The rush by policymakers on both sides of the Atlantic to legislate and regulate in the wake of the global financial crisis is an issue we’ve expressed concern over in the past. Not because we’re against politicians and regulators wishing to curb future catastrophes, but because too often private equity fund managers are painted with the same brush as other types of financial institutions.
The EU's policymakers – most notably the European Parliament – are arguing for a global financial transactions tax, which would tax each financial transaction based upon its value. At a rate of 0.1 percent, the Commission has estimated that would generate roughly €60 billion in tax revenues without derivatives. At the EU level, it is proposing a financial activities tax, which would be applied to the profits and remunerations of financial services sector companies; if applied at a rate of 5 percent, that would generate around €25 billion in revenue.
The funds industry is being swept in by taxes primarily intended for the banking industry.
Peter de Proft
The Commission admits the rationale for the proposals was primarily because “the banks played a central role in creating the recent economic crisis, and it is generally agreed that they now need to make a fair and substantial contribution to the costs of recovery”, according to a staff working document from late 2010. But the Commission also noted it had come to the conclusion the financial services sector was under-taxed and also that “some taxes have ‘corrective’ characteristics, which could help to positively influence market behaviours and help prevent future crises”.
Other justifications for the tax put forth included the need to quell high-speed trading, speculation and provide greater incentive for long-term investing. Those concerns, however, do not apply to the private equity asset class, the British Private Equity and Venture Capital Association has argued.
Private equity firms were not singled out as targets in the proposed tax measures – but they weren’t exempted either. Without lobbying and revisions or clarification to the EU proposals, additional taxes on pay, profits, borrowing capital and buying or selling assets could become realities for fund managers.
“Parliament has taken a clear political stance on this matter,” Peter de Proft, head of the European Fund and Asset Management Association, a trade body, told PEM. “The funds industry is being swept in by taxes primarily intended for the banking sector.”
While many industry participants have only just caught their breath from the hard work that was done trying to soften the EU’s Alternative Investment Fund Managers directive, it is once again time for full-scale lobbying.
The Commission is asking for public feedback as to whether alternative investment funds played a major role in the financial crisis and whether the proposed taxes should only be applied to the banking sector.
You have until 19 April to speak up on behalf of the industry and its beneficiaries. Click here to give the Commission your views.