By Daniel Carpenter, Head of Regulation at Meritsoft (a Cognizant company)
First France, then Italy and Spain, now its Germany. No, not the results of Eurovision, but the order in which European countries are enforcing financial transaction taxes (FTT). This after the German finance minister stated that his country would press on with its own FTT earlier this month.
Unfortunately these taxes have been, until now, addressed tactically by banks. With initial solutions deployed by now disbanded project teams, and with limited subsequent reviews or improvements, as there has been a general the lack of daily oversight and ownership; handling these pending additional countries tax rules on existing temporary solutions would be ill advised. Quite simply, continuing down the current make do path is not fit for purpose, and also fails in that all-important goal of minimising tax bills and auditability.
The trouble is that every time an FTT, or other similar rules such a tax on the value of dividends, have been muted, banks brush the issue underneath the carpet to prioritise other regulations that have actually been enforced. Unfortunately, this has left many houses chronically underprepared for the complexities that lie ahead regardless of who the next European country is to make its move. Take Italian derivatives as a prime case in point, which have a mind-boggling 45 different tax rates. This means, in theory, banks, particularly those using 6-year-old interim systems, need to wade through thousands of different derivative transactions, both on and off market to establish volume weighted average price (VWAP), and establish which rate applies. Extrapolate this effort and associated cost, not to mention the amount of tax being paid, all before adding them to the huge costs absorbed at a corporate tax level, and a banks bottom line starts to take a very significant hit.
This is why an increasing number of firms are seeking out new ways to minimise tax obligations, and the time and cost it takes to accurately process transactions across many varying taxes. The technological requirements for consistently being accurate in these calculations shouldn’t be underestimated. Systematically identifying transactions where a transaction tax is levied (or exonerated which still requires reporting), in addition to having all the information about a specific trading position prior to settlement, is absolutely key to saving time and reducing costs.
With this in mind, banks should use Germany’s pending FTT to ensure they minimise huge risks and costs that result from continuing to manage tax rules inadequately. Simply getting a project team to put a tax solution in place to address single rules, with nobody accountable for ongoing maintenance and improvements, will not be satisfactory. It is important to be ready for any eventuality now to get ahead of the game. The German FTT is not the first, and certainly won’t be the last tax headache banks face this year. We are, of course, perhaps seeing the biggest ever shake up of global tax codes, so who knows what is in store for financial institutions. One thing is for certain, as global political pressure mounts, financial institutions can ill afford to be unprepared for the implementation of a tax on the buying and selling of securities.