New Financial Transaction Taxes Will Carry Disproportionate Costs

January 17, 2012 Taxation in EU

Foreign ExchangeLONDON – A new financial transaction tax in Europe could hike the cost of carrying transactions on the foreign exchange market by up to 18 times, and the monetary impact on the economy would surpass the tax revenues collected.

On January 17th the Global Financial Markets Association (GFMA) released a new study examining and quantifying the potential impacts of a financial transaction tax on the foreign exchange market in Europe. The study found that due to the tight margins seen by traders and operators in the FX market, a new tax would have disproportionately heavy effects on liquidity and profits, and ultimately have a negative overall effect on the European economy.

The report examined the potential impact of a 0.01 percent financial transaction tax, as was previously proposed by the EU Commission. If implemented, the tax would directly increase the cost of a standard transaction on the foreign exchange market by up to 7 times. In some limited cases, the cost of the transaction may increase by as much as 18 times. As a result of the new tax’s implementation, the added expense could lead to as much as three quarters of all foreign exchange transactions being relocated to a jurisdiction outside of the EU.

The new costs arising from the introduction of a financial transaction tax would likely be passed entirely to the end consumer. The authors of the report specifically mentioned pension funds, asset managers, insurers and multinational corporations as likely candidates to see significant increases in costs and a drop in profits following the implementation of the tax.

After taking into account the decreased market liquidity and widespread effects of the tax, the report claims that the proposed regulation is an inefficient tool for raising additional tax revenues, and would cost the economy more than it raised for national budgets.

Commenting on the results of the study, the managing director of the GFMA Global FX Division James Kemp said that the financial transaction tax would effectively punish European companies for using FX products to manage currency fluctuation risks.

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