EU finance tax will devastate the City and damage economies, reports warn

In a presentation prepared for investors and likely to be released this week, the inter-dealer broker ICAP said that the Financial Transaction Tax (FTT) would “damage mainstream economies” and that companies would find it more expensive to secure finance.

In a separate report, Barclays said the “politically-motivated” FTT could cut EU GDP by as much as 0.3pc, at a time when many eurozone countries are in recession. It said criticisms of the tax were “numerous”, reports The Telegraph.

“The FTT risks raising the cost of capital for corporates, damaging legitimate hedging causing significant relocation of trading or fragmentation of liquidity pools and interfering with the price discovery process,” the Barclays report says.

In September 2011, the European Commission released plans for the FTT to be applied to all EU member states. Although the UK has rejected the tax, 11 countries including France, Germany and Italy have signed up.

Because Britain’s main trading partners have joined the “FTT zone”, the City could suffer as the majority of the transactions are undertaken in the UK with the tax being paid back to the host country.

“Economic activity located in the UK is likely to be among the largest generators of FTT revenue but the UK Government will not receive any revenue as it will be paid to FTT zone tax authorities,” the ICAP report says. Any decrease in the amount of activity will mean lower fees for London.

“The proposed FTT is a misguided policy which would be severely detrimental to both EU economies and businesses,” said Michael Spencer, the chief executive of ICAP.

“According to our research, if implemented, it would severely damage the functioning of debt markets which are essential for governments and companies to raise finance. It would increase both their borrowing and operational costs and lead to a flood of financial activity being moved outside the FTT zone.

“It is particularly ironic that London, as one of world’s leading financial centres, will generate the lion’s share of this revenue and act as collection agent despite the UK being outside the FTT zone and our Government being vehemently opposed to the introduction of this tax. The impact on the City if the FTT is adopted in anything like the manner advocated would be devastating.

“Can you imagine, for example, the French tolerating a new EU tax that damaged wine exports or the Germans allowing their car industry to be taxed to near extinction? That is what is effectively being proposed here to our leading export industry.”

The ICAP report says the FTT rules could breach EU free trade agreements as they will discriminate between different businesses depending on their structure and whether they operated a subsidiary in an FTT member state or a branch.

Changing structures to avoid the tax could lead to other regulatory problems such as the repatriation of capital in the event of another financial crisis.

“Systemic risk could increase as the FTT runs counter to G20 objectives and obligations under the European Market Infrastructure Regulation by disincentivising central clearing,” the report says.

“Treating overseas branches of the FTT-zone firms less favourably than those operating through subsidiaries is not compatible with the freedom of establishment required under EU treaty.

“The proposed FTT would also restrict the freedom of movement of capital.”

The projected tax take from the FTT could be as high as €34bn (£29bn) according to European Commission estimates.

Barclays says it will probably raise far less as institutions are likely to relocate outside the FTT area.

The Barclays report suggests that the volume of revenues for businesses such ICAP, competitor Tullett Prebon and the London Stock Exchange could be reduced by between 4pc and 8pc, although it says that ICAP, for example, has a “good” ability to change its business model in response.

The tax is due to be imposed across the 11 states by January, which Barclays describes as “ambitious”.

“It is extremely unlikely that they will meet this deadline,” the Barclays report says.