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The Global Effect of EU's Financial Tax

Introduction

Come 1 January 2014, the biggest change to international banking in decades is expected to take effect. The European Union's Financial Transactions Tax (FTT) is not just a tax on the European banking and financial industries, as it will have far-reaching consequences way beyond Europe and banking. The tax, part of raft of proposals that also include caps on bankers' bonuses and the amount of a capital banks must hold to act as a financial buffer, is expected to be introduced by eleven EU member states at the beginning of 2014.

The Financial Transaction Tax - FTT

The Financial Transactions Tax will see a small levy imposed on all financial transactions; proposed at 0.1% for shares, currencies or bonds, and a smaller amount for derivative trades. The tax, which has plenty of public support, is being levied after the banking industry was bailed out during the financial and euro zone crisis post 2008.

Proponents say the FTT could generate 35 billion Euros ($45 billion) and claim that the tax is so small and covers enough assets that it won't distort the markets. However, the International Banking Federation (IBFed) has slammed the proposals, claiming the tax will have consequences far beyond Europe and will hit ordinary citizens and businesses of all sizes and from all sectors.

A Per Transaction Levy

The main problem with the tax is that the FTT won't just be levied once. The proposals state that the tax will be charged at every stage of a financial process if any of the parties involved with the transaction are established to come from one of the eleven FTT countries and it doesn't matter whether it is a trade in stocks, shares, bonds or currencies.

This means the tax could be levied up to ten times on just a single transaction, especially when it comes to commodities and shares because these trades often involve an intermediary such as a stock broker. Brokers could end up being taxed several times, such as when they buy the stock and again when they sell it. Stock brokers will also face the tax every time they hedge their position to reduce risks. Because of this, the tax will be amplified when it comes to share and stock dealings that involve a number of transactions. Therefore, the 0.1% figure could begin to really hurt profit margins and trickle down to investors, many of whom will be put of buying stocks and shares in the FTT region. This in turn will reduce the trading volumes on stocks and shares and depress the entire banking sector. Furthermore, even US brokers will be affected, because it doesn't matter where a broker is based, whether it is New York or Brussels, if he or she sells European bonds, even to a pension fund in the United States, both the broker and the pension fund will be liable to the FTT levy.

Global Effects

While the tax has far-reaching consequences, financial organizations in the EU will obviously be hardest hit. They will be at a major disadvantage in the global marketplace. Not only will it deter investors from outside the region from investing in organization in the FTT area, but also it could reduce share values and make it harder for EU companies to raise funds for investment. However, it will be most detrimental of all for EU investment companies. These will be at a major disadvantage when it comes to trading in America or Asia, as they will have to pay the tax while organizations outside the FTT zone will not.

In addition, the tax could have dramatic affect outside the FTT zone, especially when it comes to issuing government bonds to European investors. Investors in FTT countries would require an increase in yields to counter the costs of the tax. Analysts suggest this per-transaction tax could cost countries outside the zone, such as the UK, as much as $6 billion to the cost of issuing bonds, and corporate bonds could be affected in a similar way. However, the effect of the tax won't just be restricted to financial organizations.

The cascading effect will hit businesses outside the world of finance. Funding will become more restricted and expensive, especially for smaller firms. It could even affect food prices and other commodities, such as mortgages, gas and diesel prices and a whole host of other consumer products, as farmers and firms providing these products often protect themselves from fluctuations to crop and wholesale prices by trading in derivatives, so the FTT will inevitably affect global prices. All this means the FTT could have implications in nearly all aspects of commerce. In essence, while the FTT is a European levy, its wide-reaching effects mean that it is almost certainly going to be a global tax that nobody outside the EU either wants or has voted for.

Clifford Brody is CEO and Founder of Global Bankers Institute (http://www.globalbankersinstitute.com). With over 30 years of experience serving the banking and financial industry, Cliff has assisted clients from New York to Nepal to maximize the performance of their human capital. Among Cliff's many clients have included such notable companies as: American Express, AXA Equitable, Bank of America, Bank of China, Citibank, Deutsche Bank, Fannie Mae, Federal Reserve Bank of New York, First Gulf Bank, IBM, Pfizer Pharmaceuticals, Qatar National Bank, RBC, Saudi Hollandi Bank, and many more. Full profile on LinkedIn at http://www.linkedin.com/in/cliffbrody/.