading in a fund’s units (no matter where the fund is located) could be subject to FTT if the counterparty to such a trade is located in the FTT zone.
For those funds located in the zone, these trades could be subject to FTT no matter where the counterparties are located. While the issuance of shares or units from a fund are not subject to FTT, redemptions will be subject to the tax if the investor or intermediary/distributor is located in the zone. Finally, a fund (no matter where it is located) may be subject to FTT on sales, purchases and hedging transactions in respect of its underlying portfolio of investments.
The true cost
A variety of reasons have been given as to why the FTT is being introduced. From raising monies from the financial sector which caused the global financial crisis, to wanting to change investor behaviour by significantly reducing speculation in securities, thereby reducing volatility and encouraging buy-and-hold strategies.
The problem with this logic however, is that the FTT net will spread to encompass pensions and funds which will ultimately affect the man on the street’s return from his savings.