Late last month the EU Commission opened a public consultation period over new taxes which could hit GPs’ pay and deal activities.
The Commission is calling for a globally applied financial transaction tax, which would tax each financial transaction based upon its value. If passed, fund managers could theoretically be hit when borrowing capital or anytime portfolio assets swap hands, explains Judy Harrison, a senior associate in the tax team at London-based law firm Norton Rose.
At the EU level, the Commission is calling for states to implement a financial activities tax, which would be applied to the profits and remunerations of companies in the financial services sector. However, it is unclear whether private equity managers would be caught by the proposal says Mark Stapleton, a tax specialist at Dechert, a law firm.
“Although the Commission's Consultation Paper refers to banks and alternative investment funds, there is no specific reference to fund managers or private equity funds which will hopefully be outside the scope of the proposed tax”, he elaborates.
Last week the EU Parliament passed resolutions in favour of the proposed taxes, with some MEPs arguing Europe should lead the way in new global financial transaction taxes.
“Parliament has taken a clear political stance on this matter,” said Peter de Proft, head of the European Fund and Asset Management Association, a trade body, in an interview with PEM. “The funds industry is being swept in by taxes primarily intended for the banking sector.”
The funds industry is being swept in by taxes primarily intended for the banking sector
Peter de Proft
In October the Commission first proposed the new taxes arguing the financial sector “needs to make a fair contribution” to cash-strapped governments who provided a lifebuoy during the credit collapse.
The Commission‘s reasoning is however “seriously flawed”, and makes “no acknowledgement of the fact that the funds industry has not benefited from government support and would not expect to rely on state bailout as a safety net”, said de Proft at the time.
In its consultation paper, the Commission asks respondents whether they feel alternative investments played a major role in the crisis and whether the proposed taxes should only be applied to the banking sector.
In response to the opening of the public consultation, EFAMA will consult with member firms and other industry lobbying groups, including the European Private Equity & Venture Capital Association (EVCA), to craft a “a very nuanced submission”, said de Proft.
Other rationales for the tax put forth by the commission include the need to curb high-speed trading, speculation and provide greater incentive for long-term investing. These risk-reducing measures, however, do not apply to the private equity class, says Simon Horner, a spokesperson for the British Private Equity and Venture Capital Association (BVCA).
“Private equity doesn’t engage in frequent trading or short-term investing”, said Horner, who added the BVCA is expected to submit its response to the Commission sometime in mid-April.
The Commission will be taking responses until 19 April.