Smaller brokers in Hong Kong are rushing to ready themselves for the Italian financial transaction tax (IFTT), which will start being collected tomorrow.
Of most relevance to the tax in Asia is the trading of equities in Prada, the Milan-based fashion house that listed its shares in Hong Kong in 2011.
“Although most broker-dealers are aware of the IFTT and have been withholding the tax from their clients, they have not been doing much in terms of meeting their compliance obligations until recently, probably because of the perceived delay of the Italian Revenue Agency’s issuance of the IFTT implementation guidance," says Sunny Liu at consultancy Ernst & Young.
"Some of those brokers have been adopting a 'wait and see' approach for the last few months," he adds, "and only started recently to seriously think about meeting their compliance obligations."
To comply, firms must obtain a tax identification number (TIN) from the Italian tax authorities to remit the levy. Some smaller brokers have only in the past few weeks begun to submit applications for the TIN. Failure to pay the charge will mean the broker incurs a 30% penalty on the tax due, on top of interest charged at 4% per annum.
“The tax amount itself is not that much, but the compliance cost is quite high, on what we hear from our broker clients,” says Liu.
Estimates suggest that a service provider might charge a broker €12,000 ($16,000) for the TIN and to provide advice on remittance procedures and file annual returns. That compares to tax payable by a large fund house for the last six months, which could be less than HK$200,000 ($26,000).
This suggests that some smaller brokers may feel it's not worth going through the process, despite the fact that it would make them non-compliant with the Italian authorities.
Still, “it is a big deal in terms of firms wanting to be good corporate citizens and be compliant with foreign regulations, because with the growing trend for globalisation, firms want to be seen as being compliant with rules across the world for reputational reasons", says a tax specialist in Hong Kong.
Meanwhile, the proposed European Union-wide FTT hit another roadblock last month, when the European Council legal service challenged the legality of the proposal. But the legal service opinion is non-binding, so the FTT talks will continue.
Germany, France and Italy are among the states in favour of the tax, with the latter two having introduced their own domestic versions of the levy. But most EU member states, including the UK, have indicated their opposition to the proposal.
Consultancy PwC suggest that the FTT’s application may be narrowed down, with the charge based solely on the place of securities issuance, rather than more broadly defined territorial rules.
Participants expect further decisions on the tax issue to be made in the upcoming months following the re-election of Angela Merkel in Germany, who will be key to the future direction of the FTT.
*The IFTT will charge 22 basis points on every trade of the stock of a company residing in Italy, and of securities representing Italian equity investments issued by companies with their registered office in Italy. The charge will drop to 20 basis points from January 2014.
For the trading of derivatives with the underlying asset in Italian equities, a fixed charge will be levied per contract based on its notional value, with the charge ranging between €0.01875 and €200.
The charges due to the Italian tax authorities this week will be on trading of Italian equities done from March 1 to September 30, and of derivatives with underlying assets in Italian equities made in September.