Thursday, November 08, 2012

Securities and Business Groups Ask Treasury to Ensure that EU Financial Transactions Tax Is Not Applied Cross-Border

In a letter to Treasury Secretary Tim Geithner, securities and business groups opposed a national, global, or regional financial transactions tax since such a levy would contribute to economic uncertainty and distort the ability of investors and businesses to make long-term economic decisions. The industry groups said that a financial transaction tax will cycle through the entire global economy, harming businesses and investors. The letter was signed by SIFMA, the Investment Company Institute, the US Chamber of Commerce and the Financial Services Roundtable.

The financial associations expressed appreciate for the Administration’s advocacy in opposing a financial transactions tax during recent meetings of the G20 finance ministers and urged continued opposition as parts of the EU move closer to imposing a financial transactions tax on securities and derivatives trades. In addition to harming financial markets and consumers, cautioned the letter, a global or extraterritorial FTT could lead to multiple taxation and protectionism that would further impede global capital flows and harm domestic economies. Thus, the industry associations urged Treasury to caution the EU countries not to apply their national financial transaction tax laws on an extraterritorial basis.

The industry associations are concerned that certain members of the European Union are determined to advance a global financial transactions tax unilaterally by adopting broad and unprecedented concepts of residency and tax jurisdiction. In July 2012, the French government enacted a tax on secondary market trading in American Depository Receipts that applies to transactions between US investors wholly within the United States. According to the industry groups, France claims jurisdiction on the grounds that ADRs trade in concert with the value of an underlying French security held by a depository bank, notwithstanding a provision in the United States income tax treaty with France designed to prevent extraterritorial application of stock transaction taxes. The French tax goes into effect on December 1, 2012.

Similarly, within the last month, eleven European Union countries, including France, Germany, Italy, and the Netherlands, wrote to the European Commission or expressed support for an EU Council Directive authorizing a harmonized regional financial transactions tax based on a proposal introduced by the European Commission in September 2011 under the EU's enhanced cooperation procedure.

Now that eleven EU countries back the implementation of a financial transactions tax, the European Commission can move forward with a concrete proposal for the European Parliament to consider. EU Tax Commissioner Algirda Semeta recently said that he plans to deliver a proposal for a financial transactions tax to the Economic and Financial Affairs Council (ECOFIN) in November in order to facilitate quick progress on this item.

Commissioner Semeta said that the proposal to ECOFIN will be based on a Commission Directive proposed last year. The proposal recommends that a financial transaction tax be applied to all financial transactions, in particular those carried out on organized markets such as the trading  of equity, bonds, derivatives, and currencies. The tax would be levied at a relatively low statutory rate and would apply each time the underlying asset was traded. The tax collection or the legal tax incidence should be, as far as possible, via the trading system which executes the transfer.

In their letter to Treasury, the industry groups expressed concern that the EU financial transactions tax is designed to be extraterritorial, and, as such, would collect revenue from financial markets and investors globally to which the minority of EU countries that support the tax have little or no connection. The extremely broad concept of residency embedded in the EC proposal would extend the financial transactions tax to many transactions occurring within the United States.