Financial services experts have sounded the alarm bell on the European Commission’s proposal for an EU-wide tax on financial transactions, insisting it will only serve to hurt growth.
Malta’s growth prospects as a financial services centre would be “materially undermined” if the tax is implemented as planned, according to financial law expert Max Ganado, managing partner of law firm Ganado and Associates.
“These taxes bring transactions to a halt or stop them in their tracks,” he said, pointing out that non-listed bonds are inexistent in Malta because bond transfers are subject to duty on documents.
The government earns absolutely nothing from this duty, he added, as no transactions happen.
He said that the introduction of a financial transaction tax in Sweden wiped out most of the domestic volume of activity.
“The growth of Malta’s centre has been mainly through players in the market carrying out international financial transactions, which means the tax will impact their global transactions. This threatens what we have been achieving since joining the EU, as it risks incentivising operators to move out of the bloc.”
The financial services sector’s economic contribution accounts for six per cent of gross value-added in the second quarter this year, according to the latest official statistics.
Moreover, the sector, which is slated as one of the areas in which the government wants to achieve excellence by 2015, employs more than 6,000 people, nearly four per cent of the island’s workforce.
The sector’s buoyancy, however, could be pierced if the tax is not adopted worldwide because it will render European jurisdictions including Malta less competitive, according to financial advisor Paul Bonello, managing director of Finco Trust.
EU Commission President JoséManuel Barroso on Wednesday called for the introduction of a financial transaction tax in the 27 member states, insisting it was time for the financial sector “to make a contribution back to society”.
Details are still sketchy but there are suggestions that the Commission will propose a 0.1 per cent tax on bonds and shares and a 0.01 per cent tax on derivatives and futures.
However, the little information available has baffled Mr Bonello given that conventional instruments like bonds and shares are being taxed more than speculative operations.
“Unless there is an explanation, I cannot understand the logic of levying a higher tax on bonds and shares while derivatives and futures, which are the culprits of the financial collapse, are taxed less,” Mr Bonello said.
The problem he sees is short-selling – a purely speculative way of making money but which no one seems to want to address.
It is a sentiment shared by Dr Ganado, who said the tax would not address the weaknesses in regulation let alone excessive state deficits that have caused the sovereign debt crisis.
“This tax will not address the imperfections which we should be trying to correct relating to systemic risk such as excessive risk-taking, over-complexity leading to lack of appreciation of impacts, short-termism, conflicts of interest and lack of proper disclosure, overcharging and excessive pays and bonuses, mis-selling and speculation among others.”
Dr Ganado said the introduction of such a tax at a time when many European states were crippled by the debt crisis would only serve to hurt growth prospects. Short-term benefits, like an initial boost to Malta’s coffers, would hardly compensate for the potential fallout.
Malta is opposed to the tax, as is the UK, both arguing that it does not make sense unless it is applicable world-wide.
Economist Joseph Falzon, who heads the University of Malta’s banking and finance department, believes the EU will find it difficult to introduce the tax if the UK opposes it since London’s financial district will bear the lion’s share of it.
“We need more information on how this EU tax is going to be put in place such as whether it will be levied only on transactions of shares and bonds or whether it will include other banking transactions,” Prof. Falzon said.
The proceeds from the tax, he added, would probably be used to increase the share capital of French, German and Greek banks that hold large amounts of Greek government bonds, and to increase the European Financial Stability Facility.
The EFSF is the eurozone’s bailout fund guaranteed by the 17 member states. The fund is expected to grow to €440 billion and Malta’s guarantee amounts to some €400 million.
According to Prof. Falzon, the guarantees will most likely increase the individual countries’ national debt with the burden falling on all taxpayers.
“The main difference with a tax on financial transactions will be that the burden only falls on the persons making the transactions and not on all taxpayers,” he said.