What is an FTT?

FTT stands for ‘financial transaction tax’ and is a generic name for taxes that are levied on transactions such as sale and purchase, that involve some sort of financial element such as currencies or stocks and shares. FTT’s are not new and are applied by various countries, including some EU Member States, such as the UK and France.

What is the EU’s FTT

This is a proposal to introduce an FTT on the basis of a common set of rules by, at present, eleven EU Member States. According to the current text of the proposal the tax would be levied at fixed low rates on certain transactions involving financial instruments such as shares, bonds and derivative contracts.

Why has an FTT been proposed at EU level?

The EU Commission put forward its original proposal for an EU-wide FTT in September 2011 with three main objectives:

• to avoid fragmentation of the EU’s internal market due to individual Member States adopting their own national FTTs
• to ensure financial institutions make a fair contribution to the costs of the recent crisis and ensuring a level (tax) playing field with other sectors
• to discourage certain types of economically inefficient transaction.

Which countries plan to implement the EU FTT?

The original proposal to adopt an EU-wide FTT did not go ahead because it did not get the support of all Member States. Although unanimity is in principle required for EU tax harmonization initiatives, an alternative procedure known as ‘enhanced cooperation’ allows a smaller group of Member States (a minimum of nine) to adopt such initiatives, subject to certain conditions and authorizations. At present the following EU Member States have indicated that they wish to proceed with this enhanced cooperation procedure: Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain. However, other Member States are allowed to join the initiative.

What is the status of the EU FTT?

The EU Commission issued its revised proposal for an EU FTT to be adopted under the enhanced cooperation procedure on February 14, 2013. This is largely based on the original proposal for all (at the time) 27 Member States published in September 2011, with adaptations to reflect the fact that not all EU Member States will apply the tax. The proposed FTT if adopted will take the form of an EU Directive that must be implemented into the domestic legislation of the eleven participating Member States. The European Parliament has endorsed the proposal subject to certain amendments. However, the proposal is not dependent on their approval. Although the non-participating Member States can be involved in the discussions they cannot vote on the approval itself. The UK has initiated proceedings before the Court of Justice of the EU arguing that the current proposals are in breach of EU law. The originally planned implementation date of January 1, 2014 has not been met and the future of the proposal is uncertain. The eleven participating Member States are currently discussing the possibilities. See further FTT latest.

Can significant changes be expected to the current draft Directive?

There appear to be significant disagreements amongst the EU11 on the form of the FTT and very little progress has been made to date. In terms of amendments to the Commission’s proposal substantial revisions are likely but there is as yet no clarity. The amendments being debated include financial instrument exemptions (e.g. Sovereign Debt), Financial Institution exemptions (e.g. Pension Funds) and Financial Transaction Exemptions (e.g. short term repos, intermediary transactions etc…).

What will happen to the existing FTTs applied by some individual Member States?

If the EU FTT is introduced by the eleven Member States that are following the enhanced cooperation procedure, they will have to abolish their existing FTTs. At present this could be relevant for Belgium, France, Greece, and Italy. EU Member States that do not participate in the EU FTT will not have to abolish their existing FTTs, although if they do not there is a risk of double taxation arising where there is an overlap. This could be relevant for Cyprus, Finland, Ireland, Luxembourg, Malta, Poland, and the UK.

Who would have to pay the EU FTT?

If a transaction falls within the scope of the EU FTT, FTT is in principle payable by the financial institutions, such as banks, investment funds and stockbrokers, that are involved in the transaction, whether this is carried out on their own behalf or on behalf of a client. However, if the tax is not paid by a particular financial institution on time, it may be recovered from other parties to the transaction, or in some circumstances even from other persons. It has also been suggested in commentaries on the proposed FTT that it would in practice be passed on to the financial institutions’ clients.

What are the rates of FTT and what is the tax base the rates are applied to?

The current proposal puts forward two rates, one for derivatives transactions (0.01%) and one for other financial transactions (0.1%). These are minimum rates and it is open for participating Member States to impose higher rates. The tax base is in general the consideration for the transaction but can be replaced by market price, e.g. where this is higher than the consideration . For derivatives the tax base is the notional amount.

How will the EU FTT affect transactions outside the eleven participating EU Member States?

Although the tax would only be imposed by eleven EU Member States, the tax could affect transactions involving financial institutions or their clients that are based in other Member States or even non-EU Member States, i.e. outside the FTT zone. The rules are rather complex, but this could occur where, for example, a financial institution based in a non-FTT zone country is involved in a transaction with an FTT zone financial institution: if the transaction is within the scope of the FTT, both financial institutions, including that based outside the FTT zone, would in principle be liable to FTT. Another example would be where a transaction involves a financial instrument that is issued by an FTT zone entity, such as a share in a German company: in this case the financial institutions involved in the transaction are, in principle, liable to FTT wherever they are based.

Will the FTT only affect financial sector businesses?

In general yes. FTT is payable by the financial institutions involved in the transaction. This term is broadly defined and includes providers of investment services, banks, insurance companies, pension funds, and securitisation vehicles. While these are generally regarded as financial sector businesses, the definition also extends to a certain kinds of businesses that may not always be regarded as financial sector businesses but are carrying out a significant proportion (more than 50% of net annual turnover) of financial transactions. This category could, for example, cover a treasury or group financing centre within a multi-national group of companies.

What can KPMG member firms do to help?

KPMG member firms have been actively involved with the EU’s FTT proposal since its launch in 2011 with dedicated cross-discipline FTT teams established in all FTT jurisdictions and beyond supported by a central coordination unit run by KPMG’s EU Tax Centre. This has enabled them to inform clients as and when relevant developments occur and to consult on the technical and practical implications. KPMG member firms have developed an FTT impact analysis approach characterized by a flexible workshop that is focused on the client’s business and results in a qualitative and quantitative assessment of the FTT and identification of management and mitigation strategies.