The proposed European Union financial transaction tax (FTT) could lead to a significant decrease in cross-border trading of financial instruments in the EU, undermining the single market, according to the Alternative Investment Management Association (AIMA), the global hedge fund association.
AIMA, which has carried out a comprehensive analysis of the proposed FTT, said there would be a significant slowdown in trading of financial instruments like shares, bonds and derivatives in the EU.
The AIMA analysis concluded that the FTT would have widespread, unintended damaging consequences. As well as undermining the EU’s single market, the FTT would be likely to reduce EU taxpayers’ savings and pensioners’ incomes, lead to a reduction in the level of investment in the real economy, send asset prices lower, widen spreads, hinder efficient price discovery and increase market volatility.
The Commission’s own studies concluded that the FTT would leave the EU worse off by tens of billions of euros annually. It estimated that the FTT’s annual revenues would be approximately €25bn-€43bn, but there would also be a reduction in EU-wide GDP of between 0.53% (€86bn) and 1.15% (€186bn).
Even that considerable cost may have been underestimated, AIMA said, because it did not fully take account of the “cascade” effect of taxes being applied to every constituent part of a particular trade.
AIMA CEO Andrew Baker (pictured), says: “Our analysis concludes that the EU’s proposed financial transaction tax will reduce or eliminate a vast amount of cross-border share and bond trading activity within the European Union, thus undermining the Single Market. And we are not talking about complex financial transactions but very simple buying or selling of shares undertaken by ordinary investors. This could have very serious unintended consequences – including a further tightening of financing conditions for business – at a critical moment for the European economy.”
Equity, bond or derivatives trades routinely involve one or more intermediaries such as dealers and brokers, often located in a different EU member state from the buyer or seller.
The Commission’s own studies acknowledge that simple share trades usually require a much longer transaction chain, with one or more intermediaries being interposed between a client and a trading venue in another EU member state. AIMA said the Commission had underestimated the widespread extent of this practice and overestimated the degree to which buyers and sellers would be able to change existing practices to reduce the number of transactions necessary for a cross-border trade. A smaller, less liquid market in the majority of Member States would be the outcome, said AIMA.
Baker says: “Article 113 of the Lisbon Treaty, which is the legal basis of the Financial Transaction Tax proposal and which states that taxes are to be introduced only ‘to the extent that such [tax] harmonisation is necessary to ensure the establishment and the functioning of the internal market’, is being used to present a proposal that would lead to a significant reduction of much cross border trading in the EU because it would attract double or triple the tax burden compared to purely domestic transactions.”