As wise men have said: in this world, nothing is certain but death and taxes.
But this is about the only certain thing when it comes to taxes – when, where, and how they are applied is constantly shifting.
When we speak to banks, financial transaction taxes (FTTs) are firmly back on the agenda as an area requiring investment, with operational costs and risk being cited as reasons why. Jurisdictions everywhere are investigating the possibility of adding FTTs to their slate of existing taxes. Some have implemented them. Some are promising to do so.
In this two-part blog series, we examine some of the challenges and look at how banks can best respond to tax uncertainty and optimise their tax operations.
The FTT spider’s web
Right now, only a small number of countries have implemented FTTs, notably France, Italy, Spain and, most recently, Hungary. But the reach of FTTs stretches beyond the national borders in which they originate. If you’re trading in one of the in-scope instruments, you will most likely have to pay tax on it wherever you are in the world. You will also need to explain why you didn’t pay tax on in-scope trades.
FTTs are applied very selectively, with multiple exoneration codes in different countries for different trades, leaving vast swathes of trading out of scope. In France, for example, only trading instruments relating to companies with a market cap over a 1bn euros are subject to FTTs, some 250 companies – although that can amount to thousands of different instruments. In Italy, it’s 150 companies and in Spain 40.
Nonetheless, every single trade for an in-scope security is subject to scrutiny. You must prove which ones are taxable, which are reportable but non-taxable or just non-declarable, before you even work out how much tax needs to be applied and when. That will depend, in part, on the trading entity within your organisation. Different exoneration codes apply for market-makers or securities lending trades, for example.
The complexities continue to multiply. In France, if you trade the same security for the same account multiple times on the same day, you can net those trades and pay FTTs only on the net long position. But in a global, follow-the-sun trading environment, that’s far from straightforward.
In Italy, you also pay an FTT on certain derivative trades (as well as equities) i.e., if more than 50% of the underlying holdings of the derivative (on a VWAP basis) are in scope, determining which of the fixed price tax rates you pay.
These are just some illustrations of the way FTTs are putting operations, compliance, and corporate tax teams under pressure. The overall increase in the flow of both taxable and non-taxable trades over recent years, as a result of the increase in market volatility, has amplified this struggle.
Inevitably, there are costs involved. Fines and fees for missing tax deadlines are the highly visible price to pay for ineffectual tax management. But there are also less obvious opportunity costs.
If you minimise all your underlying costs – including transaction taxes – you maximise your margins. But inefficient tax management leaves money on the table – or rather in the tax man’s pocket rather than yours – and that’s before considering the costs of inefficient or inaccurate internal cross-charging.
A question of data
If we take a step back from the details of tax law, we can see that at heart this is an issue of data and data management. For many banks, the transaction tax burden has been taken very seriously. An increasing number of them are establishing discrete tax operations teams, pulling transaction tax management out of asset servicing functions and, in some cases, absorbing those tax operations into the broader corporate tax function that sits across the entirety of the bank.
However, viewed through the data lens, this is clearly an incomplete response. Manually processing transaction taxes at month end, or any other data-dependent function, is slow, often inaccurate and a drag on profitability, especially as labour costs continue to rise. It also deprives banks of the chance to improve tax efficiency today – or take advantage of advanced analytics, ML and AI to continue improving it tomorrow.
As we’ll see in our next blog, with this kind of uncertainty around transaction taxes and the need to optimise processing, it’s time for a long-term, strategic approach that enables banks to handle what they face now – and whatever comes next.
In the next post we’ll look at how and where the right technology makes the difference.