financial transaction taxes - pwcfinancial transaction taxes (“ftts”) will fundamentally change...

February 201302 12 15 25

Point of view How PwC can helpA framework for responseWhat we observe in theindustry

Developing a strategic response

Financial Transaction Taxes:

Point of view

PwCFinancial transaction taxes

2February 2013

Financial Transaction Taxes (“FTTs”) willfundamentally change the tax landscape forfinancial institutions. These taxes will have wide-reaching implications for the business models ofall financial institutions, regardless of where

continued to consider the introduction of an EUwide FTT.

In September 2011, the EU released a draftDirective for an EU FTT, with a planned start dateof 1 January 2014. This represented the firstattempt to introduce a common FTT regime acrossall EU countries.

Since then, various countries have sought to ‘frontrun’ the EU FTT developments by introducing theirown, domestic FTTs.

Why have FTTs come to favour?

significantly changed the tax landscape for financialinstitutions.

Is this an issue for non-EU institutions?

In short, the answer is yes. FTTs may be charged byreference to the location of the issuer of taxablesecurities, regardless of where the parties to thetransaction are located (this is the model for theFrench FTT, for example).

An alternative model (which was incorporated inthe September 2011 draft EU Directive) taxes afinancial institution based on where it, or the

“FTTs will fundamentally change thetax landscape for financialinstitutions…The EU Commission hasestimated that the EU FTT will raise€31 billion”

institutions are located and where they transact.

In the past 18 months a number of countries haveeither introduced or announced an intention tointroduce domestic FTTs at a local country level. Inaddition, a proposal to introduce a FTT in a subsetof the European Union (“EU”) has been approved.

So, what are FTTs and where did they come from?

What are Financial Transaction Taxes?

FTTs are a form of indirect tax levied on specificfinancial transactions, such as purchases ofequity securities.

A number of countries have long had domesticFTTs, including the UK, Hong Kong andSwitzerland.

Why are new FTTs being introduced?

At a time of high fiscal deficits in most westerncountries (see figure 1), FTTs are highly attractivepolitically as a revenue raising tool. Indeed, the EUCommission has estimated that the EU FTT willraise €31 billion, which would be a considerablecost to financial services institutions and theirclients.

Moreover, the support for FTTs is representative ofa number of trends in taxation, including:

• the use of taxes to change the behaviour offinancial institutions

• increased use of indirect taxes rather thandirect taxes

• increased taxes levied on the financial sector

For all of these reasons, in our view, financialtransactions taxes will be a feature of the tax

financial institution based on where it, or thecounterparty to the transaction, is located. Underthis model, an institution outside of the FTTjurisdiction can be subject to the tax by tradingwith a counterparty resident in the FTTjurisdiction.

Figure 1: individual country deficits, aspublished on 9 February 2013

Country Budget balanceas % of GDP

United States -7.0

Japan -9.8

Britain -7.9

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Why are new FTTs being introduced?

The development of FTTs in recent years has itsroots in a request by the G20 to the IMF to findways of ensuring the financial services sectormakes a ‘fair and substantial contribution’ towardsthe costs of the financial crisis.

Although the IMF report1 ultimately concluded thata FTT was not its favoured option, the EU

transactions taxes will be a feature of the taxlandscape for many years to come.

Who is impacted by FTTs?

In summary, any financial institutions involvedin securities business are likely to be directlyimpacted by new FTT regimes. In particular, banks,brokers, asset managers, insurers, and custodiansall need to be developing a response to thesedevelopments. For these reasons, FTTs have

Financial transaction taxes3

February 2013

Source: The Economist, February 9th 2013

Britain -7.9

France -4.5

Germany +0.1

Greece -7.0

Italy -3.0

Netherlands -4.1

Spain -7.4

1. See http://ec.europa.eu/taxation_customs/resources/documents/taxation/other_taxes/financial_sector/com(2011)594_en.pdf

Notwithstanding the attractiveness of FTTs togovernments, research and experience from theintroduction of FTTs has suggested that FTTs havea significant impact at an economic level.

There have been a number of studies into theeconomic impact of introducing FTTs.

In the context of the UK’s stamp tax regime,research has suggested this has had a number ofeconomic effects on the UK economy as well as UKcompanies (see Figure 2).

When a financial transaction tax was introduced inSweden in the 1980s on the purchase and sale of

• Reduction in the share prices ofUK companies

• Increased cost of equity for UK companies

• Reduced liquidity in UK shares in thesecondary markets

• Reduced UK GDP and tax receipts

Figure 2: Impacts of UK stamp tax 1

“FTTs have a significant adverseimpact at an economic level. FTTs canresult in increased costs to companiesissuing securities…and present a riskof relocation of activities

For a very broad-based EU FTT...implementation costs of $15 – 20million would seem likely for largefinancial services organisations witha European footprint” Sweden in the 1980s on the purchase and sale of

domestic equities and stock options, this had asignificant effect on the Swedish markets(including the migration of an estimated 50% oftrading activity from Sweden to the UK).

The economic impact of any new FTT will dependon the precise nature of the regime. One key aspectis whether tax is levied by reference to the locationof the issuer of the securities (as with UK StampDuty Reserve Tax (“SDRT”) which broadly appliesto transfers of equities issued by UK companies) orby reference to the location of the parties to thetransaction.

The first model could be expected to result inincreased costs to companies issuing securities, andadd cost to parties trading those instruments.

The second model provides a greater risk of

Compliance and implementation costs

Our experience with the French FTT, and to someextent the Italian FTT, gives us an indication ofwhat the implementation costs are likely to be forfinancial institutions.

For the individual country FTTs, theimplementation costs for financial institutions wereestimated to be $2-3 million per country. Theimplementation costs of an EU wide FTT aretherefore likely to be significant.

Although it would be hoped that some economies

1. See Stamp Duty : its impact and the benefits of its abolition byOxera, May 2007.

a European footprint”

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The second model provides a greater risk ofrelocation of activities as institutions which arelocated outside of the FTT zone and who do nottrade with counterparties inside the zone will notbe subject to the tax.

These points are not simply of academic interest.They can be used to inform institutions’engagement with governments, specifically aroundthe practical issues and the shape any proposedregime should take. They will also be highlyrelevant to assessing the impact of a new regime atan institutional level. These points are discussed infurther detail later in this document.


February 2013

Although it would be hoped that some economiesof scale could be achieved, for a very broad-basedEU FTT (along the lines of the current EUCommission proposal) and based on recentexperience of individual country FTTimplementation, total implementation costs of $15– 20 million would seem likely for large financialservices organisations with a European footprint.

The EU FTT is now coming into force across asubset of EU countries. So, how did this comeabout, what happened to the planned EU wideFTT, and where does this regime stand?

From the outset, this topic has been highly politicalwith a range of views expressed by differentgovernments. France and Germany in particularhave been very strongly in support of the proposal,whilst the UK and certain other countries havebeen strongly against it.

The original intention was for the FTT to apply toall EU Member States. Once it became clear that

The EU Commission released a new draft of theDirective on 14 February 2013. The details of therevised proposal are set out in the Appendix.

The next steps in the process are as follows:

• The precise provisions of the Directive will bedebated. All EU Member States will be presentat these debates.

• Once the technical debate has concluded, theprocess will move to the political level.

Only the (currently 11) Member States, which haveformally requested to the Commission to join theEnhanced Cooperation on FTT, have the right to

“The EU FTT is now coming intoforce”

this could not be achieved given the opposition ofcertain countries, a number of countries moved forthe introduction of an EU FTT in those countriesonly through a process known as the EnhancedCooperation Procedure (“ECP”). This procedureallows a subset of at least 9 Member States toproceed with introducing progressive EU lawwithin those supporting States only.

On 22 January 2013, a vote was passed (with fourcountries abstaining) to allow the 11 countries infavour of the EU FTT to proceed with theintroduction of the tax. The Netherlands may jointhe ECP, but this is subject to certain conditions onthe nature of the final regime (see Figure 3).

Enhanced Cooperation on FTT, have the right toparticipate in the final vote on the FTT regime atthe Council political level. The vote requiresunanimity to pass.

Throughout the ECP process, Member States cansend a formal request to the Commission to join thecore group of 11 Member States in favour of the EUFTT. Based on the current draft Directive, once anEU FTT is enacted those countries signed up to theFTT will not be able to retain existing, domesticFTTs.

In summary, in what continues to be a process ofclose consultation with governments, the EU FTT islikely to become a reality. Although theCommission's proposal forms a formal basis forwhat are complex talks between Member States,the current proposal may still be considerably

Figure 3: Countries joining the EU FTTvia the Enhanced Cooperation Procedure

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11 Countries Joining the ECP

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the current proposal may still be considerablydiluted. The key issues to be determined in thecoming months are the precise shape of the EUFTT and when it will come into force. Weunderstand however that it is increasinglyuncertain whether a compromise can be reachedbefore the German elections in September 2013.This means that the proposed timeline may shift.


February 2013

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1 CountryPotentially joining theECP, subject to conditions

10 Countries Opposed to an EU wide FTT

5 countriesUndecided: not formallyopposed, and/or expressed concerns

€+ Euro Plus PactEuro currencyzone

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Over the coming months, there are a number ofkey events both with respect to the EU FTT anddomestic FTTs.

For the EU FTT, we will now see the start ofnegotiations on the precise form of the EU FTTfollowing the release of the revised Commissionproposal on 14 February 2013. In parallel, domesticFTTs will be coming into force (and it remainspossible that more countries will seek to introduceFTTs locally, especially if the EU timetable were tobe extended).

The events of the next 12-18 months will thereforebe key in shaping the FTT landscape. For thisreason, institutions need to start planning for theseevents now. The timeline below sets out the keyevents on the EU FTT and domestic FTTs as theposition currently stands, together with some keydevelopments from recent months.

“The events of the next 12 – 18 monthswill be key in shaping the FTTlandscape. Institutions need to startplanning for these events now.”

2012 2014

1 August 2012French FTT comes int0force

1 July 2013Italian FTT on derivativescomes into force

1 January 2014Proposed start date forEU FTT

2013 – Potentialintroduction ofSpanish FTT

2013

22 January 2013ECP vote passed forEU FTT

2013/2014 Potentialintroduction ofPortuguese FTT

14 February 2013 - RevisedEU FTT Directive released.Negotiations amongst ECPcountries begin

1 January 2013 HungarianFTT comes into force


6February 2013

1 March 2013Italian FTT on equitiescomes into force

EU FTTSpanish FTTEU FTT

1 January 2013Ukrainian FTT comesinto force

Financial institutions will need to prepare,develop strategies for and deal with multiple FTTsimplemented by local countries in the short tomedium term.

As the negotiation and debate around the EU FTThas continued, a number of countries have eitherintroduced, or announced an intention tointroduce, their own FTTs. The current status ofthe major countries with an FTT-style tax is set outbelow. Each of these domestic FTTs has differentscopes, rates, and exemptions, etc.

Accordingly, until the introduction of the EU FTTfinancial institutions will be faced with a patchworkof local country FTTs, all with different features – avery difficult situation to manage.

As mentioned before, under the terms of thecurrent draft EU FTT Directive those countriessigning up to the Directive cannot retain theirdomestic FTTs. That said, even once the EU FTT isintroduced local implementation may still differ.For example, the Directive will only specifyminimum rates of tax – these could therefore differat a local country level.

“As the negotiation and debatearound the EU FTT has continued, anumber of countries have eitherintroduced, or announced anintention to introduce, their ownFTTs”

Rate of tax

Country

Scope oftax

Spain

Acquisition of equityand similar securitiesissued by large Spanishcompanies. Tax onhigh frequency tradingand certain CDS bySpanish entities

To be confirmed

Portugal

Secondary markettransactions overfinancial instruments,including equities, bondsand fund units,derivative transactions

Up to 0.3%

Italy

Charged on the sale ofItalian equities and ADRs,transactions in Italianequity derivatives and highfrequency trading oftaxable instruments

0.1% for equities traded onregulated securitiesexchanges, 0.2% otherwise(0.12%/0.22% for 2013).Nominal rates applied toderivatives

Hungary

Money transfers,collections, payments,cash disbursements, cashtransfers, redemptions ofletters of credit andcheques, and certaincentral bank deposits

In most cases 0.01%, butin some cases up to 0.3%depending on thetransaction

France

Acquisition of equity andsimilar securities issued by aFrench listed companyhaving a market cap inexcess of €1bn (and ADRsover such). Tax on highfrequency trading andcertain CDS by Frenchentities

0.2% shares, 0.01% for highfrequency trading and CDS

EU

Transactions involving afinancial institution, witha party established in anECP country, overequities, bonds, moneymarket instruments,derivatives and UCITSunits

0.1% for non derivatives,0.01% for derivatives

Ukraine

OTC transfers ofUkrainiansecurities and OTCtransactions overUkrainianderivatives

0.1% for listedsecurities, 1.5% forunlisted securities


7February 2013

Key reliefs

ExpectedStart date

Primary markettransactions, marketmaker transactions

Potentially first half of2013

Issuance of securities,potentially marketmakers (to bedetermined)

2013/2014

derivatives

Primary markettransactions, market makertransactions

Equities tax from 1 March2013, derivatives tax from 1July 2013

Various, includingaccounts held at the samebank by the same person,cash pooling andsecurities accounts

1 January 2013

Primary markettransactions, market makertransactions, stock loans,repos, intra-grouptransactions

Effective from 1 August 2012

Primary markettransactions; transactionswith certain governmentbodies, certain grouprestructuring transactions

1 January 2014

Primary markettransactions,transactions overgovernmentsecurities

1 January 2013

For some time financial institutions have had todeal with domestic FTTs. Accordingly, theintroduction of more FTTs that need to bemanaged means that financial institutions mustprepare to deal with this dynamic landscape.

The table below sets out the features of some of themain existing FTT regimes. In developing astrategic response to the introduction of new FTTs,

to the extent possible financial institutions shouldseek to leverage the experience and lessons learnedfrom dealing with these existing FTTs (this themeof building from experience of existing regimes isdiscussed further later in this document). This isparticularly true for FTT regimes that tax equitytransactions, since this forms the basis for mostFTT regimes already in existence.

“In developing a strategic response tothe introduction of new FTTs, to theextent possible financial institutionsshould seek to leverage the experienceand lessons learned from dealing withthese existing FTTs”

Rate of tax

Country

Scope oftax

South Africa

Securities transfer tax applies onthe transfer of South Africansecurities or listed securities

0.25%

Hong Kong

Charged on the transfer of stockwhich is registered in Hong Kongby way of sale and purchase

0.20% shared between the buyerand seller of the chargeablesecurity

Ireland

Charged the on transfer of stock inIrish incorporated companies

1%

United Kingdom

Agreements to the transfer of UKequities and certain UK securitieswith equity-like features

0.5%

Switzerland

Securities transfer tax applies totransfers of qualifying securities,wherever issued, involving Swissparties

0.15% for Swiss securities, 0.3%for non-Swiss securities


8February 2013

Key reliefs Exemptions for asset to sharetransactions and intra grouptransactions

Exemption for transfer betweenassociated companies (i.e. thosewith a 90% association)

Exemptions for intermediaries,transfers between companieswithin a group relief group,foreign transfers and stockborrowing

Exemptions for intermediaries,certain capital marketstransactions (including stockloans) and transfers within agroup

Exemptions for certain capitalmarkets transactions, includingstock lending

The EU FTT will impact financial institutionsglobally and not just those based in the Europeancountries.

This is for two key reasons:

1) under the current Commission proposals, afinancial institution located outside of the ECPzone that is a party to an in-scope financialtransaction with a counterparty establishedwithin the ECP zone is subject to the tax; and

2) it is likely that the majority of the economiccost of the FTT will be passed on to the endinvestor by the financial institution.

For example, see Figure 4 below. In Scenario (1),the Japanese bank is subject to the EU FTT as aresult of transacting with a German counterpartydespite having no physical presence within the ECPzone. This contrasts with the stamp model wherethe German Bank would normally be theaccountable party.

Likewise under Scenario (2), the UK broker dealerin selling shares in a Swiss company would bebrought within the scope of the EU FTT by virtue oftransacting with a bank situated within the ECPzone.

“The EU FTT will impact financialinstitutions globally and not justthose based in the Europeancountries.”

investor by the financial institution.

Even if the ECP countries choose to push aheadwith an FTT which is closer to a more traditionalstamp-style regime, any company or individualentering into a transaction over securities issued bycompanies located within the ECP zone will besubject to the FTT.

Figure 4: the global impact of an EU FTT

In both scenarios, the US corporate is likely to bearthe economic cost of the FTT indirectly throughincreased brokerage fees in the case of Scenario (1)or through the pricing of the CFD in the case ofScenario (2).

1. German bank acting for a US corporate customer buys French equities from Japanese Bank and sells to its customer

2. German bank writes CFD over Swiss equities with US corporate and hedges CFD by purchasing reference equities from UKBroker Dealer

Japanese bank German bank US CorporatePurchase Sale


9February 2013

Key

Charge under EU FTT

Charge under French FTT

Broker Dealer

UK Broker Dealer German bank US CorporatePurchase CFD

Swiss equities

At this stage, it is not clear what the final form ofthe EU FTT will be, nor is it clear when the EU FTTwill ultimately take effect. However, in our viewfinancial institutions need to develop a strategicresponse now.

Notwithstanding uncertainty on how EU anddomestic FTT regimes will develop, in our viewfinancial institutions cannot afford to ignore theFTT developments and wait for clarity. There are anumber of reasons for this.

1. FTTs are not going away

As we have discussed earlier, FTTs are politically

However, to make their voices heard now, financialinstitutions need to assess the impact of proposedregimes and engage governments in discussion.

4. FTTs can have a very short lead time

Recent experience from the French and ItalianFTTs has shown that FTTs can be introduced withvery little lead time. This is coupled with a lack ofclarity in the rules and related guidance, often untilvery shortly before (or after) the regime comes intoforce. This means that institutions struggle toimplement a response and frequently the cost ofimplementation is many times higher because it isbeing completed in a ‘burning platform’, tactical

“Financial institutions needto develop a strategic response now.”

As we have discussed earlier, FTTs are politicallyattractive and regarded as a valuable new source ofrevenue for governments. Given this trend,financial institutions need to be prepared to dealwith FTTs over the foreseeable future.

2. FTTs can have a significant impact onfinancial institutions

In our experience, FTTs impact institutions in avery wide range of areas. FTTs can impact theviability of business lines, product pricing,operational and systems requirements,legal agreements with clients, and many otherways besides the direct impact of the FTT.

3. The final shape of many regimes is not yetdecided

With the shape of certain FTT regimes (including,in particular, the proposed EU FTT) not yet

being completed in a ‘burning platform’, tacticalenvironment rather than through adopting a moreconsidered, strategic approach.

So, what should institutions be doing now?In our experience, many institutions developed a‘tactical’ solution to the French FTT, quicklyamending systems and processes to deal with theregime at short notice. Very few institutions arepreparing for the EU FTT regime because the focusso far has been preparing for domestic FTTs thatare in force already or coming into force incoming months.

However, given the pace of developments in thisarea, and the number of FTTs expected over thecoming months and years, in our view institutionsneed to take a more strategic approach in

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in particular, the proposed EU FTT) not yetfinalised, there remains time for discussions withgovernment and the EU to refine the precise formof these taxes. For example, banks and brokerswould want to ensure that any new FTT has a broadbased exemption for market makers (the currentEU Directive contains no such exemption).

For asset managers, a key issue will be the scope ofany charge on the issue and redemption of sharesor fund units.

need to take a more strategic approach inresponding to these developments. Furthermore,any response should seek to leverage the work donealready in responding to previous FTT regimes.The following sections of this document set outwhat we observe in the industry by way ofresponding to these developments and ourrecommendations for the practical stepsinstitutions can be taking now.


February 2013

“FTTs impact across the organisation.Financial institutions need to act nowand involve the stakeholders fromacross the business.”

FTTs impact a number of different areas of a financial institution from the front office trading strategies through to the clearing and settlement systems andprocesses. The level of impact in each of these areas will vary depending on the type of institution - broker, custodian, asset manager etc. For each of the areas of theorganisation which are likely to be impacted, the table below summarises the key activities that will need to be undertaken by those functions in response, togetherwith a summary of the main deliverables which will be required.

Front office/trading Operations Tax and legal Technology Risk management andcompliance

• Determine how the FTT wouldimpact trading strategies and theproducts that each desk/location/fund vehicle has a mandateto trade.

• Determine whether FTT costs will berecharged to end investors or theextent to which these will beabsorbed internally.

• Assess the impact of FTT on marketliquidity, product pricing andbid/offer spreads.

• For products which are potentiallysubject to FTT review and identifythe booking locations.

• Map the location of counterparties toin-scope financial transactions.

• Assess the changesneeded to currentoperations functionactivities andprocesses to cope withsettling FTT across adiverse range offinancial instruments.

• Determine the role that the in-house tax resource will play inproviding tax technical input andin supporting constructiveengagement with governments.

• Review customer terms andconditions to determine whetherthe FTT can be recharged tocustomers where appropriate.

• Prepare detailed memo settingout the technical analysis of FTTregime as it will apply to theorganisation.

• Identify key areas of uncertaintyin the application of the rulesgiven its business profile andtrading activities.

• Map existing systems from front-office booking to clearing andsettlement interface for all in-scopeproducts.

• Review existing data fields todetermine what additionalinformation should be held oncounterparties and customers.

• Assess third party vendor solutionsfor data feeds on legal entities, in-scope securities and tax engines.

• Determine whether tax enginesdeveloped in-house for other FTTregimes can be adapted to cater forthe new requirements.

• Define what riskmanagement proceduresare required to monitorcompliance with FTTregimes and the extent towhich any third partyassurance is required.

Ac

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s


11February 2013

in-scope financial transactions. trading activities.

• Inventory of products, transactiontypes and the location ofcounterparties.

• Operating model for recharging FTT.• High-level model of impact across the

product range.

• Documentation ofexisting process flowsfor the operationfunctions at eachstage of thetransaction life-cycle.

• Detailed memo setting out thetechnical requirements of theFTT regime.

• Recommendation of theapproach to amending existingcustomer terms and conditions.

• Documentation summarisingexisting systems architecture.

• Recommendations as to third partyvendor solutions.

• Recommendations as to changes tosystems architecture to captureadditional data fields.

• Compliance model.• Internal audit review

procedures.• Controls documentation.

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liv

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ab

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What we observe in the industry


12February 2013

Our observations of industrypractices

Brokers and custodians

Governance • Most brokers and custodians have put in place working groups in response to the FrenchFTT and in anticipation of the Italian FTT.

• They have typically established working groups comprising subject matter experts fromacross the organisation, covering legal, compliance, tax, operations, front-office, andtechnology.

• Ownership generally sits with the business or operations in the location where theprimary infrastructure supporting the impacted businesses sits.

ConstructiveEngagement withGovernment

• A number of industry groups have taken a very pro-active approach in trying to seekclarity on the application of the rules and putting in place contractual documentation tomanage exposures where the law fails to clarify the position.

• On French FTT, consultation with governments has been primarily aimed at obtainingclarity on the application of the law for all the parties involved. Given time constraints,

“What we observe in the industry”

clarity on the application of the law for all the parties involved. Given time constraints,much of the discussion was undertaken after the commencement date in order to obtainclarity on the law and guidance issued.

• Debate on the EU FTT has been more focused on trying to demonstrate why the FTTwould have adverse impacts at a macro-economic level.

BusinessResponse

• Banks and brokers do not generally view the FTT as a direct cost since client agreementswill typically provide for them to pass the cost on to the end client.

• Accordingly their response to the FTT developments has been to ensure that there arerobust processes for ensuring compliance with the regimes, rather than changing howthey conduct securities business to mitigate FTT costs.

Implementation • Most brokers and custodians have taken a ‘tactical’ approach to implementation as aresult of the very short lead times, primarily focusing on addressing the client interfacefirst and ensuring that the FTT cost can be passed on to the client where appropriate.

• The other key area of focus has been on ensuring that the use of the various exemptions(e.g. market maker and securities financing exemptions) can be maximised.

• Significant reliance has been placed on industry groups to resolve uncertainties as to thedetailed application of the requirements.

• Best practice seeks to leverage lessons learned from the experience gained fromoperating other transfer tax regimes – for example, UK SDRT, French FTT and Hong


13February 2013

operating other transfer tax regimes – for example, UK SDRT, French FTT and HongKong stamp duty.

• Very few institutions have taken a ‘strategic’ approach in response to FTT developments,(1) seeking to develop a process which can be replicated for future regimes and (2)gathering information in a way which ensures that, for any future regimes, it is onlynecessary to consider what is different for that market.

Asset management

Governance • Given that the French and Italian FTTs place the tax collection and reporting obligationswith the custodians and brokers, the asset management community has not typicallyestablished dedicated teams to focus in detail on operational implicationsof FTTs.

ConstructiveEngagement withGovernment

• There has been engagement to date in connection with the EU Commission proposals.Those submissions that have been made focus primarily on the overall cost of doingbusiness and exemptions that should apply in principle.

• Input (including the submissions made by the Dutch Government in connection with theEnhanced Cooperation Procedure) has emphasised the need for an exemption forpension funds and relief for units or shares issued or redeemed in UCITS.

• Another key issue for consultation on the EU FTT has been the potential for multiplecharges to arise under a single transaction. This has been seen as inequitable and also

“What we observe in the industry”

charges to arise under a single transaction. This has been seen as inequitable and alsoarguably contrary to the public policy of encouraging saving by investors.

BusinessResponse

• For asset managers, FTTs will be a cost that will impact their expected performance oninvestment strategies.

• Certain FTTs (in particular the EU FTT) may act to charge funds distributing units(depending on the distribution model used) as well as fund investment activities.Accordingly, funds need to consider the impact on distribution strategy as well as theimpact on investment strategy.

• Consequently we have seen the asset management industry seek to identify the impact ofthe various FTTs on their business and establish a response to limit the cost of the tax byengaging in constructive discussion for changes.

Implementation • The primary focus for the asset management sector has been on assessing the businessimpact of domestic FTTs, given the additional transactional costs associated withdoing business.

• As a result of the narrow scope of the netting rules in recent FTTs, asset managers havebeen looking at the impact of transacting across different brokers. Under the FrenchFTT, there is no ability for a fund to net positions in relation to a particular securityacross different brokers. This arguably creates a tension with the requirement under theAIFMD regulatory regime to select brokers based on best execution capability.


14February 2013

AIFMD regulatory regime to select brokers based on best execution capability.

A framework for response


15February 2013

Our recommended approach tothe issue

• Manage changing rules

• Ensure key messages are conveyed togovernments, and

• Develop an approach to preparing for changesto operational systems and processes, and tofacilitate required changes to the businessstrategy.

When should this work begin? In our view thereare good reasons for launching a strategy now,including the following:

• With the shape of the EU FTT to be debatedamong the participating countries in the coming

Figure 5: An integrated strategy fordealing with FTTs

Financial institutions need to start consideringtheir approach to preparing for FTTs now. In ourview they should look to obtain synergies from thework they undertake in response to domestic FTTsto minimise the amount of re-work required in the

FTT impact assessment

CurrentFTT rules

ProposedFTT rules

Currentstate

“Financial institutions need to adoptan integrated strategy, recognisingthat there is likely to be significantoverlap in the scope of the domesticFTTs and the EU FTT”

among the participating countries in the comingmonths, now is the time to engage withgovernments and provide input on the design ofthe regime.

• More domestic FTTs may take effect in the shortterm. The Italian FTT comes into force on 1March 2013.

• Given the complexity and scale of the businessoperated by financial institutions, a full impactassessment is likely to require careful planningand sufficient time for analysis.

However, these points need to be balanced with thefollowing considerations:

• As new regimes are announced, there willinevitably be some replication of work inperforming subsequent impact assessments.For this reason, to the extent possible,

event the ECP is successful.

In order to respond to the challenges posed byFTTs, financial institutions need to adopt anintegrated strategy, recognising that there is likelyto be significant overlap in the scope of thedomestic FTTs and the EU FTT.

The integrated strategy should include thefollowing key elements (see Figure 5):

• An impact assessment of FTT across all lines ofbusiness;

• A strategic response, based on the results of theimpact assessment, covering the following areas:

• Constructive Engagement withGovernment

• Business Response

Governance

ConstructiveEngagement

withGovernment

BusinessResponse

Implement-ation


16February 2013

For this reason, to the extent possible,institutions should seek to capture data likely tobe relevant for all regimes as part of the firstimpact assessment and seek to leverage this infuture exercises.

• The final shape of a number of future FTTregimes (including the EU FTT) is not yetcertain, which means that work on a detailedbusiness response and implementation is notyet possible. However, the impact of futureregimes can still be assessed based on what isknown at this stage and certain assumptionsabout the final end state.

• Business Response

• Implementation

The strategy needs to be supported by anappropriate governance model to:

For many institutions, there is currently a need torespond specifically to the Italian FTT. In doingso, many are considering how to build on the workalready undertaken in preparing for the FrenchFTT.

In our view, the implementation of the Italian FTTpresents an opportunity to start gathering theinformation required to assess the impact offurther domestic FTTs and/or the EU FTT, and tobuild the governance framework in anticipation ofthese regimes. This is because there will be certainfeatures of existing regimes that will be replicatedin future regimes.

An impact assessment can therefore use a ‘buildingblocks’ approach – building on knowledge of theimpact of existing FTT regimes and seeking toidentify commonality between the existing andfuture regimes, thereby enabling previous impactassessment work to be re-used. This approachensures that those areas that are most likely to bein scope under a new FTT are prioritised as part ofany implementation work.

Following this process, the impact of those aspectsof new FTT regimes which differ from existingFTTs can then be reviewed. The results of thisreview can then be used as a starting point for the

“The various domestic FTT proposalsand the EU FTT model can be viewedalong a spectrum. This reflects thekey attributes of FTT regimes thatneed to be considered.”

in future regimes.

To illustrate this conceptually, the various domesticFTT proposals and the EU FTT model can beviewed along a spectrum, with ‘narrower scope’FTTs, closer to the UK SDRT model, at one end ofthe spectrum and ‘wider scope’ FTTs, such as thecurrent EU FTT proposal, at the other end (seeFigure 6). This reflects the key attributes of FTTregimes that need to be considered.

review can then be used as a starting point for thereview of other FTT regimes which are yet widerin scope.

Figure 6: The spectrum of FTT regimes

UK SDRTFrench

FTT

EU FTTproposal

ItalianFTT


17February 2013

• Tax based on location of securities

• Few instruments in scope

• Few transactions in scope

• Exemptions, e.g. market maker relief

• Single charge

FinalEU FTT?

• Tax based on location of parties

• Many instruments in scope

• Many transactions in scope

• Few exemptions

• Purchaser and seller liable

Turning to the lessons learned from the FrenchFTT in particular, many institutions impacted bynew FTTs have already had to deal with theFrench regime.

In light of the approach set out on the previouspage, in order to implement an efficient strategy formanaging future FTTs it is therefore of criticalimportance to maximise the benefits of the lessonslearned from preparing for the French tax.

These lessons can be used to focus resources forimplementation, enable effective communication ofkey messages and help to inform any adaptation ofbusiness strategy.

The table sets out what we consider to be the keyissues from the French FTT experience for financialinstitutions to learn from.

French FTT challenges Learning for future FTTs

“In order to implement an efficientstrategy for managing future FTTs, itis of critical importance to maximisethe benefits of the lessons learnedfrom preparing for the French tax.”

Lack of clarity in the rulesand guidance

• Need to look for areas of commonality among regimes

• Consider compiling list of key issues likely to be relevant – this will help in planning ahead and developing responses(key issues include the scope of any market maker exemption, the types of products covered, impact of nettingarrangements, etc.)

Need for constructiveengagement

• By developing a list of key common issues and engaging at an early stage with local tax authorities, institutions will bebest placed to ensure that future regimes are implemented in a practical way

Importance of developing astrategic response

• FTT renders trading in taxed instruments less attractive, thus business cases for activities in such instruments need tobe reviewed, in particular for those cases where margins are tight already

• Depending on the results of the business case analysis, trading strategies and asset allocation need to be reviewed

• Where trading in taxed instruments is offered as a service to customers (e.g. brokers trading on behalf of assetmanagers), the contracts with the customers must be reviewed (on pricing, at a minimum); business relations might bere-defined or even given up

Importance of understandingthe underlying business froma product, operational, and

• Requires the assembly of a combined team with representatives from the business, operations, IT and Tax and Legalin particular

• Across this team issues to be considered include products traded, identity of counterparties, legal entities involved,


18February 2013

a product, operational, andlegal perspective

• Across this team issues to be considered include products traded, identity of counterparties, legal entities involved,interaction between desks, how transactions are cleared and settled, etc.

Importance of legaldocumentation

• Necessary to have a clear understanding under existing legal documentation as to who will bear the cost of FTT,requiring a review of existing terms and conditions with customers and counterparties

• In particular, review agreements to determine accountability where there are chains of brokers

We now turn to the practical steps required aspart of the integrated strategy set out on page 16.The impact assessment underpins this strategy. Itis the foundation of the governance structure, theconstructive engagement strategy andidentification of the operational challenges forimplementation and allows timely formulation ofbusiness strategy.

The assessment needs to use a structuredmethodology comprising a ‘top-down’ analysis oftax technical requirements coupled with a ‘bottom-up’ analysis of the business transactions andprocesses. This provides the best chance of

Impact Assessment

Governance


withGovernment

BusinessResponse

Implemen-tation

“The impact assessment underpinsthis strategy.”

processes. This provides the best chance ofobtaining a complete picture of how an FTT regimewill impact across the organisation. The four keyphases are set out below.

• Through the current stateassessment, the aim is toidentify the key attributes suchas transactions, products,counterparties, processes andsystems which will be affectedby the implementation of thechange in legislation.

• The gap analysis aims toidentify gaps between thecurrent state assessmentperformed in phase 3 and therequirements analysis fromphase 2, and understand andprioritise changes byestablishing a strategicroadmap alongside detailed

• With FTT regimes in a state offlux we can expect many newamendments and details to beintroduced.

• This phase will be on-goingthroughout the project workand will involve monitoringany changes and updates tomake sure all the latest

• To keep the impact assessmentfocused and resource usedeffectively and efficiently, thisinitial phase confirms scopewith key stakeholders andsponsors.

• A series of targeted workshopscan be run to confirm the listof businesses, products, and

1. Scoping andkick-off

2. Requirements analysis 3. Current stateassessment

4. Gap analysis andimplementation planning


19February 2013

roadmap alongside detailedtechnical specifications.

make sure all the latestdevelopments are capturedand considered.

of businesses, products, andsystems that are expected to bein scope.

• A plan is developed for theimpact assessment, includingFTT team structure, roles, andresponsibilities.

The structure will evolve during the various phasesof the programme as its objectives change. Thatsaid, the key focus areas for governance will remainas follows:

• Engagement strategy and impact assessment:ensure the high-impacted areas are mobilised tofocus the attention on the business andterritories where the most effort is expected tobe required, and develop the implementationapproach.

• Implementation: ensure that adequate progressis made by all impacted parties, and coordinate

Impact Assessment

Governance


withGovernment

BusinessResponse

Implemen-tation

Turning to the governance structure, setting upthe right governance is critical to ensuring that the

• In addition, close coordination should be inplace with the other key regulatory/change

“Setting up the right governance iscritical to ensure that all the keystakeholders across the institutionare involved, kept up to date withlatest developments, drive theimplementation and report onprogress.”

is made by all impacted parties, and coordinatethe various FTT responses (if more than one hasto be delivered simultaneously).

• Ongoing maintenance: whilst embeddingcompliance into business-as-usual activities,monitor for new products and new taxes toinform key stakeholders and anticipate changes.

the right governance is critical to ensuring that thekey stakeholders across the institution areinvolved, kept up to date with latest developments,drive the implementation and report on progress.

Global Steering Committee(All FTTs)

FTT monitoringand design team

Functionalrepresentation

Tax

IT

Regionalcoordination

APAC

EMEA

Businessrepresentation

InvestmentBank

Asset Mgt

• Overall governance/decision-making authority, providing programoversight, direction, resources/funding and approval

• Track the developments of FTT in all relevant jurisdictions and informthe Steering Committee and relevant parties

• Constituted of tax experts to understand the rules andOperations/Change specialists to derive the operational impacts

place with the other key regulatory/changeprogrammes to manage synergies and shareresources where relevant.

• A Global Steering Committee overseeing theimplementation of all relevant FTTs should bein place, and could be constituted as follows:


20February 2013

Operations

Finance

Americas Wealth Mgt

Retail

Custodian

• Representation from key regions (and key relevant territories), keyfunctions and all impacted businesses is essential to consistent andeffective constructive engagement and implementation

Central PMO

• Coordinate the activities across the various working groups and ensuretimely communication to all stakeholders

• Track progress across the different FTT regimes and different locationsand coordinate analysis and implementation

1. What issues should be focused on?

• Identification of the provisions to be focusedon should begin with identification of the areasof difficulty arising from:

- Past FTTs (e.g. Hong Kong Stamp Duty,UK SDRT);

- Recently in force FTTs (e.g. French andItalian FTT); and

- Proposed FTTs (e.g. EU FTT).

• Figure 7 below sets out the key areas that wewill expect to be of interest to financial

Impact Assessment

Governance


withGovernment

BusinessResponse

Implemen-tation

Effective discussions with government andregulators is a core component of the integratedstrategy. In order to be effective, thecommunication needs to be informed by theimpact assessment so that the debate is focused onthe key issues relevant to the business. 3. When should constructive engagement

“The time for constructiveengagement is now. The quicker thisprocess is undertaken, the moreeffective it will be.”

will expect to be of interest to financialinstitutions.

2. Who should be engaged?

• In our view, the most effective and constructiveengagement with government will be thatwhich seeks to inform the policy intent withpractical input/experience (e.g. limiting theinstruments in scope, etc.) rather than arguingagainst an FTT in its entirety.

• Our experience with the French and ItalianFTTs is that the most effective and constructiveengagement has been indirect debate via thelocal industry bodies (e.g. AMAFI, AFTI, etc.).

• With respect to the EU FTT, it would be mostproductive to liaise with governmentsimplementing the FTT as they will be closest to

Having identified how an institution is impacted bythe current and proposed FTTs (which will be afunction of the business structure and businessmodel), an institution’s constructive engagementstrategy needs to address three questions.

3. When should constructive engagementstart?

• The time for constructive engagement is now.

• With a stated start date of 1 January 2014 forthe EU FTT, it is essential that any engagementstarts as soon as possible to have the bestchance possible of shaping the EUCommission’s proposals.

• Similarly, engagement with government bodieson the other proposed FTTs (e.g. Spanish,Portuguese, etc.) should be undertaken as soonas possible to have effective impact.

• Consultations or discussions should not belimited to the proposed FTTs as the guidanceand practice around in-force FTTs (e.g. Italian,French, etc.) remains in its infancy. Theguidance and practice will have practical

Figure 7: Key areas of focus forconstructive engagement

Instrumentsin scope

Parties inscope

Transactions/activities in

scope

Basis ofcalculation

Rate of tax Exemptions Reporting Tax payment


21February 2013

implementing the FTT as they will be closest tothe EU FTT implementation issues in theircountries.

guidance and practice will have practicalimplications so it is important that discussionswith local tax authorities take place to reachthe right outcome. As with the proposed FTTs,the quicker this process is undertaken the moreeffective it will be.

As with the other components of the strategy, thiswill be driven from the results of the impactassessment.

For a given FTT regime, a key factor that will drivethe type of business response available will bewhether the FTT operates a ‘residence model’ or an‘issuance model’:

• Residence model – the FTT is levied byreference to the location of the parties to thetransaction (e.g. the original draft EU FTTreleased in September 2011).

• Issuance model – the FTT is levied by reference

Impact Assessment

Governance


withGovernment

BusinessResponse

Implemen-tation

Turning to the Business Response component ofthe integrated model, this centres around potentialadaptations to an institution’s business model inresponse to the impact of FTTs.

Such business and operational planning couldrange from minor changes to trading models in

Depending on which model a given FTT falls into,the impact on the business model and investment

“A key factor that will drive the typeof business response required will bewhether the FTT operates a residencemodel or an issuance model.”

• Issuance model – the FTT is levied by referenceto the location of the issuer of the securitiesbeing traded (e.g. the French and Italian FTTs).

range from minor changes to trading models inresponse to the cost of the tax, through toabandoning businesses that are rendered nonviableby the additional cost of FTT regimes.

the impact on the business model and investmentstrategy for financial institutions will vary. Thetable below sets out examples of some of thebusiness response techniques that might beadopted, depending on whether the FTT follows aresidence model or an issuance model.

Portfoliochanges

Residence model (e.g. original draft EU FTT Directive) Issuance model (e.g. French and Italian FTTs)

End investor considerations

• FTT charge will arise regardless of the market in whichfinancial instruments are issued. The incidence of tax willtherefore depend on the type of instrument traded (e.g.equities or equity derivatives)

• Incidence of tax will depend on the market in which theinstrument is issued. It may also depend on the type ofinstrument traded (e.g. equities or equity derivatives)depending on the precise structure of the regime


22February 2013

Transactioncounterparty

TradeInfrastructure

equities or equity derivatives)

• Trading with counterparties inside the FTT zone will give riseto FTT charges, whereas transactions with counterpartiesoutside the FTT zone will not

• Transactions may or may not be subject to FTT, depending onthe group company which enters into the transaction andwhether or not it is treated as established in the FTT zone

depending on the precise structure of the regime

• Transacting over taxable instruments will give rise to a FTTcharge regardless of the counterparty, so the focus willinstead be on who bears the economic cost under thecontractual terms

• Potential to net purchase and sale transactions, depending onthe provisions of the regime (this may involve using a singlebroker for purchase and sale transactions)

The extent to which this is an issue only for brokersand custodians, and whether other types ofinstitutions need to consider this, will depend onthe form of the regime. This is considered on thefollowing page.

Through the mapping exercise, the institutionneeds to build an understanding of:

• booking entity and account structure

• the clearing model used for transactions

• process and systems interfaces

• interaction between front-end systems and the

Impact Assessment

Governance


withGovernment

BusinessResponse

Implemen-tation

The implementation phase is focused on thepractical steps required to deal with FTTs on anongoing basis, including systems requirements,reporting and payment processes, infrastructurerequirements, etc.

For each product within scope of the FTT, anexercise needs to be undertaken to map the existingsystems and processes in order to identify thechanges that will be required to enable therequirements of each respective FTT (domestic andEU FTT) to be met. An example systems map that • legal documentation in place with clients

and providers• interaction between front-end systems and theclearing and settlement process

• location of infrastructure supportingthe business

• interaction between desks

might be developed in a banking context is set outin Figure 8 below.

and providers

• the legal capacity in which an institution acts

• specifics from clients and transaction typeswhich might trigger exemptions

Figure 8: An example systems map for a banking institution

End investor/fund/asset manager

Securities Account/Central Counterparty

/CSD/sub-custodian

Client

• Pricing• Client on-boarding – classification• Legal agreements• Nature of client request• Confirmations

Desk Front end system Core banking system Settlement interface


23February 2013

Settlement agentExecution broker

Desk

• Product type

• Transaction type

• Client type

• Position type (Client vs.proprietary)

• Available exemptions

Front end system

• Account structure

• Flagging of exemptions

• Identifying in-scope products/clients

• ISIN codes/security ID

• Calculation logic

• Collection tax events

Core banking system

• ISIN codes/security ID

• Calculation logic

• Reporting engine

Settlement interface

• Payment processes

• Netting approach

• Clearing model

• Report delivery/declarations

However, whether this will be the case for futureFTTs depends on the precise form of the FTT.Conceptually, this point can be illustrated byreference to the FTT spectrum introducedpreviously in this document (we have reproducedthis below in Figure 9).

For a new FTT which is narrow in scope, closer onthe spectrum to UK SDRT, we can expect theoperational burden to fall primarily on brokers,custodians and settlement venues.

A wider scope FTT, however, may give rise tomultiple charges for a number of financial

Impact Assessment

Governance


withGovernment

BusinessResponse

Implemen-tation

For existing FTT regimes, the operationalimpact has fallen largely on the brokers,custodians and settlement venues (includingclearance services and Central SecuritiesDepositories). Therefore for end investors (suchas asset management institutions), FTTs have Accordingly, if it is concluded as part of the impact

“Depending on the design of theFTT.... the operational burden couldbe expected to fall on end investors aswell as brokers, custodians”

multiple charges for a number of financialinstitutions involved, and place the FTT liability oneach such institution (indeed, this is the approachof the current draft EU FTT).

For such a regime, therefore, the operationalburden could be expected to fall on end investors,as well as brokers, custodians, etc.

primarily had an economic (i.e. cost) impactrather than an operational impact (though in thecase of the French FTT this cost may bemitigated through netting, for example). Thishas limited the operational work required at theimplementation stage.

Accordingly, if it is concluded as part of the impactassessment that the regime under review is verywide in scope, institutions such as asset managerswill need to be much more focused on operationalrequirements as part of the implementation phasethan they would be for a narrow scope FTT. Issuessuch as whether infrastructure needs to bedeveloped in-house or whether third party serviceproviders are engaged for operational processeswill need to be considered carefully.

Figure 9: The spectrum of FTT regimes

UK SDRT EU FTTproposal

Increasing operational impact for end investors


24February 2013

• Tax based on location of securities

• Few instruments in scope

• Few transactions in scope

• Exemptions, e.g. market maker relief

• Single charge

• Tax based on location of parties

• Many instruments in scope

• Many transactions in scope

• Few exemptions

• Purchaser and seller liable

How PwC can help


25February 2013

Our capabilities andtailored approach

We have worked on a number of engagementsassisting clients with preparing for the FrenchFTT. We also have a long history of advisinginstitutions on existing FTTs, such as the UK SDRTand Hong Kong stamp duty.

With this experience we have developed anapproach to help clients prepare for FTTs to comein the future. This approach is sufficiently

structured to ensure that all affected transactionsand projects are captured, but flexible enough torespond to regimes that in many cases are not yetfinalised.

The key features of our approach are set out below.

A single teamcombining taxtechnical expertise

Our FTT network comprises a team that brings together industry knowledge,operational expertise, and tax technical specialists. This allows us the bestchance of identifying all of the products, transaction configurations, and

“How PwC can support theintegrated strategy”

technical expertisewith industryknowledge

chance of identifying all of the products, transaction configurations, andbusiness lines that will be impacted by FTTs and addressing the operationalimplications at an early stage.

Our experience working with a number of existing FTTs, including the FrenchFTT, allows us to identify the scenarios that commonly give rise to chargesunder FTTs.

We have extensive experience in wider operational taxes matters, such asFATCA, for example.

A structuredapproach whichcan be replicated

We have developed a structured approach comprising a ‘top-down’ analysis oftax technical requirements coupled with a ‘bottom-up’ analysis of thebusiness transactions and processes.

A global networkwith FTT technicaland consultingspecialists in each

We have developed a network of FTT specialists across Europe, withrepresentation in all countries with a domestic FTT and all countries involvedin the ECP process. Each jurisdiction includes a tax specialist and a consultingspecialist so that we can cover the tax technical and operational side of any


26February 2013

specialists in eachjurisdiction

specialist so that we can cover the tax technical and operational side of anynew regime.

Our team members frequently have relationships with local industry groupsand tax authorities to provide an avenue for constructive engagement withgovernments.

FTT impact assessment

CurrentFTT rules

ProposedFTT rules

Currentstate

FTT Impact assessment• Assist in workshop and/or questionnaire design

• Briefing and training for the business

• Facilitate workshop

• Advise on technical requirements

• Undertake gap analysis

• Document current systems and processes

“How PwC can support the integratedstrategy”

Governance


withGovernment

BusinessResponse

Implement-ation

• Document current systems and processes

• Project management

Governance• Reviewing governance structure, benchmarking, and providing PMO support

where required

Engagement with governments• Helping to devise the message and strategy around the engagement with

government

• Alongside industry and other professional organisations, we can bring our specialisttechnical expertise to bear on issues subject to consultation.

• Using links to industry bodies

Business Response


27February 2013

Business Response• Technical input to identify the FTT consequences of proposed changes to the

business strategy and model

Implementation• Reviewing tax calculation logic and decision trees

• Reviewing changes to systems architecture

• Developing testing procedures

• Pilot testing

• Reviewing third party vendor solutions

PwC Global FTT network

Network established comprising specialists acrossall 11 enhanced cooperation procedurejurisdictions and all domestic FTT locations.Regular communication across the network to

Country Local contacts – Tax and advisory

Austria [email protected], [email protected]

Belgium [email protected], [email protected]

Estonia [email protected], [email protected]

[email protected], [email protected], [email protected], [email protected],[email protected] and [email protected]

[email protected], [email protected] [email protected]

Greece [email protected], [email protected]

Hungary [email protected], [email protected]

Hong Kong [email protected], [email protected]

“Our Global FTT network”

Regular communication across the network toshare latest information.

Local contacts available to yourbusiness globally

Network comprises tax and consulting specialists.PwC capability to assist you on strategicresponse, governance, systems andprocesses aspects as well as taxtechnical input

Network includes individuals closely involved in

Hong Kong [email protected], [email protected]

Ireland [email protected], [email protected]

[email protected], [email protected],[email protected], [email protected] [email protected]

Japan [email protected], [email protected]

[email protected], [email protected],[email protected] and [email protected]

[email protected], [email protected],[email protected] and [email protected]

Portugal [email protected], [email protected]

Slovakia [email protected], [email protected]

Slovenia [email protected], [email protected]

South Africa [email protected], [email protected],

Spain [email protected], [email protected]

Sweden [email protected], [email protected]


28February 2013

Network includes individuals closely involved indiscussions around the scope of domestic andEU FTTs.

This ‘inside track’ will provide you withthe very latest position as the legislationand practical implementation of FTTregimes evolves

Sweden [email protected], [email protected]

Switzerland [email protected], [email protected]

[email protected], [email protected]@uk.pwc.com, [email protected] [email protected]

Ukraine [email protected], [email protected]

[email protected], [email protected] [email protected]

EU Public Affairs Group [email protected], [email protected]

“We have established a strong networkof Tax and Advisory experts acrossEurope to monitor the development ofFTTs. They regularly issue newsflashesand webcasts to update our clients andour teams.”


29February 2013

The latest draft Directive for the EU FTT wasreleased on 14 February 2013. The key aspects ofthe proposed regime are set out in this Appendix.

This page and the four pages that follow focus onthe scope of the charge. We then turn to otheraspects of the regime including the rates of tax andexemptions from the charge.

The Directive applies to ‘…all financial transactions, on condition that at least one party to the transaction is established in the territory of aparticipating Member State and that a financial institution established in the territory of a participating Member State is party to the

Appendix – the EU FTT

participating Member State and that a financial institution established in the territory of a participating Member State is party to thetransaction, acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction’ [Article 3]

Financialtransactions

EstablishedParticipatingMember State

Financialinstitution


30February 2013





transactions Member State institution

Financial transactions are any of the following:• Purchase and sale of a financial instrument

• The transfer between group companies of the right to dispose of a financial instrument

• Conclusion or modification of derivative contracts

• Exchange of financial instruments

• Repo, reverse repo and stock lending agreements

Financial instruments:All instruments in Section C, Annex I of Directive 2004/39/EC, which include the following:• Transferable securities (including equity and debt securities)

• Money market instruments


31February 2013

• Money market instruments

• Fund units

• Options, futures, swaps, forwards and other derivatives over commodities, currencies, indices and various other assets/prices (whether physically settled orcash settled)

• Credit default swaps

• Financial contracts for differences (“CFDs”)

• Structured products

Comments: the draft Directive applies to a very wide range of transactions, over a very wide range of financial instruments






A financial institution is established in a jurisdiction in any of the following cases:• It is authorised by authorities in that jurisdiction

• It is authorised or entitled to operate in that jurisdiction from abroad

• It is incorporated in that jurisdiction

• It has a permanent address or usual residence in that jurisdiction

• It has a branch in that jurisdiction (for transactions carried out by that branch)

• It is party to a transaction (as principal or agent) with another party ‘established’ in that jurisdiction

• It is party to a transaction (as principal or agent) in financial instruments issued in that jurisdiction


32February 2013

Comments: under the draft Directive, financial institutions can be ‘established’ in a jurisdiction (and therefore subject to EU FTT in thatjurisdiction) in many ways. In particular, a financial institution with no nexus with a country in the FTT zone can still be taxable in thatcountry by trading with a counterparty in that country (the ‘residence principle’) or by trading instruments issued in that country (the‘issuance principle’)






The participating Member States are those that have signed up to the Enhanced Cooperation Procedure. Currently, these arethe following countries:

• Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, and Spain

• Other countries may join the Enhanced Cooperation Procedure at any time during this process .


33February 2013

Comments: in assessing the impact of the EU FTT, the focus will need to be on operations conducted in these 11 countries, transactions withcounterparties in these countries, and transactions involving financial instruments issued in these countries






A financial institution is any of the following (each of which is defined by reference to existing EU regulations):

• An investment firm

• A regulated market and similar trade venues

• A credit institution

• An insurance or reinsurance enterprise

• A UCITS fund or management company

• A pension fund or vehicle, and the manager of such an enterprise

• An alternative investment fund, and the manager of such a fund

• A securitisation SPV

• A special purpose vehicle


34February 2013

• A special purpose vehicle

• Other institutions which carry out certain activities, including lending, financial leasing, providing guarantees, holding subsidiaries and issuing financialinstruments (provided more than half of annual turnover comes from financial transactions)

Comments: this definition is sufficiently wide to bring most participants in the financial services sector in scope. Also within scope are otherinstitutions which might consider they operate outside of the FS sector (such as group treasury companies or group holding companies,depending on levels of turnover)

Having determined the scope of the tax, we set outbelow the other key aspects of the FTT regimeunder the draft Directive.

Feature Comments

Liability for the tax • For each financial transaction, FTT shall be payable by each financial institution which is party to the transaction

• Each party to a transaction is jointly and severally liable for payment of the tax if it is not paid within the time limit


• Each party to a transaction is jointly and severally liable for payment of the tax if it is not paid within the time limit

Rates of tax The rates will be set by each participating Member State. The rates shall not be lower than:

• 0.01% for derivative transactions (calculated based on the notional value of the derivative)

• 0.1% in respect of other financial transactions (calculated based on the value of the consideration, or market valueif higher)

Exempt transactions Very few. The following transactions are exempt:

• Primary market transactions

• Transactions with certain bodies, including central banks, the EU and certain national bodies

• Certain group restructuring transactions

Significantly, no exemptions for market makers, intra-group transactions, stock loan or repo transactions.

Exempt parties Exemptions provided for the following:

• Central counterparties

• Central Securities Depositories and International Central Securities Depositories


35February 2013

• Central Securities Depositories and International Central Securities Depositories

• Member States and associated public bodies

Payment and reporting • Payment is due instantly for transactions carried out electronically, or within 3 days in other cases

• Each party liable to pay FTT is required to submit a return to the tax authorities on a monthly basis

Proposed start date • 1 January 2014

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should notact upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express orimplied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law,PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for anyconsequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decisionbased on it.

© 2013 PricewaterhouseCoopers LLP. All rights reserved. In this document, ‘PwC’ refers to the UK member firm, and may sometimes refer to thePwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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