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Eversheds comment: European Commission alive to FTT circumvention risk

  • United Kingdom

    04-04-2013

    Commenting on potential methods institutional investors could use to avoid paying the EU Financial Transactions Tax (FTT), Ben Jones, tax expert at global law firm Eversheds, says:

    "The FTT has been specifically designed to be difficult to avoid or circumvent and is wide in scope, with a broad definition for financial institutions

    resident in states applying the FTT. The issuance principle further extends that scope by applying the tax to transactions between businesses resident in any country where the underlying financial instrument is issued by an entity resident in an FTT country.

    "Furthermore, each party to a transaction to which the FTT applies will be jointly and severally liable for the tax, increasing the relevant tax authorities' options for recovering the tax.

    "However, there have already been suggestions as to potential ways in which the FTT could be circumvented in certain circumstances. These typically have centred on ensuring that the relevant financial transaction does not create a taxable "financial instrument" for the purposes of the legislation (either by falling outside the definition or falling with in an exemption). Such suggestions include entering into fixed rate loans rather than floating rate loans with an interest rate hedge or using insurance contracts rather than credit default swaps.

    "Given the general flexibility of financial instruments, opportunities to circumvent the FTT in certain circumstances are inevitable. However, the European Commission is alive to this risk and the FTT directive requires participating member states to adopt measures to prevent evasion and avoidance of the FTT, even though the exact measures aren't specified at this stage."

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