Taxing Transactions in Financial Derivatives: Problems and Solutions

Avinash Persaud – Intelligence Capital, September 2014

In this report, Professor Persaud dismantles arguments made by bank lobbyists fighting against the Financial Transactions Tax.

He shows the tax, which will be implemented by ten countries including Germany and France, not only has many precedents around the world, but thanks to changes in the way markets operate, would not be difficult to apply to derivatives. Such a tax would raise billions more in revenue with limited scope for avoidance, the report says.

Read the full report here.

The report sets out that the FTT is:

  • Modest: numerous studies of transaction costs (such as clearing and settlement fees, research costs and brokerage charges) suggest they are between 1.0% and 1.5% per annum of assets under management for long-term investors, many times the proposed levels of the FTT.
  • Proven: today, more than 30 countries collect over £18bn per year through stamp duties on financial transactions. Three-quarters of both the G-8 and G-20 levy some form of FTT.
  • Share tax hard to avoid: The UK Stamp Duty on share transactions provides a good model – it is almost impossible to avoid because legal title is not transferred if the tax is not paid. As much as 60% of those who pay the tax on share transactions are non-UK residents.
  • Derivatives no exception: The tax on derivatives is not based on where a transaction is traded, but the residence of the underlying owner. New, international anti-money laundering initiatives, agreements for mutual assistance on tax matters and the ring-fencing of bank capital within countries make it hard for residents of an FTT jurisdiction to evade the tax. All trades, derivative or not, are now required to be reported. The beneficial parties of all transactions can be traced, meaning the tax cannot simply be avoided by moving (or giving the appearance of moving) jurisdiction.

 Derivative instruments on which the tax is due and unpaid can also be marked null and void in FTT jurisdictions, reducing the liquidity of untaxed instruments creating a further incentive for compliance.

The already well developed system of charges applied to derivatives contracts by clearing houses provides a good basis for determining a schedule of tax rates for derivatives.