Aside from straight monetary costs, a proposed EU-wide tax on financial transactions also means new administrative burdens, a study released this week by the European Private Equity & Venture Capital Association (EVCA) argues.
The proposed financial transaction tax (FTT) – commonly called the Tobin tax after economist James Tobin who first proposed the idea in the 1970s – would impose a 0.1 percent levy on most equity and debt transactions originating in Europe.
“Each time a transaction is within the scope of the tax it will trigger an array of administrative requirements that…require the affected financial institutions to navigate a non-uniform and complex legal landscape,” said in the study Anita Millar, an industry risk consultant with ADM Risk, Regulation & Strategy and one of the study’s lead authors. The report was written in collaboration with law firm King & Wood Mallesons SJ Berwin.
Under the proposal, GPs must submit tax returns to each national tax authority where a transaction is made. The EVCA research says this reporting provides no “group-level exemption”, meaning LPs and other actors embedded throughout a typical private equity structure may have to file their own individual tax returns.
“Each financial institution (and perhaps party) involved in a private equity structure would have to evaluate the potential returns against the costs of developing the infrastructure needed to meet requirements arising from a tax they may not, in the end, need to pay,” the report said.
Individual member states taking different approaches on where and when to apply the tax within the private equity structure will also result in new legal and compliance costs, the private equity industry argued.
“Not only will PE funds be required to work with different national tax collection structures and processes, but each PE structure will require a local country-by-country analysis whether they are within or outside of the FTT jurisdiction,” the report elaborated.
The tax is due to be enforced in 11 countries through “enhanced cooperation” – a term describing nine or more EU member states deciding to move ahead with an initiative proposed by the Commission once it proves too difficult to reach unanimous agreement in all member states. The 11 countries participating are: France, Germany, Belgium, Austria, Slovenia, Portugal, Greece, Slovakia, Italy, Spain and Estonia.
Because only 11 of the 28 EU members signed on to the controversial tax, critics say it would be “discriminatory and likely to lead to distortion of competition to the detriment of non-participating member states.”
The tax was originally planned to enter into force January 1, 2014, but disagreements over the minutiae of the rules between the 11 states has delayed its implementation. European Tax Commissioner, Algirdas Semeta, reportedly said it's likely a compromise will made by the summer, but a final implementation date is unknown.