20 June 2013

Insurance Europe: FTT proposal requires significant amendments

Insurance Europe is concerned that the FTT as outlined in the Proposal would have a serious negative impact on the real economy. This would be particularly damaging at a time when Europe continues to struggle to sustain an economic recovery. The Commission’s own impact assessment study calculates that, under certain scenarios, the FTT would have a negative impact of 0.28 per cent on EU GDP. In Insurance Europe’s view, the negative impact on Europe’s economy would primarily be the result of a substantial increase in the cost of funding of companies, as a result of significantly less liquid financial markets and increased costs for financial intermediaries. This increase in the cost of funding would, in turn, affect future levels of investment by Europe’s companies in the European economy.

Moreover, Insurance Europe believes that the introduction of an FTT in a limited number of EU countries would disrupt rather than strengthen the EU single market, as it would increase the differences between the FTT markets and the non-FTT markets. The entry into force of the FTT would lead to a competitive disadvantage for companies from jurisdictions subject to the FTT. On the other hand, the FTT proposal would have significant extra-territorial effects, as financial institutions established outside the FTT-zone would be liable to pay the FTT on all their transactions with financial institutions established in a participating state. This would undoubtedly discourage them from conducting transactions with counterparts in the FTT-zone. Insurance Europe is very concerned about the consequences that this strong divide between the two categories of countries might have on the functioning of the EU single market.

In addition, Insurance Europe is concerned that, even if the conclusion of insurance contracts is excluded from the scope, the FTT proposal will have a significant impact on insurance companies and their customers, notably through a higher cost of protection and lower returns on long term products. Here, it is important to keep in mind that investing in financial instruments is a key feature of insurance companies, which receive premiums up-front from policyholders and invest them in financial assets. The duration of the investment is normally determined by the duration of the liability, as insurers typically seek to match the nature and duration of their liabilities and assets. By taxing all types of financial transactions, irrespective of whether these are conducted for a speculative or investment purpose, the proposal will significantly increase the cost of policyholder protection (as the price of a policy benefits from the investment return) and will decrease the return offered on pension products. Insurance Europe is very concerned that, ultimately, the substantial cost of the EU FTT will be paid by consumers, as was outlined by the International Monetary Fund in its June 2010 report “A fair and substantial contribution by the financial sector”.

For these main reasons, Insurance Europe opposes the introduction of the FTT, as designed by the Commission.

If, despite the above concerns, participating Member States decide to move ahead with the FTT, Insurance Europe believes that the rationale for the inclusion of insurers should be reconsidered or, at the very least, the proposal should be profoundly amended to ensure that the anticipated rise in the costs of long-term products is minimised. The following points should be considered as a matter of priority:

• Retirement products should not be included in the scope of the FTT.
• Transactions with bonds on the secondary market should be excluded from the FTT regime.
• Economically unified transactions should be taxed only once.
• Transactions within groups should be outside the scope of the FTT.
• Imposing a tax on derivatives should be reconsidered.
• Repurchase agreements and securities lending trades should fall outside the scope of the FTT.
• No joint liability for the payment of the FTT should be envisaged.
• Implementation of the FTT should be harmonised. In particular, a uniform tax rate of 0.01 per cent should be applied.
• The introduction of the FTT should be delayed to ensure it can be collected accurately and efficiently. Insurers should be able to pay the due taxes via brokers and intermediaries.

Insurance Europe’s more detailed comments on these points are set out in the link below.

Position Paper

© InsuranceEurope