What is an FTT?
FTT stands for ‘financial transaction tax’ and is a generic name for taxes that are levied on transactions such as sale and purchase, that involve some sort of financial element such as currencies or stocks and shares. FTTs are not new and are applied by various countries, including some EU Member States, such as France, Italy and Spain.
What is the EU’s FTT
This is a proposal to introduce an FTT on the basis of a common EU-wide set of rules. Under the Commission’s initial proposal (2011), the tax would have been introduced by all EU Member States and would have been levied at fixed low rates on certain transactions involving financial instruments such as shares, bonds and derivative contracts.
Member States did not unanimously agree on the introduction of an EU-wide FTT and therefore eleven EU Member States (subsequently down to ten) decided to move forward with the initiative under the enhanced cooperation procedure, whereby a group of Member States can choose to adopt a directive to apply only in their jurisdictions, rather than in all EU Member States. The Commission therefore put forward a revised proposal, largely based on the initial design, but adapted to the new situation.
Following the lack of consensus in the negotiations among EU Member States participating in enhanced cooperation over a number of years, in June 2018 France and Germany decided to introduce a new impetus to the negotiations. In 2019 the participating states agreed that the FTT proposal should continue to be discussed based on a proposal advanced by Germany and that was largely based on the design of the French FTT, which differs from the 2013 Commission proposal.
Under the proposal issued by the German Finance Minister in December 2019:
- the application of the FTT would be limited to financial transactions that mainly involve the acquisition of certain shares (i.e. shares issued by listed companies located in a participating Member State with a market capitalization above EUR 1 billion), while financial transactions involving bonds and derivatives would be out of scope;
- the FTT would be based on the issuance principle only, i.e. the FTT would apply to the acquisition of ownership for a consideration of shares or similar instruments issued by a company, a partnership or other entity whose registered office is established in the territory of a participating Member State, wherever the transaction takes place and whoever the counterparties are (the initial proposal also referred to the residency of the parties to the transaction);
- the applicable rate (0.2%) would be higher than that suggested in the Commission’s 2013 proposal (0.1%).
Why has an FTT been proposed at EU level?
The EU Commission put forward its original proposal for an EU-wide FTT in September 2011 with three main objectives:
- to avoid fragmentation of the EU’s internal market due to individual Member States adopting their own national FTTs;
- to ensure financial institutions make a fair contribution to the costs of the global economic and financial crisis of 2007-2008 and ensure a level (tax) playing field with other sectors;
- to discourage certain types of economically inefficient transaction.
The European Commission is of the view that a uniform definition at EU level of the essential features of an FTT would lead to several advantages, such as:
- ensuring the proper functioning of the internal market and avoiding distortions of competition within the EU;
- reducing the existing fragmentation of the Internal Market, including for the different products of the financial sector that often serve as close substitutes;
- preventing tax arbitrage and potential double or non-taxation;
- avoiding extra compliance costs on the financial sector arising from too different FTT regimes.
These findings would remain valid also in the context of enhanced cooperation, even though such cooperation would imply a more reduced geographical reach than a similar scheme adopted at the level of all EU Member States.
Which countries plan to implement the EU FTT?
The original proposal to adopt an EU-wide FTT did not go ahead because it did not get the support of all Member States. Although unanimity is in principle required for EU tax harmonization initiatives, an alternative procedure known as ‘enhanced cooperation’ allows a smaller group of Member States (a minimum of nine) to adopt such initiatives, subject to certain conditions and authorizations. Initially, the following EU Member States had indicated that they wanted to proceed with this enhanced cooperation procedure: Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain.
Following Estonia's formal withdrawal on 16 March 2016, ten Member States are currently participating in the negotiations under the enhanced cooperation procedure on the revised proposal. However, other Member States may join the initiative at any point. In the meantime, some EU countries have introduced unilateral FTTs, namely:
- France, as of 1 August 2012;
- Italy, respectively, i) as of 1 March 2013 with respect to FTT on equity trades and certain high-frequency transactions involving equities and ii) as of 1 September 2013 on derivative trades and certain high-frequency transactions involving derivatives;
- Spain as of 16 January 2021.
What is the status of the EU FTT?
In February 2021, the Portuguese Presidency of the Council proposed an inclusive discussion among all Member States on tax design issues of the FTT at EU level.
The approach suggested by the Portuguese Presidency would be to start a gradual implementation of the tax, based on the models developed and already tested by France and Italy, where unilateral FTTs have been introduced.
In the Presidency’s view, a step-by-step approach, potentially structured on the basis of a review clause, would allow:
- Member States and the Commission to methodically evaluate the economic impact of the FTT;
- tax administrations to progressively develop efficient and effective collection procedures; and
- market structures and financial institutions to gradually build up the knowledge and infrastructure required to facilitate tax compliance.
Member States were invited to provide views on the proposed approach to the FTT design, as to whether the French and Italian experience would represent a solid basis for the gradual European approach on the FTT (either in the context of the enhanced co-operation or EU wide) and on the proposal to include the transactions in equity derivatives in the scope of the FTT (in line with the Italian FTT model).
Member States not participating in the enhanced cooperation initiative were also asked whether the need to find additional sources for financing the EU recovery effort, coupled with the proposed technical approach to FTT design, might increase their interest in further work on an inclusive compromise proposal, i.e. for an EU-wide FTT.
The FTT file was discussed in a meeting of the Working Party on Tax Questions on 24 February 2021. Based on the agenda, members discussed the EU FTT’s state of play and exchanged views on the way forward. The outcome of the meeting has not been made public.
In parallel, the FTT was also mentioned as a possible new EU own resource as part of the Union’s long-term budget (the Multiannual Financial Framework – MFF) and the EU’s recovery fund (Next Generation EU). The European Commission has committed to putting forward a proposal in this respect by 1 January 2024.
Can significant changes be expected to the current draft Directive?
Although the revised proposal addresses some of the outstanding considerations and the need for additional EU resources may provide some impetus for the introduction of an FTT at European level , it remains to be seen whether the 2019 proposal can serve as a first step towards reaching agreement on a common approach to taxing financial transactions. As a first reaction to the February 2021 discussions, the Austrian Finance Minister criticized the narrow scope of the tax base which excludes synthetic investment products, derivatives and high frequency trading form taxation. Moreover, it has already been clarified that a potential consensus needs to be presented to all Member States for an inclusive discussion. Such an inclusive debate among all Member States has to take place following the required procedural steps (analysis by experts at WPTQ level, preparatory debate by Committee of Permanent Representatives, agreement in Council).
Based on the Multiannual Financial Framework (“MFF”) for the years 2021 to 2027, should no agreement be reached on the introduction of the FTT at the EU level under enhanced cooperation by the end of 2022, the EU Commission will put forward a proposal for an FTT as a new EU own resource by June 2024 in view of its introduction by 1 January 2026. The essential features of an EU FTT as a new own resource are yet to be determined.
What will happen to the existing FTTs applied by some individual Member States?
If the EU FTT is introduced by the ten Member States that are following the enhanced cooperation procedure, they will have to abolish their existing unilateral FTTs. At present, this could be relevant for Belgium, France, Greece, Italy and Spain. EU Member States that do not participate in the EU FTT will not have to abolish their existing FTTs, although if they do not there is a risk of double taxation arising where there is an overlap. This could be relevant, e.g., for Cyprus, Ireland and Malta.
Who would have to pay the EU FTT?
Under the revised proposal put forward by Germany in 2019, if a transaction falls within the scope of the EU FTT, the tax would in principle be payable by the financial institutions that are involved in the transaction, whether this is carried out on their own behalf or on behalf of a client. However, if the tax is not paid by a financial institution on time, it may be recovered from the custodian. Moreover, the participating Member States, in implementing the EU FTT into local legislation, may provide that the person liable for payment of FTT be entitled to claim from the acquirer of the financial instruments the FTT due or paid.
Which are the main features of the current EU FTT proposal?
The 2019 revised proposal (advanced by Germany) refers to an FTT that would be levied at a minimum standard rate of 0.2% and would apply to financial transactions that mainly involve the acquisition of shares issued by listed companies located in a participating Member State with a market capitalization above EUR 1 billion.
In line with the proposal that was under discussion within the enhanced cooperation group, certain types of financial transactions would not be subject to the FTT. Examples include initial public offerings, market making activities, intra-group transactions, repurchase agreements and reverse repurchase agreements, securities lending and securities borrowing buy-sell back and sell-buy back agreements.
In addition, the 2019 proposal includes an optional tax exemption for pension schemes, which was requested by Italy, Belgium and Slovakia.
The draft law also provides for a mutualization mechanism, which (according to a document accompanying the proposal) represents a compromise reached by Germany, France and Italy. Under the proposed mechanism, FTT revenue generated will be allocated between the participating Member States to ensure that all participating jurisdictions reach a guaranteed minimum annual revenue of EUR 20 million. This mechanism is thought to encourage smaller economies, for which the FTT would only generate limited revenues, to participate in the initiative.
How will the EU FTT affect transactions outside the eleven participating EU Member States?
Although the tax would only be imposed by ten EU Member States, it could affect transactions involving financial institutions or their clients that are based in other Member States or even non-EU Member States, i.e. outside the FTT zone.
The rules are rather complex, but this could occur where, for example, a financial institution based in a non-FTT zone country is involved in a transaction with an FTT zone financial institution: if the transaction is within the scope of the FTT, both financial institutions, including that based outside the FTT zone, would in principle be liable to FTT. Another example would be where a transaction involves a financial instrument that is issued by an FTT zone entity, such as a share in a German company: in this case the financial institutions involved in the transaction are, in principle, liable to FTT wherever they are based.
Will the FTT only affect financial sector businesses?
In general, yes. FTT is payable by the financial institutions involved in the transaction. This term is broadly defined and includes investment firms and credit institutions. However, the participating Member States may provide that the purchaser of the financial instruments is to be held jointly and severally liable for payment of FTT under certain conditions (e.g. in case of misapplication of the exemptions or incorrect determination of the taxable amount due to the inaccurate or incorrect information provided to the person liable for payment of FTT by the purchaser of the financial instruments).
What can KPMG firms do to help?
KPMG firms have been actively involved with the EU’s FTT proposal since its launch in 2011 with dedicated cross-discipline FTT teams established in all FTT jurisdictions and beyond, supported by a central coordination unit run by KPMG’s EU Tax Centre. This has enabled KPMG professionals to inform clients as and when relevant developments occur and to consult on the technical and practical implications. KPMG firms combined with the FTT support unit have the business understanding as well as the tax expertise to understand the implications of financial transaction taxes across the EU and to communicate these to clients, putting clients in control and enabling them to take the appropriate decisions and actions.