Posted In: Institutional Broking and Clearing
In July, the 11 European countries who are working in cooperation to introduce financial transaction taxes moved even closer to agreeing FTT rules and rates, despite global pressure from financial institutions. Within six months, these countries could be introducing their own individual rules.
This proposed tax, referred to as the Financial Transaction Tax (FTT), or Tobin tax, was named after a 1972 proposal by Nobel economist James Tobin to tax currency transactions; and has quickly come in to vogue again in the wake of bank speculation which brought on the financial crisis.
As companies begin to understand the EU FTT remit, many are now realizing that similar transaction taxes are already severely affecting their bottom lines. In fact, more than 40 transaction taxes or stamp duties—outside of the EU FTT—are currently active or being implemented in countries around the globe.
In the Americas, eight out of 35 countries have some form of transaction tax (including Brazil, Bolivia, Columbia and Peru), while in the Asia Pacific region; almost half the countries there have such a tax.
Despite the debate and political rhetoric, and the varying names, it’s becoming increasingly clear that the actions in Europe are part of a much stronger global shift towards transaction based taxation.
Most experts would agree that some form of EU FTT is now inevitable, with its scope definitively covering American Depositary Receipts (ADR). While the tax may be diluted, its inherent operational challenge will not disappear.
Whether the transaction fee is 1.0 per cent or 0.01 per cent, the operational task remains the same. Regardless of the decisions taken at an EU level, there is still a great deal of activity that is taking place on a national level – the introduction of French taxes on equities last year and the commencement of tax payments in October this year on Italian derivative and equity trading being prime examples. Capital markets, asset management and custodian firms need to put their uncertainties around fee levels within the EU FTT aside and start to prepare for the operational certainties that are already here.
While most institutions have tactical solutions in place, forward-thinking firms are now looking for a more strategic tax-processing solution that acts as a central repository for all tax rules – not just the EU FTT. The idea is that this repository would then serve all of the regional tax requirements, interfacing with local systems, the alternative is a tactical solution, which typically is resource intensive and has limited capability in terms of workflow, exceptions management or rule flexibility. Industry evidence with regards to both French and Italian experiences has highlighted the costliness and inefficiency of these tactical solutions.
As each country globally implements their own unique version of the FTT, capital markets, asset management and custodian firms will potentially need to develop a unique set of rules for each jurisdiction. Aside from these rules, the solution deployed will need to interface with in-house ledgers, MI systems and other applications both up and downstream. Ideally the solution should also support the whole lifecycle of a trade, including pre-trade ‘what if’ analysis.
Currently, institutions are capturing trades from multiple upstream systems (systems that may cover different regions or even different instruments). Once the operations teams have captured all of the data from trading platforms, they then need to apply the rules regarding which trades are subject to FTT and which are not. In operational terms, the requirement is for a system that is capable of identifying the, say, 25 trades out of 100 that attract FTT and disregard the rest. Today, this task is being undertaken in a very manual fashion or at best via a batch process: it is not a scalable or realtime system that can accommodate the addition of new countries with their own unique set of rules.
There are obviously huge advantages to be derived from having a central tax repository, one that provides a dashboard presenting the effects of the tax on all potential trades across multiple jurisdictions.
Any form of transactional tax generates a huge workload in terms of capturing the trades, validating them to ensure sufficient and accurate data is being used (or fixing the data where necessary); determining those that are exempt, performing the tax calculations (and netting trades), generating the messaging to the relevant authorities and creating an audit trail of all of these activities. To do this manually for one country is not feasible, let alone 40 countries.
While the FTT may be limited in terms of European jurisdictions, at a global level the scope of the tax is actually growing. Additionally, few firms realize that the EU FTT actually encompasses ADRs as well.
While politicians and industry bodies debate the EU transaction tax, financial institutions are searching for a desperately needed strategic solution. Failing to introduce a truly scalable, global, tax processing methodology, will have significant implications.