A question came up at the Clearstream GSF conference last week: can the Financial Transactions Tax be avoided by using a Central Securities Depository that isn’t responsible for paying the tax to national authorities? We know the French version of the FTT and checked into the European Commission language to find an answer. We present our findings here.
France’s FTT relies on a declaration system to Euroclear France – investment service providers such as brokers are required to declare to Euroclear what transactions they made and pay the appropriate level of tax. Euroclear France then assesses the tax from Euroclear France members and pays it to the French treasury. This is a little different than the UK’s stamp tax, where the CREST system operated by Euroclear assesses the stamp tax and pays it directly to Her Majesty’s Treasury.
According to Euroclear’s Detailed Service Description v 1.2 of the FTT, Euroclear France members must submit declarations and pay the tax if one or more of the following situations apply:
– They are an Accountable Party with an account in Euroclear France
– They are the settlement agent/custodian of an Accountable Party
– They are the last intermediary in a chain from an Accountable Party to Euroclear France (if there are no more than 2 intermediaries in the chain)
– They are a Euroclear France member acting for an Accountable Party which has more than two intermediaries between itself and Euroclear France.
“Euroclear France Members must be direct members, i.e. members holding securities accounts with Euroclear France. They include French and non-French intermediaries, CSDs and ICSDs and issuers of taxable securities.”
In sum, any settlement activity that deals with a security listed on a French exchange (well, Euronext) and settled on Euroclear France could be affected by the tax regardless of the domicile of the investor or intermediary, so long as the final intermediary ultimately connects with Euroclear France. It does not matter where the security trades in order for Euroclear France to capture the settlement information. Which securities are affected of course is decided by the French Treasury according to its rules.
The European Commission version of the FTT doesn’t have the same level of specifics at this point, although presumably France’s model will be taken as a guideline. The closest we found to defining how taxes will be paid comes from a tax collection analysis of the European Commission’s FT proposal. The analysis has the following relevant points for our purposes:
1) MiFID requires financial firms to keep data on all financial transactions for five years. Firms not subject to MiFID will also be required to keep five years worth of transactional data.
2) Regardless of the trading venue, any trading in listed shares must be reported. “Member States shall require investment firms which execute transactions in any financial instruments admitted to trading on a regulated market to report details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day. This obligation applies whether or not such transactions were carried out on a regulated market.”
3) EMIR requires CCPs to keep trade data for 10 years. The EU FTT plan suggests that national laws allow tax authorities access to CCP data for cross-checking transactional volumes.
Given this start and the clarity of the UK stamp tax and France’s FTT model, it seems most likely that the EU will capture any trading on member state securities that are listed on the home exchange.
Our conclusion then when buying securities listed on an exchange in an EU member-state that has the FTT, there is no way to avoid the tax. Perhaps theoretically, an offshore CSD could hold a substantial amount of an FTT-relevant security, but both the buyer and the seller would need to use this CSD and no laws would require the reporting to the CSD in the country where the security has been issued. We think this situation is highly unlikely as a long-term tax avoidance strategy.
This drives us to think that the Contracts for Differences market and ETFs that are based on derivatives will continue to be the beneficiaries of the new tax regime. As noted in a post on our sister blog Asset Ops and Strategy (“As expected, Financial Transactions Tax drives investors to swaps and ETFs“), “[Europe’s] FTT is likely to be modeled on France’s version, which requires that the actual tax be paid at the time of title transfer by a Central Securities Depository. This works well for any transaction on a French-listed company anywhere in the world, as titles have to transfer. However, this taxation approach fails mightily when dealing with derivatives such as Contracts for Differences (CFDs), and France’s tax does not even consider these products.” Further, according to Risk Magazine, “Investors who own French shares are selling them and taking positions on them through derivatives instruments such as contracts for difference, structured products and ETFs, according to a Paris-based lawyer.”
Rather than try to avoid the FTT by using a different CSD, moving to CFDs and derivative-backed ETFs seems to be the way to go.