Wednesday, April 03, 2013

ICI Senior Counsel Says Financial Transaction Tax Would Harm Individual Fund Investors

The Investment Company Institute senior tax counsel said that the financial transaction tax being implemented in the European Union under an enhanced cooperation framework and proposed in Senate and House Legislation would harm individual investors despite assurances from proponents that the tax would be imposed only on financial institutions. Keith Lawson noted that, while mutual funds would ostensibly pay the tax, it would be borne solely by fund shareholders. A mutual fund is merely a vehicle through which investors pool their resources, he pointed out, and a mutual fund’s investors are the only owners of the fund.

Further, any financial transaction tax incurred by a fund reduces dollar-for-dollar (or euro-for-euro) the value of the fund’s assets. Thus, each investor incurs directly, in the form of a smaller account balance, his or her proportionate share of the tax, based upon his or her proportionate interest in the fund.

The European Parliament has approved the European Commission’s proposal for a financial transaction tax, which would impose a 0.1% tax for shares and bonds and a 0.01% tax for derivatives. Parliament set forth the possibility of using the enhanced cooperation provision to enable a subgroup of at least nine EU Member States to adopt the financial transaction tax if there is no agreement among all EU Member States. However, the legislative body also recognizes that introducing the tax in a very limited number of Member States could lead to the single market being undermined and that measures should therefore be taken to prevent this.

At the end of last year, eleven EU members, Germany and France plus Austria, Belgium, Estonia, Greece, Italy, Portugal, Slovakia, Slovenia and Spain, applied to the European Commission to enter into enhanced cooperation on the introduction of a financial transaction tax. In the view of German Federal Finance Minister Wolfgang Schäuble, enhanced cooperation will ensure that the participating countries introduce a European financial transaction tax through a joint European process and under European rules.

The ICI senior counsel noted that a fund is expressly identified as a financial institution under the E.U. proposal. As such, a fund would be taxed each time it bought or sold securities issued by a company with a participating member state connection. The fund also would be taxed each time one of its individual investors with a permanent address in a participating member state redeemed shares in the fund.

Under the Wall Street Trading and Speculators Tax Act, S. 410, introduced by Senator Tom Harkin (D-Iowa), a fund would be taxed each time a fund investor redeemed shares, as the fund is purchasing its shares from the redeeming shareholder. The fund also would be taxed each time it bought securities for its portfolio, including with new cash invested by individuals in the fund. A companion bill, H.R. 880, was introduced in the House by Rep. Peter DeFazio, (D-OR).

Counsel also observed that the extent of a mutual fund’s liability would depend, in part, on whether a financial transaction tax has extraterritorial or only national application. In his view, the European Commission proposal has unprecedented extraterritorial scope. Specifically, the FTT would be imposed in all cases without regard to where a fund is organized. A Hong Kong fund, for example, would owe the financial transaction tax to Germany if a German investor residing outside of Germany, but with a permanent address in Germany, redeemed shares of the Hong Kong fund. Likewise, a Canadian fund would owe tax to France if it bought shares of a French company on a stock exchange, even if the exchange were located outside of France. Under the Harkin-DeFazio legislation, the financial transaction tax would be only national in scope. Specifically, the tax would be imposed only on transactions occurring in the United States and involving U.S. persons. Thus, a U.S. fund buying shares of a U.S. company would be a taxable transaction.