EU’s Transactions Levy a Back Door Tax on London, U.K. Firms Say

The European Union is attempting to tax London’s financial firms through the “back door” with its transactions levy and should be stopped by the U.K. government, according to British banks and fund managers.

The EU proposes to tax stock and bond trades at 0.1 percent for any transactions involving 11 nations, including France and Germany, under plans announced by EU Tax Commissioner Algirdas Semeta in Brussels yesterday. To escape the tax entirely, firms in other nations would have to cease financial-services business with the 11 countries involved.

“We continue to support the U.K. government’s refusal to participate in this proposal,” the British Bankers’ Association said yesterday in an e-mailed statement. “We urge that they remain vigilant to ensure that the application of the tax will not damage the City by the back door.”

The City, as the London district is known, is the world’s number one financial center, according to consulting firm Z/Yen Group Ltd. and has opposed attempts by EU policy makers to increase regulation and raise revenue from its activities since the financial crisis of 2008. The City is already under scrutiny by U.K. and U.S. lawmakers after scandals including interest rate-rigging across the industry, money laundering settlements at HSBC Holdings Plc and Standard Chartered Plc and trading losses at UBS AG and JPMorgan Chase & Co.’s London operations.

The EU proposal would levy a 0.01 percent charge on derivative trades as well as the 0.1 percent charge on stock and bond trades that involve one of the participating countries, regardless of where the transaction takes place. It would exclude day-to-day transactions by individuals and non-financial firms; primary offerings of stocks and bonds; and trades with central banks.

Estimated Cost

The plan, which includes pension funds, could raise 30 billion euros ($40 billion) to 35 billion euros a year, according to the EU. To become law, the proposal must be approved by the nations that agree to participate.

Large financial firms with operations in Europe will spend about 12 million euros to 14 million euros implementing the tax, according to David Newton, global financial-services tax leader at PricewaterhouseCoopers LLP in London.

As both the buyer and seller for each transaction would have to pay the tax, the cost to investors will be “substantial,” said the London-based Investment Management Association, which represents fund managers. The charge will further rise if intermediaries are involved, it said.

About half of European investment-banking activity is conducted through London and the U.K.’s financial firms generated almost 12 percent of the country’s tax revenue from 2011 to 2012, according to TheCityUK, a bank lobbying group.

‘Particularly Worrying’

“It is particularly worrying that the increased scope of the tax will now cover businesses’ risk-management activities, as well as hitting financial services in non-participating member states like the U.K. because of extra territoriality,” said Matthew Fell, director for competitive markets at the Confederation of British Industry.

“As today’s proposal shows, a unilateral European financial transactions tax will hit growth for the countries taking part, which is why Britain was right not to participate,” a U.K. government spokesman said in a statement. “We will now study the proposal carefully in order to assess its impact on non-participating EU member states and the single market.”

London may benefit from the increased cost of trading in Europe if it can avoid having to pay the tax, according to Philip Keevil, a partner at New York-based Compass Advisers Group LLC, which is combining with Richmond Park Partners to form Compass Partners.

“The more trades that escape the net, the better it will be for London and New York,” said Keevil, a former head of investment banking at S.G. Warburg & Co. “I’m reminded that the euro-bond market in London in the 1970s was created by a transaction tax in New York.”

London remains the world’s top financial center, according to a survey of 1,887 executives by Z/Yen published in September. The city beat New York and Hong Kong on regulation, tax and lifestyle, while the euro crisis caused Frankfurt and Paris to drop down the list, the survey found.