Global FS Tax Newsflash 26 August 2°13. The Italian Financial Transaction Tax (“FTT, has now been in force since 1 March 2013. The regime comprises three taxes; a tax on equities, a tax on derivatives and a tax on high frequency trading.
Following the introduction of the tax, market participants have been seeking further clarity on a number of areas, most notably the payment and reporting requirements and the application of the derivatives tax. This lack of clarity led to the announcement in June of the deferral of the first payment deadline from 16 July to 16 October 2013, and the deferral of the start of the derivatives tax from 1 July to 1 September 2013.
In recent weeks we have seen the release of the payment and reporting provision and, more recently, the release of a Frequently Asked Questions (“FAQs”) document. This bulletin provides a recap of these recent developments and an analysis of the key points from the FAQs.
At the start of July, institutions within the scope of the Italian FTT regime were waiting for two documents from the Italian tax authorities. Firstly, the authorities were required to release a “provision” on the rules for payment and reporting of the tax (“the Provision”) which would enable the tax to be collected and allow taxpayers to meet their compliance obligations. Secondly, the authorities had indicated that they would release a “circular letter” which, it was hoped, would clarify certain aspects of the Italian FTT regime, including the derivatives tax.
The Provision was released on 18 July 2013. As highlighted in our e-mail alert of 19 July 2013, as well as clarifying the reporting and payment mechanisms the Provision also introduced some substantive changes to the Italian FTT regime. The detailed rules for the regime are set out in a decree released by the Italian Ministry of Finance on 22 February 2013 (“the Decree”).
The substantive changes related mainly to the identification of the party responsible for tax payment where the execution of the transaction involves a chain of “intermediaries” (i.e. parties that qualify as banks, trust or investment companies under the regime). Under the Decree, the default position is that the payment obligation falls on the intermediary involved in the execution of the purchase for the end purchaser, except where the end purchaser is itself an intermediary.
The Provision changed this position by defining two “classes” of intermediary. Broadly, the payment obligation falls on “first class” intermediaries (typically Italian banks and Italian investment companies, and other entities authorised to trade on own account, execute client orders or receive and transmit client orders, wherever located). “Second class” intermediaries have no responsibility for payment if a first class intermediary is involved in the purchase.
The Decree also differentiates between intermediaries located in so-called “white list” countries and “black list” countriesl. Under the Decree, if a transaction involves a chain of intermediaries, including a black list intermediary, that intermediary is treated as a final purchaser and responsibility for tax payment passes to the nearest white list intermediary. Furthermore, black list intermediaries cannot confer the exemptions on exempt parties, such as certain pension funds.
The Provision expanded the rules for intermediaries located in black list jurisdictions. Broadly, under the Provision a black list intermediary with an Italian branch, or a branch in a white list jurisdiction, can be treated as a white list intermediary. The Provision also introduced a procedure under which other intermediaries located in black list jurisdictions could be treated the same as a white list intermediary, either by appointing a representative or by agreeing to provide prescribed information.
Following the release of the Provision, on 8 August 2013 the Italian Finance Ministry released a FAQs document providing guidance on certain issues relating to the equities tax.
Key points from the FAQs
The FAQs document includes responses to 32 questions covering a range of areas relating to the equities tax. Among various clarifications and points of detail, the key points of interest in the FAQs can be broadly categorised as those relating to the scope of the tax, and those relating to exemptions and exclusions.
Scope of tax
- The treatment of certain corporate actions is addressed. Per the FAQs, stock dividends are excluded from the regime.
- Guidance is provided on the tax treatment of the creation of American Depositary Receipts (“ADRs”). The FAQs state that only the final sale of the ADR to the client is taxable — the purchase of equities by the intermediary, transfer of equities to the depositary bank and issuance of the ADR to the intermediary are all outside the scope of the tax.
- Guidance is also provided on the tax treatment of creating exchange traded funds (“ETFs”), which mirrors the guidance already released in the report to the Decree. The purchase of taxable equities by a creation agent, to contribute to an ETF in exchange for ETF units, is taxable. Where an ETF is created by a contribution of cash to an ETF which the ETF uses to purchase taxable equities, the purchase of the shares by the ETF is taxable.
Exemptions and exclusions
- The Decree included an exemption for brokers acting in a “riskless principal” capacity. However, the exemption includes a requirement that the intermediary buys and sells securities for the same price, which creates an issue if brokerage fees are included in the bid/offer spread rather than charged separately (because this results in different buy and sell prices). The FAQs confirm that brokerage fees should not be taken into account in evaluating whether the purchase price and sale price are the same.
- It is confirmed that a purchase of own shares is exempt from the tax, provided such shares are cancelled automatically upon purchase (rather than purchased and subsequently cancelled).
- It is confirmed that transactions between “sister” companies within a group, indirectly held by the same party, can benefit from the intra¬group exclusion. The FAQs also confirm that the intra-group exclusion is available to commonly controlled unincorporated mutual funds.
When will the circular letter be issued?
Current indications suggest that further FAQ documents are being prepared, covering the derivatives tax, the high frequency trading tax and the market maker exemption. We understand that these FAQs may replace the circular letter, or it may be that any circular letter released is simply a consolidation of these FAQ documents.
Whilst the FAQs on the equities tax include some useful guidance and welcome clarification (for example, concerning the application of the “riskless principal” exemption), the big outstanding issues relate to the derivatives regime and, to a lesser extent, the application of the market maker exemption. There is frustration amongst market participants that detailed guidance is yet to be provided on the derivatives tax and, with the start date for the derivatives tax now very close, there is no guarantee that further derivatives guidance will be released in advance of the 1 September 2013 start date.
What’s the latest position on the EU FTT?
As we anticipated, there have been no signs of progress with the EU FTT discussions between the Participating Member States over the summer. With the German election taking place in September one might expect momentum to return to the negotiations in the weeks and months following the election.
That said, the pause in activity with the EU FTT does present an opportunity for institutions to take stock of the processes and systems implemented for the Italian FTT (and the French k 1 11 and to consider how these might be improved, having regard to the potential requirements of an EU FTT.
Stop press: a revised Decree
Yesterday evening, the Italian Ministry of Finance released a document proposing draft amendments to the Italian FTT. It is currently only available in Italian and we will release a bulletin next week with an analysis of its contents.