Asian institutions and fund houses should not be complacent about incoming European tax rules, despite leaders there failing to reach consensus on the financial transaction tax (FTT) initiative.
According to FTT proposals, Asian fund houses buying or selling European securities or dealing with a European broker will eventually face unspecified fees from countries implementing the rules. So far 11 member states have expressed interest.
Although nothing has been put into practice yet, some form of current proposals may come into force by mid-2014, according to the European Commission, provided the member states come to an agreement by the end of the year.
Laurent de La Mettrie, asset management tax leader at consultancy PwC in Luxembourg, says that given the significant political investment in FTT “it is likely that the enhanced cooperation procedure will survive”.
Twenty-eight EU members failed to reach an agreement on a European Union wide tax, initially introduced in September 2011. Late last year some 11 EU members, including Germany, France and Italy, all expressed interest in implementing some form of FTT to raise money.
Disagreements emerged this summer that have brought into question whether FTT laws – which could include charges of 0.1% on all European bond or equities transactions and 0.01% for derivatives – will ever be applied.
One proposal on the table is that the FTT’s application be narrowed down – ie, that it be based solely on the place of securities issuance, rather than more broadly defined territorial rules.
The idea behind place-of-issuance laws suggests European tax authorities would be able to charge global investors and counterparties whenever they purchase securities from a firm based in an FTT jurisdiction. This might mean, for example, that a Singaporean fund manager looking to buy shares in an Italy-based, Hong Kong-listed company such as Prada would be affected.
“The effects of the territorial principle under the current proposal to Asia can be wide-ranging,” says Florence Yip, Asia-Pacific asset management tax leader from PwC Hong Kong. “In one extreme example, a Hong Kong-domiciled fund undertaking transactions to buy Singaporean shares with a broker based in France may be hit with the charge, which is of particular concern to Asia.”
But recent disagreements include the potential detrimental effects on trading volumes, not to mention the logistics involved of collecting tax from fund houses and investors around the world, notes De La Mettrie.
In addition, retail investors seeking to participate in secondary trading or to redeem a fund domiciled within the FTT zone would likely face charges.
Luxembourg and Ireland are not part of the consortium of cooperating countries in the EU, and as many Asian Ucits are domiciled in these two countries, they would not be affected – assuming the fund does not invest in FTT-zone-issued securities and derivatives, and neither the fund nor the investor makes use of FTT-zone based brokers.
De La Mettrie notes that large member states such as Germany and France will favour implementing the place-of-issuance rules, as “their stock markets have high capitalisation and they have more companies issuing, so they would benefit from more revenue from the FTT”.
“This is in contrast to smaller member states such as Belgium and Slovenia, which have a smaller capitalisation market and will therefore benefit less from a FTT based on the place of issuance principle and therefore favouring the original proposed territorial rules,” he adds. “We cannot say what the final rules will be, but it might be somewhere in the middle.”
As it stands, under the broad definition of territorial rules, the FTT would come into effect if at least one financial institution party to the transaction is established in the FTT zone.
If the FTT is implemented in full, investors’ returns would be hit. De La Mettrie estimates it could cost a retail fund focused on FTT-zone securities and derivatives 100 basis points of the funds' annual returns, although it depends on numerous factors, including turnover.
But for now, any decision on FTT will likely remain on hold. Germany is heading towards a federal election in late September, while Brussels said in June that the taxation scheme won’t be introduced until the middle of 2014 at the earliest.