Canada’s investment dealers have been passing on the cost of France’s financial transaction tax (FTT) to their clients on transactions the firms process involving French securities and American depository receipts (ADRs), even as Canadian financial services industry groups lobby against such taxes and the introduction of a broader European FTT set for next year.
“Canadian [investment] dealers are complying with these extremely extraterritorial taxes,” says Andrea Taylor, director with the Toronto-based Investment Industry Association of Canada (IIAC).
France introduced an FTT of 0.2% on the transaction amount on a purchase of a French security or ADR in August 2012. Under the French law, dealers around the world have been required to collect and remit the French FTT since late last year on affected securities. A similar tax from Italy, albeit structured differently than the French one, was passed earlier this year, with payments beginning this autumn.
“Canadian [investment] dealers will comply with Italian FTT requirements as they are phased in,” Taylor confirms.
An FTT is levied on financial transactions in order to achieve either the goal of reining in high-frequency trading or as a means of raising revenue, or both.
In early 2013, 11 European countries – including Germany, France, Italy and Spain – agreed to a proposed European FTT, which would see a tax of 0.1% on transactions involving equities and bonds and 0.01% on derivatives. The tax would apply to transactions processed by firms within these 11 nations and on any transactions made involving shares or bonds issued in those countries. The European FTT is intended to supersede the FTTs of the individual nations that have signed on to the proposed agreement.
Originally, the European FTT was slated to begin Jan. 1, 2014, but has been delayed until the middle of next year at the earliest as the 11 countries continue to debate the framework of the tax.Since the global financial crisis and the European sovereign debt crisis that ensued, governments in Europe have considered FTTs as a means of generating revenue.
“Basically, [European countries] are saying that the financial [services] institutions were the cause of the problem,” says Don Brean, professor of finance and business economics at the Rotman School of Management at the University of Toronto. “They therefore should be [put] in a position to generate revenue that can be set aside in order to replenish capital in distressed financial institutions in the event of some future crisis.”
Several European countries did not join the proposed FTT, with the most notable being the U.K., which instead has vigorously lobbied against the tax, arguing that: it is extraterritorial; it would not raise the revenue anticipated; and it would have a host of negative consequences to the competitiveness of European capital markets.
Canada’s federal government has also argued against the European FTT. In April, the IIAC, along with the Canadian Bankers Association, the Investment Funds Institute of Canada, and the Canadian Life and Health Insurance Association Inc., all of Toronto, wrote to the federal minister of finance urging him to continue to express his strong opposition, arguing that the tax would unfairly punish firms and investors.
“Canadian financial institutions and their clients will have to bear the costs associated with collecting and remitting the tax to European governments, while possibly taking on liability in that regard,” the groups argued. “There will be an outflow of tax revenue from Canadian institutions and Canadian investors to jurisdictions in the EU with no net benefit [tax or otherwise] to Canada.”
Opponents of the European FTT received some good news in September when lawyers for the European Union (EU) itself submitted a legal opinion to the EU saying the tax was illegal as it contravened member states’ jurisdictions, both in terms of international law and the EU treaty. The report is non-binding, but it represents a serious setback to the proposal.
“[The legal opinion] confirms our assessment that the EU FTT is extremely extraterritorial in its scope and will lead to distortions of global capital markets generally,” Taylor says. “While we would prefer that the EU withdraw its proposed FTT altogether, even a reassessment and reduction in its extraterritorial application would be welcome.”
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