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By Joe Kirwin
Nov. 2 — Financial institutions—including banks such as Deutsche Bank AG, BNP Paribas S.A., UniCredit SpA, and leading U.K.-based banks such as The Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc—risk increased costs and compliance burdens in collecting a financial transactions tax set to move forward in 10 European Union countries.
In documents detailing plans for the financial transactions tax, seen by Bloomberg BNA ahead of a Nov. 8 EU finance ministers meeting, the mechanism for collecting levies on shares, bonds and derivatives is laid out. The plans involve a new EU central collection approach, and a possible new authority to oversee the process. There will also be a requirement for “self assessment’’ by financial institutions, according to the plan.
In a Nov. 2 email, the European Savings and Retail Group, a European banking association, told Bloomberg BNA that costs related to collecting the tax would push up trading fees to the point that “investors in fixed income instruments will not be interested in trading if spreads are increased to the levels needed to cover the tax.”
Financial institutions have lobbied hard against the FTT on the basis of cost implications for them. They insist that banks, especially in the EU, are already facing large regulatory costs because of the increased regulatory capital requirements.
The European Savings and Retail Group added that “it is currently unclear how this mechanism will be designed and also who will carry the cost of collecting the tax in nations outside the member states introducing the FTT.”
The EU countries working on the FTT proposal are still divided on important subjects, Dutch Finance Minister Jeroen Dijsselbloem told lawmakers in The Hague Nov. 3, and there isn’t a proposal on FTT yet. Dijsselbloem is chairman of the Eurogroup.
The European Commission is hoping to finalize the plans by the end of 2016, but the issue of collection costs is crucial for some of the 10 EU countries in determining whether the FTT is economically beneficial.
“The participating member states seemed to broadly agree that both the centralized tax collection model, as well as the self-assessment model, will play a role in administrating a future FTT,’' according to one of several documents prepared for the Nov. 8 Council of Economic and Finance Ministers.
“To cover all transactions taxed by a future FTT, a system of self-assessment by financial institutions will have anyhow to be put into place, either as an addition to a centralized system or as the main system of tax collection,” the document states.
The commission estimated that costs to set a collection system for the new FTT would range from approximately $8 million in Germany, the largest EU country adopting the levy, and approximately $1 million in Slovenia, the smallest EU nation with the FTT. Operating costs after setting up the collection system would be significantly less, according to the commission.
“A model where participating member states adjust their national systems of collection to the specific infrastructures and procedures in their financial markets would allow participating member states to implement the most cost-efficient mix of centralized collection and self-assessment for their current situation,’' the confidential document states.
The commission also outlines the pros and cons for both a centralized collection system and a self-assessment plan.
“An adequate level of legal enforcement of the tax in each participating member states needs to be ensured,” the document states.
The commission’s analysis insists that a “flexible’’ FTT collection system, where financial institutions would be primarily responsible, would be advantageous because it would be in line with the consensus on taxing the whole transaction chain.
According to the commission’s documents, that means that “every financial institution involved in such a chain is liable to tax.”
By directly obliging the financial institution, “the liable persons remain responsible for the tax reporting,” the commission says. “This could minimize tax circumvention.”
The commission notes the proposal to make financial institutions the primary collectors also means that the “risk of tax evasion could be higher, given the limitations of auditing and the absence of a fiscal authority and/or a market infrastructure having a comprehensive picture of all transactions falling within the scope of the European FTT.”
The commission’s collection option involving a centralized approach considers two possibilities. While one considers a new centralized authority, the other option would task current central clearing parties, such as ICE Clear Europe, LCH.Clearnet or stock exchanges, to collect the tax.
The commission believes the centralized collection authority lacks “a global approach” which would difficult to collect the tax on securities or derivatives issued in an EU FTT country but traded abroad, including in the U.S.
As for setting up a new central authority, the commission said a key disadvantage would be the lack of a “cash flow the authority receives so it is not able to deduct the tax,’' noting that all information received stems from the relevant financial institutions and is currently not always very reliable.
An official working in the financial service industry with experience dealing with collecting the French and Italian FTT adopted in recent years said that compliance costs and legal certainty can vary.
“The French system is straightforward and minimal bureaucratically speaking,” the official told Bloomberg BNA. “On the other hand the Italian system of reporting is very detailed and comprehensive and, as a result, it can be very confusing. Many financial services operators are still struggling to understand how to comply.”
EU financial service officials say they are hopeful that Brexit could give them leverage in persuading EU member states to design an FTT collection system that is not costly.
“As the French and German governments are moving to convince banks to move from the U.K. because of Brexit it will not be in their interest to have an FTT collection system that puts significant economic and legal costs on banks,” an EU financial service official told Bloomberg BNA on the condition of anonymity.
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