You should read this if you are a US business party to any financial instruments transactions involving a European issuer or counter-party, as you will need to think about Europe’s proposed “Tobin” style Financial Transactions Tax (FTT).
The proposed FTT is controversial and is being met with strong resistance, even within those countries that support it. Eleven European countries (the FTT Zone) plan to introduce it from 1 January 2014 (although a delay looks increasingly likely). The countries involved include France, Germany, Italy and Spain, but not the UK. But the UK is not just sitting on the sidelines - it is challenging the legality of the FTT in the European Court on the grounds of its extra territorial impact.
Under the current proposal, financial institutions (including pension funds, investment undertakings and group treasury and holding companies) will be liable to pay FTT on transactions involving financial instruments and certain structured products.
The extra territorial impact of FTT arises because a financial institution established outside the FTT Zone may be liable for the tax if its counterparty is established in the FTT Zone or the transaction involves financial instruments or products issued in the FTT Zone. If more than one financial institution is party to the transaction, more than one charge may arise. All parties to the financial transaction will be jointly and severally liable for any unpaid FTT.
The minimum tax rate will be 0.1% for sales of securities (including exchanges and intra group transfers, repos and security loans) and 0.01% for derivative contracts (e.g. interest rate swaps and other hedges).
There are few exemptions and the FTT is specifically designed so that there may be a cascade of charges where, for example, there is a sale through several intermediaries to an ultimate buyer.