London set to benefit from EU FTT proposals

Thu 23rd Jul 2015

Plans due this month to relaunch a watered-down Financial Transaction Tax (FTT) across 11 EU member states in 2017 look set to benefit London financial markets.  This comes despite criticism from the German and French central banks, and threats from major European investment banks to shift trading to London to avoid the levy.

The latest proposals, sponsored by the French socialist government of François Hollande, have scaled back the range of taxable securities and withdrawn the extra-territorial obligation of foreign governments to apply the tax.  George Osborne had unsuccessfully challenged this element of the previous proposals at the European Court of Justice in April 2014.

It appears the sums likely to be raised from the revised FTT would be a small fraction of the original €35 billion estimated by the European Commission (EC) – including over €4 billion from the UK.  A lot of political capital has been invested in introducing the tax so a face-saving version is probably inevitable.

Compromise changes to boost London, New York and other international markets

Criticism of the original proposals for FTT from German banks had appeared to have choked-off plans to introduce the tax last year.  But the French government rekindled the initiative at the start of this year.  The French Finance Minister, Michel Sapin, has predicted a details announcement of the changes this month which will be based on a limited tax on shares and some derivatives.  Government bonds are expected to be dropped from the original proposals, and potentially associated repo markets.

One major French bank has already publicly stated that it will move some effected trading to London if the new proposals go ahead.

About EU FTT

Germany and France originally proposed a harmonized EU FTT in 2011 following the breakdown of discussions to impose EU VAT on the financial services industry.  After failing to secure unanimous member states support for the measure, 11 member states (Germany, France, Spain, Italy, Belgium, Austria, Portugal, Greece, Estonia, Slovakia and Slovenia) agreed to continue negotiations co-ordinated by the EC under the auspices of the ‘enhanced co-operation’ facility.  Initial proposals included a levy on shares, bonds and derivatives.