Swiss stand to gain from EU transactions tax

Century-old stamp duty may be dampener

By Priti Patnaik

GENEVA (MarketWatch)—A plan for a European Union-wide financial-transactions tax could bolster Switzerland’s reputation as a financial center.

The tax, which the EU hopes would shore up the revenues of indebted euro-zone nations, would impose a tax of 0.1% on financial transactions conducted in countries that would introduce it.

  

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“If the EU introduces a tax and Switzerland doesn't, it is difficult to see how Switzerland would not come out ahead,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C., in emailed comments.

“Even if a small portion of EU trades slip out of the country to evade the tax, it would still amount to a large increase in volume for Switzerland,” Baker added. “I’m not going to argue for the virtues of being a tax haven as an economic growth strategy, but undoubtedly Switzerland would benefit to some extent. I can’t really see the story of it being a loser,” Baker said.

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In a country where the banking sector is substantially bigger than the country’s gross domestic product, banks dominate a large part of policy-making as well as the public imagination. Not only do they fund political campaigns, they are too big to be ignored.

Before the financial crisis, two of the largest Swiss banks, Credit Suisse Group AG and UBS AG, held nearly 90% of the total balance sheet of all banks in the country. But that model may not stand for long.

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The government is set to introduce wide-ranging changes on capital-adequacy requirements for some of its systemically important banks. And given the unrelenting pressure from the U.S. and the EU to liberalize the exchange of information on tax evaders, the Holy Grail of Swiss banking—secrecy—is also under attack.

What’s more, the Swiss already impose 0.15% to 0.3% as stamp duty on securities transactions. The federal stamp duties are indirect taxes on certain legal transactions such as the issuance of shares or transfer of securities or on the payments of premiums for some insurance policies. They were introduced following a popular vote in 1917 during the World War I to create much needed revenues.

Therefore, in the case of Switzerland, a financial-transaction tax could be a double whammy. “If a Swiss broker sells a security to a German, the Swiss broker would be deemed an EU resident for the purposes of the transaction tax. And that would trigger the situation that the Swiss broker has to pay not only the EU transaction tax but also the Swiss stamp duty. I don’t think the Swiss will be imminent gainers if the taxis introduced,” said Hans-Joachim Jaeger, a partner at Ernst & Young in Zurich.

Further, there may be no automatic repeal of the Swiss stamp tax if an EU-wide financial-transactions tax is introduced. Revenues from the Swiss stamp tax currently yield an estimated 4 to 5 billion Swiss francs ($4.35 billion to $5.44 billion) annually. The Swiss government is discussing the abolition of the tax but it may take years before it is phased out.

Samuel Brandner, a representative from UBS, said: “We think a [tax] should not be adopted because it would be disruptive to the efficient formation and transmission of capital, and would therefore adversely affect economic growth prospects.”

That fear isn't completely unjustified. The effect of any tax on the Swiss market may lower its price by about 8% if the tax is 0.2%—0.1% for each buying and selling party—according to estimates by Yakov Amihud, a professor at New York University’s Stern School of Business. Amihud expects part of the trading in Swiss stocks to migrate abroad. The estimates assume that after the tax an average stock is traded once a year. Debate on transaction tax heats up in Europe

“People can trade UBS, for example, in New York rather than in Zurich,” Amihud said. Many Swiss stocks are traded in New York through American Depositary Receipts (ADRs).

Still, trading can’t be dispersed in too many markets because both depth and liquidity are important. And the domestic market perhaps provides the best liquidity for most if not all Swiss stocks.

“But I can see a situation where the center of trading a Swiss stock will migrate in time to another market,” Amihud added. London, for example, could be a more suitable trading platform for Swiss stocks because of its time zone compared with New York.

Christian Casal, who heads consultancy McKinsey and Company’s Swiss office in Zurich, said, “If [the tax] is introduced, it would not only affect banking services and segments like classical trading, but also asset management, including hedge funds and high-frequency trading. All these businesses are very mobile, so they could migrate to another country quickly. In one possible scenario, they could migrate to Switzerland and strengthen our financial center even more.”

A proposal to examine the implications of Swiss participation in any EU transactions tax was rejected by one of the chambers of the country’s parliament last year.