Germany suggests alternative to Tobin tax

Germany has unveiled plans for an alternative to the Tobin tax in the form of European stamp duty on shares.

The country is seeking UK support for a European-wide levy as an alternative to the financial transaction tax, Bloomberg reports.

Chancellor Angela Merkel's Christian Democrats are backing a Europe-wide tax along the lines of the UK's levy on shares. Such a solution is a "good option" if accompanied by rules that limit "abusive excesses" in automated trading, the party said in a draft paper.

"What is emerging in the coalition is consensus that maximum demands such as those put forward by the European Commission are just not realistic," Ralph Brinkhaus, a Christian Democrat who sits on parliament's finance committee, told Bloomberg.

"We are looking at multiple proposals that can possibly add to the UK's instrument, that is ‘stamp duty plus X'."

The German move is an acknowledgement that the transaction tax championed by Merkel and French President Nicholas Sakozy is unlikely to work without the backing of the UK and the City of London, Bloomberg reports.

It is also a potential blow to Sarkozy as he faces re-election in April, after he suggested France would impose the levy even if others did not.

The European Commission, the EU's executive body, has proposed a bloc-wide tax that it says could raise €57bn ($74.8bn) per year. David Cameron has opposed the tax, saying it would be ineffective unless applied globally.

Earlier this month he said: "Unless the rest of the world all agreed at the same time that we are all going to have some sort of tax then we are not going to go ahead with it."

Speaking at the World Economic Forum in Davos yesterday, Cameron said it would be "madness" to consider such a tax at a time when economies are floundering, putting the economic cost the tax at €200bn and 500,000 jobs.

The implications of the Tobin tax could have wide-ranging implications for the UK financial sector, commentators have warned.

Money market funds, short duration fixed income funds and government liquidity funds could be most exposed to the damaging impacts of the tax, with experts saying such strategies would be "untenable". The tax could also prompt a move away from active towards passive strategies which will be less affected by the new regime.

What is the financial transaction tax?

A proposed Europe-wide tax on financial transactions on stock, bonds and derivatives trades to be implemented from 2014. It would tax stocks and bond trades at a rate of 0.1% and derivatives at 0.01% in its current form.

Who will be affected?

EU authorities say the tax would be imposed on all financial transactions between financial firms where one or both are based in the European Union. It would apply to banks, insurance companies, investment funds, stockbrokers, hedge funds and pension funds, among other financial firms.

The taxes would be paid by both; the seller and the buyer. The determining factor in applying the tax would not be the place where the deal is processed, but rather the location of the trading partners.

What about UK retail investors?
They could only avoid the FTT if they invest in funds domiciled outside Europe which invest purely in non-European assets. In practice, the FTT may even capture investments that would seem to meet these two conditions.

This will limit investor choice as to which assets and funds to buy - for example, almost all the ETF products regulated for sale to UK retail investors are domiciled in the eurozone. There is no exemption for ISAs or SIPPs.

Who has used an FTT before?

Germany used to have a stock exchange turnover tax which taxed transactions involving stocks at 0.25% and bonds at 0.1%. It was repealed in 1991.

In 1984, Sweden introduced a 1% stock market transaction tax, repealed in 1991. In subsequent years, the amount was increased, but revenues still remained low. Many investors fled the Stockholm stock exchange and its financial services industry was permanently damaged.

The UK currently has a tax on purchase of shares, the Stamp Duty Reserve Tax, which is 0.5% of the sale price. This is one of the reasons why David Cameron is so opposed to another form of transaction tax.

How likely is it to go ahead?

Initially the EC said the plan needs the backing of all 27 EU member states to become law, but the body has now said it may push for a tax among a smaller group of members. So far, the UK, Sweden and the Czech Republic have opposed the tax. France adamantly supports the tax and has vowed to go it alone if it cannot gain the support of other EU countries. Ireland wants the tax to apply to all 27 states or else to be dropped.