Memo raises concerns over FTT effect on bonds

by Calum Fuller

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24 Apr 2013

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GRAVE DOUBTS have been raised over the proposed introduction of a financial transaction tax - or Tobin Tax - after civil servants from participating nations alleged it could damage the bond market.

A memo leaked to think tank Open Europe raises a litany of questions over how the collection of revenues would work in practice, and warns the tax would introduce additional and unsustainable costs for participants in the bonds market.

Britain staunchly opposes the levy, which will impose a 0.1% tax on the value of stocks or bonds and 0.01% on derivative contracts and will be introduced across 11 EU countries including France, Germany, Italy and Spain.

The document includes criticism of the European Commission's impact assessment of the levy, noting it "is not fully clear on how the taxation on government bonds would interact with the cost of national debt", querying whether an increase in the cost "could be counterbalanced by the revenues of the FTT".

The memo reinforced reservations expressed by market bodies and George Obsorne about the spillover effect of the tax, by noting each member state would not be allowed "to collect the whole EU FTT paid on the bonds issued by the same member state. As a result, the increase of cost of government debt...would not necessarily be compensated by the collection of the tax on the same instruments".

The group's misgivings were not limited to the bond market, and suggested the  problems identified in bonds could be replicated in wider businesses, while the impact on high-frequency trading was also a source of disquiet.

"The memo shows that the UK, Sweden and others are absolutely right to raise concerns about the way the tax is drafted at the moment", said Open Europe director Mats Persson, cited in The Times.

He added: "In addition to creating a perverse situation which sees the tax hitting a firm in one country but being collected by a government in another, most worryingly it could increase borrowing costs for businesses and governments at a time when the eurozone absolutely cannot afford it."

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