Pension funds could soon have to bear the cost of a Europe-wide tax on equity, bonds, currency and derivative transactions, finds Lynn Strongin Dodds
A tax on financial transactions may be firmly on the European Union agenda but there is already dissension in the ranks not only among member states but also financial experts, trade associations and institutional investors. The details are still being hammered out but there is no doubt that if imposed, pension funds will have a high price to pay.
As Grant Thornton’s head of pensions, Ian Hartnell put it, “It is too early to predict the exact outcome but if it goes through the impact on pensions will be an extra layer of cost. This goes against what Adair Turner (chairman of the Financial Services Authority) has been saying in terms of the need to reduce the costs for long term savers.”
Julie Patterson, director of authorised funds and tax at the Investment Management Association, agreed adding that the European financial transaction tax would “penalise ordinary long term savers, investors in Ucits as well as pension funds. We could see the very high net worth individuals and EU wholesale financial institutions move their business outside of Europe”.
She continued: “One of the main issues is that every link of the transaction chain will be hit. Pension funds could be hit twice by this tax – when the fund manager arranges a transaction on behalf of the fund and when the fund acquires or sells that asset. They may also incur higher fees from their brokers who are likely to pass down the costs of the tax that they incur. As for Ucits, investors could be hit three times, as they may also be taxed when they buy units in the fund.”
A taxing issue
The view that end investors will suffer is not specific to the EU financial transaction tax (FTT). It can be applied to other taxes on the financial services sector. In fact, one of the conclusions by the International Monetary Fund in its report – A Fair and Substantial Contribution by the Financial Sector – was that the “real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector”. It further adds that a tax levied on transactions at one stage ‘cascades’ into prices at all further stages of production.
The FTT, like many levies on the financial sector, is not a new concept. It was first flouted in Europe about 40 years ago and has regularly reappeared in different guises. The latest version was drafted in the wake of the financial crisis and has been given fresh impetus earlier this year when the European parliament voted in favour. The pace accelerated in September after Wolfgang Schäuble, German finance minister, and his French counterpart François Baroin, asked the European Commission to put the topic firmly on its agenda.
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