German Fund Manager Warns Against EU11 FTT

By Editorial 11 September, 2013

The grounds on which the European Commission has proposed a financial transaction tax (FTT) are "questionable," the head of Germany's funds association has said.

Writing in the Financial Times, Thomas Richter warns that a Tobin tax would prove "economically damaging and legally problematic." Richter, who serves as chief executive of the association BVI, claims that the Commission's aim to rein in high-frequency trading with the FTT is already served by reforms to the European Markets in Financial Instruments Directive. Furthermore, although the Commission intends to target "those who allegedly caused the financial crisis," Richter stresses that the tax will also be levied on private investors. This would impact on fund assets, and eventually hit investors themselves.

France, Germany, Belgium, Spain, Portugal, Italy, Austria, Estonia, Greece, Slovakia, and Slovenia are the eleven countries (EU11) to sign up to use the Commission's "enhanced cooperation" procedure as a means of introducing the FTT.

As Richter points out, the proposed residence principle would mean that for tax purposes, financial institutions operating in jurisdictions such as the UK – which refused to sign up to the plans – and the US "would be treated as resident in the participating member states, and they would therefore have to pay tax, simply because they enter into transactions with other financial institutions resident in a participating state." They would in turn be required to "make declarations in all 11 countries and establish the infrastructure for meeting those liabilities."

Richter is concerned that this "may not only infringe the right to the free movement of capital but also the international law principle of territoriality." He asks: "Should individual states be able to interfere with the tax sovereignty of other nations and impose tax obligations on their financial institutions?"

Turning to Germany, Richter raises the question of how the Government would be able to collect the tax. He wonders how, for instance, the Government could enforce the FTT in the case of a Chinese bank selling German equities to a bank in Australia. Some German banks are already refusing to pay an existing FTT to France, citing the principle of territoriality. Going forward, Richter believes that "German taxpayers dealing in French equities could set the tax against their German tax liability. Germany's exchequer would effectively be acting as a source of revenue for the French government."

German financial institutions look set to lose out as competition from outside the EU11 increases. Richter predicts that "hubs, such as Luxembourg, would benefit by attracting new fund business away from German supervisory control."

In the run up to Germany's national elections, BVI has found that a majority of voters "are in favor of the FTT because they do not realize that they would also end up paying it." However, a recent BVI survey concluded that "once this misunderstanding is clarified most voters will end up deciding they are against the tax." Richter hopes that "common sense" will return once the elections are over.

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