Plans to introduce a new Financial Transaction Tax in 11 EU member states from 1 Jan 2014 has so far only raised concerns within the banking system. However, it will also impact the insurance industry, distorting key asset investment decisions. Most controversially, the new draft tax proposals will stretch to the UK and beyond, leading to extra costs particularly for insurers that own asset management businesses.
EU-11 roll-out of harmonised FTT January 2014
After failing to gain EU-wide support from all member states, 11 EU countries published plans on 14 February 2013 to introduce a harmonised FTT under the European Commission’s Enhanced Co-operation rules. They include: France; Germany, Belgium, Spain, Portugal, Italy, Austria, Estonia, Greece, Slovakia and Slovenia. The new tax will levy 0.1% on share and debt/bond transactions and 0.01% on derivatives. It is payable by financial institutions (banks; pensions; fund managers; market makers; hedge funds).
The objectives of FTT are to ensure the financial services industry contributes a large share of national tax revenues, and to stabilise more speculative trading which is seen as contributing to the current financial malaise. The EC expects the new tax to raise over €34bn per annum, and contribute to reducing the state deficits of the 11 countries.
The most controversial element of the proposed FTT is that transactions carried out in countries not part of the FTT regime, but which involve instruments involving companies within the zone, will be liable to the tax. This ‘extra-territorial’ element will draw the UK, US and all other countries into being liable.
Insurance exempt, but insurers not
Whilst insurance is exempt from FTT, insurers are still drawn into its net since they are investors in equities, bonds and other taxable instruments.
The impact on insurers will include:
- reduced holdings in equity investments as they rebalance towards FTT-exempt classes such as property and public construction
- reduced holdings of taxable equity and bonds from the FTT countries, instead looking to invest in the UK, Switzerland, Asia Pacific or the Americas. This could potentially create risk management issues as insures may not be able to match their assets and liabilities by country or currency.
UK challenges FTT
On 19 April 2013, the UK government issued a legal challenge against the FTT through the European Court of Justice, the highest court in European legal matters. It is questioning the extra-territorial element of the tax, and whether the 11 countries can use the EU’s Enhanced Co-operation terms. This has since been backed by Luxembourg and Ireland.
Richard Asquith, Head of Tax at TMF Group commented:
"The banking sector has woken up in the past month to the threat of FTT. However, little has been said in the insurance industry. Aside from raising the costs of trading in taxable shares and bonds, which the insurance market is a huge holder of, it will create asset management problems. It is time the industry joined the lobbying efforts of the other impacted sectors before the 2014 implementation."
richard.asquith@tmf-group.com
Tel: +44 (0)870 067 881