We review taxes which have been proposed for the financial services sector following extensive G20 discussions.
Several new taxes are currently being considered with the aim of ensuring that the financial sector makes a greater contribution to public finances. The most relevant potential changes to the financial services sector are the proposed bank levy, financial activities tax, and financial transactions tax.
Bank levy
A levy on banks' balance sheets is due to come into force on 1 January 2011. This is being introduced along with similar levies in Germany, France and the US (Hungary and Sweden have already introduced a similar tax), though the scope and cost of the tax is/will be different in each location. Dubbed a 'financial stability contribution', the levy is intended to both create tax revenue and discourage highrisk funding profiles.
The levy will apply to UK banks and building societies, and to branches of foreign banks operating in the UK, where their relevant short-term and long-term liabilities amount to £20bn or more. The definition of bank is the same as that used for the much maligned bank payroll tax so it can apply to certain financial businesses that are not banks, though the size requirement will exclude many of these businesses.
The rate of levy has still to be set, but if the June 2010 Budget proposals are accepted the initial levy will likely be set at 0.04% of equity and liabilities for 2011, expected to rise to 0.07% for subsequent years. The June Budget also proposed reduced rates for certain funding, starting at 0.02% for 2011 and rising to 0.035%. HMRC will collect the levy, which is not deductible for corporation tax. There are complicated rules concerning what is included as a liability.
The effect on individual institutions will vary, but the impact of the levy will be partly offset by the proposed reduction in the rate of corporation tax from 28% to 24% over the next few years. Some analysts have suggested that some of the largest banks operating in the UK will be better off under the 2011 taxation regime, though this remains to be seen.
Although some other countries have introduced or committed to a similar levy, concerns will remain about the competitiveness of the UK within the global banking market. Most countries outside of the EU have stated their intention not to impose similar charges. Despite possible tax savings by banks from the corporation tax reduction, the introduction of another tax charge may well be damaging to the UK's reputation within the global banking market. Financial activities tax In April, the International Monetary Fund released a report to the G20 proposing a financial activities tax (FAT) to be levied on the profits of financial institutions and potentially from high remuneration levels. Financial institutions are currently undefined although it is expected that it would be widely drawn.
On 7 October the EU published a report supporting the implementation of a FAT at EU-level. If introduced, it is argued that revenues from the FAT could reach €25bn annually across the EU, based on a tax rate of 5%. The report notes that the FAT could offset the VAT exemption that financial services institutions currently benefit from for certain transactions, since the FAT effectively acts as a tax on value added.
Implementation of the FAT is not intended to directly alter the structure of the markets where financial institutions operate, since income would be taxed regardless of how it is generated. Similarly, since the FAT applies to the profits and/or remuneration from financial activities, the prices of specific financial instruments are not intended to be directly affected and the market structure not directly altered. A stated aim of the tax is to discourage risky investment practices so it could be targeted more at such transactions. If so, there may be indirect changes in the market structure as financial institutions seek to minimise their tax burden while still maximising revenue.
The European Commission has noted the probable ineffectiveness of a FAT at a national level, due to the mobility of multinationals. Indeed, the UK Government has stated that it is unlikely to implement the FAT without international agreement. Accordingly, without EU agreement the FAT looks unlikely to come into practice. If it is implemented within the EU, it remains to be seen if it will encourage businesses to move activities outside the EU to avoid the tax.
Financial transactions tax
A financial transactions tax (FTT) would be a tax on the value of individual transactions. If implemented it would most likely apply to a wide range of transactions in order to raise the most revenue. Much like the FAT, the FTT would need international agreement so as not to encourage financial institutions to relocate. It should be noted that the UK Government has not indicated that it is in favour of such a tax so it is perhaps less likely to be implemented than the other taxes.
While the bank levy is likely to come into effect as proposed, implementation of the FAT and the FTT appear doubtful at this stage. However, discussion surrounding them creates uncertainty regarding the tax position for financial services businesses, which may prove damaging to their respective positions within the global financial market and encourage them to consider relocating.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
