FTT – A premeditated disaster
On February 14, 2013, the European Commission proposed a council directive implementing enhanced cooperation in the area of Financial Transaction Tax (FTT). The aim of the Commission is to cover the costs of the financial crisis and impose similar taxation on the financial sector rather than on other industries. Anouk Agnes, Director of Strategy and Communications at the Association of the Luxembourg Fund Industry (ALFI) speaks about the misconceptions of the FTT.
Why is the introduction of a Financial Transaction Tax counterproductive?
ALFI believes that the FTT will eventually mean the death of the European investment fund industry. The tax is supposed to make financial institutions pay for the costs of the recent crisis, but ALFI believes that this will not be the case. It is actually neither the financial institutions nor the investment funds that will be paying this tax, but ultimately it will be investors themselves, as the institutions and funds will pass the cost on to them.
ALFI believes that investment funds in general have neither created the crisis nor made it worse and should therefore not be included in the Financial Transaction Tax’s scope, especially with regard to the fact that it will be the investor – who can also be a small saver – who will be most impacted by this measure.
Furthermore, it will be counterproductive because whereas the goal is to generate an entirely new stream of revenue for the European Union as a whole, we believe that there is a strong risk that the financial institutions affected might relocate outside of Europe in an effort to avoid the tax, which means that the taxable base will disappear and that there will be no revenue generated, contrary to what the European Commission believes.
Do you think that the FTT is hindering speculation?
That is another misconception in ALFI’s opinion. One of the aims of the FTT is indeed to make speculation more difficult, because speculation is supposed to be one of the causes of the financial crisis. We believe that speculation should refer to something like high frequency trading. However, the current version of the Financial Transaction Tax does not prevent speculation in that sense.
On the contrary, some investment products that will be impacted are not at all speculative. For instance, money market funds, which represent almost one fifth of the European investment fund industry, i.e. a lot of money and a whole lot of jobs will be affected. These money market funds are known to invest in rather safe underlying assets, in short-term bonds or in treasury bills. These are not at all speculative investments and are therefore unfairly impacted by the FTT.
What impact will this tax have on the Luxemburg investment fund industry?
We believe that the FTT will have a disastrous effect not only on the Luxembourg investment fund industry, but also on the European one, because this is a tax that will not only impact Luxembourg. It will impact the industry in all European countries, whether they participate in the enhanced cooperation procedure or not because the tax laws, as they currently stand, have extraterritorial effects.
It will therefore impact the whole industry in both Luxembourg and in Europe because of two main factors. One is that the daily bread of investment funds is to invest and divest to make their portfolio turn in the interest of the investor. This means always insuring the best portfolio of assets for the investor: a portfolio that diversifies risks and therefore invests in a whole array of asset classes.
These portfolios can turn tens or hundreds of times and will therefore pay the tax continuously. This is obviously a huge additional cost compared to the current situation; as a consequence, several investment funds will be out of business very soon, because they will no longer be profitable. On top of that, there is a sort of double taxation happening, because the investor will be taxed each time he wants to share his portion of an investment fund.
So he pays on the portfolio turnover multiple times and every time he wants to get out of a fund. This is not at all the case in other investment products like for instance various insurance or savings products. That is why this is a completely unfair treatment of investment funds, which we believe will be condemned in the long term. CW