Because of numerous errors in its design, the Financial Transaction Tax will mean the death of European fund industry
ALFI, the Association of the Luxembourg Fund Industry, rejects the European Commission proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax,published on 14 February 2013.
ALFI believes that the financial transaction tax, (FTT), which will eventually be imposed on ALL Member States whether they have opted for this tax or not, will not achieve the main objectives set out by the Commission.
Through this tax, the Commission aims to ensure “that financial institutions make a fair and substantial contribution to covering the costs of the recent crisis and creating a level playing field with other sectors from a taxation point of view”.
Misconception one, according to ALFI.
As calculations from the European Fund and Asset Management Association (EFAMA) have shown, the tax will not ultimately be paid by the financial institutions, but by savers and investors in European investment funds. This tax risks limiting European savers’ access to high-quality, professionally-managed savings products. Ultimately, this tax will have an extremely negative impact on all long-term savings of European Union nationals, including pension funds. “For this reason investment funds, which neither caused nor exacerbated the crisis, should not be included within the scope of the Financial Transaction Tax,” says Marc Saluzzi, Chairman of ALFI.
In addition, according to the text proposed by the Commission, the FTT is supposed to "create appropriate disincentives for transactions that do not enhance the efficiency of financial markets”or in other words, eliminate speculation.
Misconception two, ALFI claims.
Money market funds, for example, which at 31 December 2012 represented approximately 16% of European assets under management, or EUR 1.05 trillion, are not the speculative financial instruments that FTT is supposed to curtail. Instead, the monetary fund assets are invested in low risk securities, such as treasury bills or short term bonds. This is why they are a commonly used savings product both for institutional and retail clients. More generally, the FTT risks damaging funds investing in shares, bonds or both. This, in turn, would have a devastating effect on the long-term financing of the European economy.
Nonetheless, the Commission and the 11 countries involved in the process of enhanced cooperation believe that they will recover tens of billions of Euros through this tax.
This is a third misconception, according to ALFI.
The FTT will not reap the expected revenue. The introduction, in the past, of similar taxes in Sweden and Australia have shown this clearly: the tax will be avoided and any activity which falls into the scope of the tax will relocate, so the tax base will disappear. Taking the example of money market funds again, these have to invest and disinvest continuously according to inflows and outflows and in the interest of their investors. Under the proposals, they would therefore be taxed continuously and will no longer be able to generate a positive return. They will soon disappear, together with related jobs and activity, as well as a large part of the expected revenue.
In light of these arguments, Marc Saluzzi says: "An FTT in its present form is both unacceptable and undesirable. It would have a disastrous effect on savers, investors and the economy generally.”
These arguments apply not just to Luxembourg, but to Europe as a whole. UCITS “made in Europe” are now distributed throughout the world and enjoy an excellent reputation. They have become the products of choice in Asia, Latin America and the Middle East. The extraterritorial effects of the FTT will mean that UCITS aimed at the international market will likely redomicile outside of Europe. This will mark the end of a key European export, that of a quality European financial product.
Ultimately, the European market for investment funds as a whole will suffer considerably from the introduction of an FTT. Between 2007 and 2011, the market share of European industry in the global management fell from 35% to 31% in terms of assets under management, and this negative trend will only be increased by this measure.