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'Merry Christmas' from Brussels?

'Merry Christmas' from Brussels?

Agreement on the introduction of a financial transaction tax still in 2016 suddenly seems possible


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The discussion about a European financial transaction tax has been ongoing for years at varying levels of intensity as time went on. After initial plans for an EU-wide tax and intermittently considering to only tax financial transactions in the eurozone, merely ten member states remained in the end for an isolated introduction within the framework of so-called "intensified collaboration". But, these negotiations in a small circle have also not made much noticeable progress since 2013, so that there was justifiable doubt as to introduction of such a financial transaction tax in these member states.

These doubts now seem misplaced however since the meeting of the finance ministers of Belgium, Germany, France, Greece, Italy, Austria, Portugal, Slovakia, Slovenia and Spain in October 2016, as it has been possible for the first time to come to an agreement about the central key issues of tax at ministerial level. The German finance minister Schäuble, who has always been in favour of a global financial transaction tax and thus in fact argued against a limited introduction in the ten member states, has assured approval from the German federal government and intends to bring this issue to a conclusion at the latest during the German presidency of the EU council in 2017.

The path now seems to be clear for introduction of a financial transaction tax in said member states. The finance ministers already indirectly provided a timetable during their meeting in Luxembourg: the bill is expected to be finalised by the end of 2016, with the tax taking effect at the beginning of 2018 (at the earliest).

The exact details of the new proposal, which was introduced by the Austrian negotiator, have not yet been publicised. What should be certain is that at least the transactions within the scope of the bill of 2011 – specifically share and bond transactions as well as derivatives in this asset category – should be subject to a financial transaction tax. Based on the previous bill of 2011, the tax amounts to 0.1 percent on the trade of shares and bonds and 0.01 percent on derivatives of these shares and bonds.

Moreover, press releases from the finance ministers involved seem to indicate that spot transactions and derivatives on interest rates, currencies and/or commodities are no longer categorically excluded from the scope of application. Apart from the participation of financial markets in community costs, the primary objective of this tax is to protect small and private investors. Accordingly, all products used by corporate treasury could now be subject to a financial transaction tax in these countries after all, although realistically, appropriate exemptions are to be expected for hedging instruments for example.

However, even a financial transaction tax on shares, bonds and derivatives in these two asset categories could impact industrial enterprises and their treasury departments. For example, a bond issue and subsequent forward transaction in one of the ten EU member states would involve additional costs compared to the status quo and – even more relevant in the long term – be imposed compared to issue in a country without financial transaction tax (such as the Netherlands or Luxembourg). This would make Germany less attractive as a financial centre for the issue of bonds due to higher refinancing costs. A tax of "only 0.1 percent" may seem a small amount initially. However, considering the usual bond volumes traded and current financing environment, it could quickly become significant and relevant for making decisions in competitive industries.

Should a financial transaction tax, as already requested in preliminary form, include all financial transactions – i.e. also spot transactions and derivatives on other asset categories – this could quickly have considerable consequences for day-to-day operations in corporate treasury. In view of the current state of discussions concerning revision of the Markets in Financial Instruments Directive (MiFID), the question quickly arises as to whether in addition to the so-called 'regulated markets' other trading venues and platforms should also become subject to such a tax.

All in all, it is still too early to focus on specific activities, such as the adaptation of refinancing policies or early refinancing of bonds that mature after 2017. What is certain however is that corporate treasurers will pay particular attention to developments concerning financial transaction tax in the coming years, to be well prepared just in case. Should the agreement between the remaining EU member states materialise, for which there is the best indication yet, a transaction tax could result in changes in EU capital markets more quickly and already before its introduction in the countries concerned.

Source: KPMG Corporate Treasury News, Edition 60, October 2016
Author: Robert Abendroth, Senior Manager, Finance Advisory, rabendroth@kpmg.com 

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