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Corporate Review

By Partners at BDO

EU Commitment To Financial Transaction Tax Damaging and Unrealistic

Tuesday, 08 November 2011 Written by 
EU Commitment To Financial Transaction Tax Damaging and UnrealisticJose Manuel Barroso and Nicolas Sarkozy have reconfirmed the EU's commitment to press ahead with a unilateral Financial Transaction Tax (FTT). Estimates are that the tax could raise between £50bn and £70bn, of which around 70% to 80% would come from the UK. But while potentially attractive, the idea that an FTT will make banks pay more towards economic recovery, or contribute sums in the region of £30bn for development, is unrealistic.http://www.ftseglobalmarkets.com/

Jose Manuel Barroso and Nicolas Sarkozy have reconfirmed the EU's commitment to press ahead with a unilateral Financial Transaction Tax (FTT). Estimates are that the tax could raise between £50bn and £70bn, of which around 70% to 80% would come from the UK.

But while potentially attractive, the idea that an FTT will make banks pay more towards economic recovery, or contribute sums in the region of £30bn for development, is unrealistic.

The Commission seems intent on ignoring the evidence from its own investigation and from experience in other countries that an FTT will not raise the sums promised. Earlier warnings have also come from the European Central Bank that this levy would be damaging to European financial centres.

The full economic impact of introducing an FTT are unknown, but the simple maths do not take account of how firms will react to the imposition of such a tax. Many low margin trades would simply not take place if the tax was imposed, while an EU-only tax would simply drive transactions out of the EU and divert trading to other jurisdictions. ICAP has already warned that implementation of this tax could drive them out of the UK.

The cost of the tax will most likely be passed on directly to the businesses and consumers using the banking services; this is already the case with stamp duty. The cost of business for manufacturers and exporters will increase by adding extra cost to the straightforward transactions they make to take risk out of their business, such as hedging against foreign currency exposures. Some of the activities likely to be penalised by a financial transaction tax are exactly the activities that will help drive the trade and growth the Eurozone desperately needs.

The impact will be less on pension funds, insurance companies and individual investors who are generally less frequent traders and seeking longer term returns. A one-off 0.1% tax may not be material for a longer-term investment decision.

However, as with all proposals of this nature, the likely consequences will only be known when the detail is published. Some key concerns to be addressed are which transactions and what base this proposed tax would apply to, its rate and scope.

At this stage, though, it must remain unlikely that the UK government will agree to an FTT being imposed; particularly knowing the disproportionate impact it will have on the UK and London.

Interestingly, however, there were some hints in the statements coming out of G20 that the EU may press ahead with an FTT within the Eurozone region only, although it's not clear this would win practical support from the French and German leaders.

Whatever the moral justification for an FTT, there are valid concerns that a transaction tax will increase costs for business and investors, reduce liquidity and decrease market efficiency and growth. Those calling for the tax should therefore be concerned as to whether this could, in fact, decrease the tax base and further slow Europe's growth prospects if it is limited to either the EU or the Eurozone and pushes market liquidity, business and related jobs to countries which do not follow Europe's lead.

Tim Kirk

Tim is Head of Financial Services for BDO and leads the BDO’s UK Financial Services Advisory Practice, which provides specialist risk, regulatory, internal audit, technology assurance and management consultancy support across the financial services sector.

Tim international experience is based on advising his clients’ senior management teams on emerging issues in relation to strategic, customer and reputational risk. This includes helping clients to develop approaches to respond to globally increasing and more intrusive consumer protection regulation in ways that meet regulatory requirements whilst also delivering positive outcomes for the business and for customers.

Website: www.bdo.co.uk

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