OF FINANCIAL TRANSACTIONS TAXES
FLIGHT FROM TAXATION: LESSONS FOR CANADA
THE INTERNATIONAL EXPERIENCE AND
THE LESSONS FOR CANADA
A financial transactions
tax can be generally thought of as any tax, fee, or duty, imposed by a
government upon the sale, purchase, transfer, registration, etc. of a
financial instrument -- it is, for the most part, a turnover tax. It can
be broadly based or it can exempt a variety of instruments, or transactions
by certain types of traders. It can be an ad valorem tax or a specific
tax. It can be levied against transactions by residents or it can be levied
against domestic transactions, or both. The law can levy the tax on buyers
(as in the United Kingdom), sellers (as in Japan), or both (as in France).
This paper looks at the
international experience with financial transactions taxes (FTTs). It
is a companion piece to the background paper BP-418E, Financial Transactions
Taxes: Pros, Cons, Design Issues and Revenue Estimates.
A number of countries have
had an FTT for some time. An early example was the American tax on the
time sales of gold ("forward contracts" in todays nomenclature)
imposed during the Civil War.
As a general rule, the financial
transactions taxes found in other countries do not apply to such activities
as bank withdrawals, cheque writing, or obtaining financing for a car
or home. In Brazil, a temporary tax of 25 basis points(1)
on bank withdrawals was introduced in 1993, with a variety of special
measures for withdrawals of salary, pension benefits etc.(2)
This tax was, however, intended as a temporary measure in response to
a financial crisis; it was eliminated at the end of 1994.
The international experience
is based on a wide variety of tax designs. Often, transactions outside
national boundaries are not subject to tax; where they are so subject,
they pose considerable enforcement problems. Trading in national government
securities tends not to be subject to the tax. Specialized traders, such
as market makers or others providing liquidity to the market, are often
not subject to tax on their trades or are subject to reduced tax rates.
These features can significantly reduce the tax base upon which the FTT
Table 1 presents an international
comparison of direct revenues from FTT-type taxes in the mid 1980s. It
measures revenue against three different bases to give some indication
as to the revenue fertility of these taxes.
TRANSACTIONS TAXES AND REVENUES
(in basis points)
AS A PERCENTAGE OF:
VALUE OF EQUITY
30 & 15
18 & 55
50 on small trades
15 & 30
various state taxes
Source: L.H. Summers and
V.P. Summers, "When Financial Markets Work Too Well: A Cautious Case
For a Securities Tax," Journal of Financial Services Research,
Vol. 3, 1989, p. 275.
The table includes a wide
range of seemingly contradictory entries. Switzerland, with a tax rate
not much different from that of Germany, raised twelve times as much revenue
in relation to the size of the economy. Switzerlands role as a safe
financial haven has resulted at times in an undesirably strong currency
due to large capital inflows. The Swiss system of financial taxes was
at times designed specifically to stem this capital inflow,(3)
and this might well be the effect being picked up.
Italy, with a relatively
low tax rate, generates an impressive amount of revenue. But its tax revenue
as a proportion of the market value of equity is so out of line with that
of the other countries, and so large, that it appears untenable. The UK
tax, which also brings in an ample amount of revenue, taxes away only
0.01% of the market value of equity, far out of line with the tax in other
countries, such as Germany, that raise less revenue.
All these contradictions
suggest that the design and implementation of taxes vary substantially,
and in a way that cannot be captured easily in tabular form.
INTERNATIONAL EXPERIENCE (4)
There is not much literature
on the international experience with financial transactions taxes. The
United Kingdom and Sweden are the two countries whose experiences have
been studied most extensively. Although the UK has not had many problems
with its tax, the government has announced its commitment to eliminating
it. Sweden, on the other hand, abandoned its taxes after they proved to
be a disappointing revenue source with wide-ranging negative side effects.
In January 1984, Sweden introduced a 50-basis-point tax on the purchase
or sale of an equity security. Thus a round trip (purchase and sale) transaction
resulted in a 100-basis-point tax. The tax applied to all trades in Sweden
using local brokerage services and to stock options. It did not apply
to gifts or bequests. In July 1986 the rate was doubled. The next year,
a tax at half the normal rate was also applied against trades between
dealers. In January 1989, a tax on fixed-income securities was introduced.
The tax on fixed-income
securities was considerably less than on equities, as low as 0.2 basis
points for a security with a maturity of 90 days or less. On a bond with
a maturity of five years or more, the tax was three basis points.
On 15 April 1990, the tax
on fixed-income securities was abolished. In January 1991 the rates on
the remaining taxes were cut in half and by the end of the year they were
There were several reasons
for this change in policy. In the first place, the political climate in
Sweden had shifted. The taxes were initially supported because financial
transactions were viewed as destabilizing to the economy and as promoting
excessive wage differentials. This latter point was distasteful in a society
that places so much importance on income equality. The revenues from taxes
were disappointing; for example, revenues from the tax on fixed-income
securities were initially expected to amount to 1,500 million Swedish
kroner per year. They did not amount to more than 80 million Swedish kroner
in any year and the average was closer to 50 million.(5)
As taxable trading volumes
fell, so did revenues from capital gains taxes, almost entirely offsetting
revenues from the equity transactions tax that had grown to 4,000 million
Swedish kroner by 1988.(6)
(This point is lost entirely in data such as those in Table 1 on page
2, where only direct tax revenues are included.) Another reason
for the reduction in capital gains taxes was the decline in share prices
associated with the initial announcement of the tax and its increase.
On the day that the tax was announced, share prices fell by 2.2%. But
there was leakage of information prior to the announcement, which might
explain the 5.35% price decline in the 30 days prior to the announcement.
When the tax was doubled, prices again fell by another 1%. These declines
were in line with the capitalized value of future tax payments resulting
from expected trades. It was further felt that the taxes on fixed-income
securities only served to increase the cost of government borrowing, providing
another argument against the tax.
The Swedish system of taxes
also played a very profound role in causing trades to migrate to non-taxed
or lower-taxed jurisdictions. With the 1986 announcement that the equity
tax would double, 60% of the trading volume of the 11 most actively traded
Swedish share classes, accounting for one-half of all Swedish equity trading,
moved to London; thus 30% of all Swedish equity trading moved offshore.
By 1990, more than 50% of all Swedish trading had moved to London.(7)
Foreign investors reacted to the tax by moving their trading offshore
while domestic investors reacted by reducing the number of their equity
Even though the tax on fixed-income
securities was much lower than that on equities, the impact on market
trading was much more dramatic. During the first week of the tax, the
volume of bond trading fell by 85%, even though the tax rate on five-year
bonds was only three basis points. The volume of futures trading fell
by 98% and the options trading market disappeared. Trading in money market
securities, which faced a tax as low as 0.2 basis points, fell by 20%.
This reaction was due in large part to the existence of a wide variety
of non-taxed substitutes. Once the taxes were eliminated, trading volumes
returned and grew substantially in the 1990s.
The Swedish results cited
above are all consistent with those that economic theory would predict.
Events and factors other than the FTT could, however, cause similar results,
making it difficult to establish cause-and-effect relationships. The timing
and magnitude of the financial market effects lead one to look for dramatic
changes in explanatory variables. No such changes were evident in economic
or financial variables; however, they were evident in changing institutional
(i.e., FTT) variables.
This does not mean that
high FTT rates are needed to generate such results. The high rates simply
make the cause-and-effect relationship clear. Low rates would likely produce
similar qualitative results, albeit of smaller magnitudes, but they might
be masked by other factors.
The United Kingdom:
The UK tax, actually a stamp duty, is not levied on transactions per
se but on the registration of securities. Where transactions result
in a change of ownership that needs to be registered, the stamp duty comes
into effect. This tax does not apply to trades by non-residents, nor does
it apply to trades in foreign securities.
This stamp duty has been
in effect for many decades. In 1974 it was 2%. In 1984 it was reduced
to 1% and in 1986 it was halved. The current plan is to eliminate the
Trades can take place in
a variety of ways without changes in registration. For example, brokers
may register shares in their own name for the benefit of their customers.
It is then possible that clients could be trading shares without any change
in the official registration of the shares, as brokers traded shares amongst
their own clients. To take this factor into account, the British government
taxes the registration of these active nominees at three times the normal
Although the British stamp
duty raised about £800 million per year, it did lead to a number of market
responses designed to avoid the tax. Bearer securities grew at the expense
of registered securities. To some extent, investors switched from equities
trading to trading in equity derivatives that provided a similar return.
Investors also increasingly used American Depository Receipts (ADRs) which
allowed British active nominees to trade assets on American stock markets
without incurring British registration duties.
These stamp duties account
for about one-half of trading costs in the UK. With an elasticity ranging
from -1 to -1.7, the tax could have reduced trading volumes by as much
as 50%. This is consistent with the fact that trading volume as a proportion
of market value in London is only about 60% the equivalent volume in the
The Japanese government also levies an FTT, which, in the late 1980s,
was generating revenues of about US $12 billion per year. The Japanese
tax was at that time levied on both debt instruments (at a rate of three
basis points) and equity instruments (at a rate of 30 basis points). Prior
to 1988, the tax rate on equity transactions was 55 basis points.(8)
More recently, Japan has introduced transactions taxes on derivative products.(9)
OF FINANCIAL TRANSACTIONS TAXES
The material in this section
is taken from a variety of sources,(10)
some of which are out of date in certain respects. Not all the sources
agree on the set of taxes to include in the FTT category. For example,
the Securities Industry Association in the United States claims that no
FTT exists in Greece, Portugal or Spain, contrary to what is presented
here, based on equally up-to-date information. Also, the IMF study states
that Italy does not impose an FTT, even though some minor FTT-type levies
do continue to be applied there.
Of the countries listed
below, 15 have eliminated or reduced their FTT in the last decade, or
plan to reduce it in the near future. It appears to be the intention of
the European Commission to recommend that these taxes be abolished, rather
than working towards a harmonization of rates.(11)
Trading by non-residents or trading in foreign companies is exempt from
tax in Finland, France, Ireland, Italy, Switzerland and the United Kingdom.
Transfers of shares are subject to a 100-basis-point stamp duty when made
through a written agreement.
The states impose a transactions tax of six basis points on transactions
engaged in by financial institutions. The maximum duty is A$1,500 on any
transaction. An additional stamp duty was removed in 1991, at which time
the tax was 30 basis points.
Three types of taxes exist. A capital duty and a securities tax apply
respectively to any increase in a companys capital stock and any
initial issue of interest-bearing securities. A transactions tax also
applies to exchanges in Austria, or elsewhere if one party is Austrian.
The rate is four basis points for government bonds and 15 basis points
for equities. Taxes can be reduced by trading off the exchange.
An exchange tax applies to transfers of financial securities. The tax
ranges from a high of 35 basis points to a low of 8.5 basis points. Taxes
are subject to maximum amounts and can be avoided by trading outside the
Borrowers, purchasers of securities or foreign currency and purchasers
of insurance pay tax. The rate varies from a low of 0.4 basis points on
borrowings to a high of 150 basis points on longer-term debt. A punitive
tax of 13000 basis points was levied on some foreign exchange transactions.
It has subsequently been abolished for some transactions. At the end of
1994, a temporary 25-basis-point tax on banking transactions was removed.
There is no FTT.
There is no FTT, but a stamp duty is applied to a limited set of financial
In Shenzen economic zone a 60-basis-point tax is applied to stock transactions.
A limited set of transactions is subject to a stamp duty. The initial
issue of stocks and bonds and their transfer are not subject to stamp
duty or FTT.
All shares sold by a resident of Denmark are subject to a 50-basis-point
tax; it was 100 basis points prior to 1995. Financial institutions are
not subject to the tax and new issues and transfers due to mergers are
not taxed. A stamp duty applies to the issue of new bonds or loan agreements.
The rate is 30 basis points for registered securities and 100 basis points
for bearer bonds. Non-residents are not subject to Danish tax.
A 160-basis-point stamp duty applies to the transfer of securities off
the exchange. Transfers between non-residents are not subject to duty.
A 50-basis-point transactions tax was eliminated in 1992.
France levies a stock exchange tax on the transfer of securities at a
rate of 30 basis points for small trades and 15 basis points on large
trades. These rates apply to both resident buyers and resident sellers
so a small trade between two French residents triggers a total tax of
60 basis points. It is only recently that non-residents have been exempted
from this tax. Taxes can be avoided by trading outside the country. There
is a maximum tax of 4,000 francs per trade and very small trades get a
full tax rebate.
A registration tax of 480
basis points was levied on equity capital prior to 1993; it is now 100
basis points. In certain instances another 100-basis-point exchange tax
All Germanys taxes were abolished in 1991. Prior to that year, residents
paid as much as 18.5 basis points on the sale of stocks while non-residents
paid a six-basis-point tax.
A 30-basis-point transfer tax is imposed.
Stamp duties are levied on registration documents for financial transactions.
The duties are in some instances fixed, ranging from HK $3 to HK $20,
and in some instances ad valorem, ranging from 25 basis points
to 300 basis points.
Increases in share capital are subject to registration duty and transactions
are subject to stamp duties.
The transfer of ownership of securities is subject to a registration tax
which is levied at a fixed amount. Stamp duties are also applied at a
rate of five basis points in certain circumstances. These can be avoided
by trading outside the country.
Securities transactions taxes are levied at rates of 30 basis points for
shares and three basis points for government bonds in the event of a sale.
These rates were as high as 55 basis points prior to 1990. Transfers by
way of gift, bequest or merger are not subject to tax. Securities companies
pay a lower tax rate and there is no tax on government money market securities.
These taxes can be avoided by trading outside the country.
No FTT is levied.
A 30-basis-point transfer stamp duty on purchases and sales of securities
was eliminated in 1992. A five-basis-point clearing fee is imposed, to
a maximum of $100. It may be avoided by trading off the exchange.
There is no FTT on the transfer of shares.
No FTT is levied on transactions although every new issue of shares is
subject to a capital duty. The Netherlands did impose an FTT in the 1980s
at over 100 basis points. It was abolished on 1 July 1990.
Stamp duties are levied on the issue and transfer of financial securities.
A transaction levy was eliminated in 1992. A five-cent duty applies to
No FTT is levied.
All financial transactions are subject to a stamp tax, applied at varying
rates. Incorporation of a new company triggers a stamp tax and registration
A stamp duty of 20 basis points was applied to financial transactions
prior to 1992. A wide variety of instruments were exempt from the tax
and there was a maximum that was applied to debentures. A registration
fee is also imposed on new share capital. Other fees equal to 15 basis
points are in existence but these can be avoided by trading off the exchange.
An FTT of 50 basis points is levied on transactions, although it may be
reduced or eliminated by Presidential decree.
A 600-basis-point transactions tax applies when control of a company changes
The Swedish system of transactions taxes was abolished in 1991. At one
point the turnover tax was as high as 200 basis points for equities.
A stamp duty applies to the purchase of securities. It is 15 basis points
for Swiss securities and 30 basis points for foreign securities. Certain
transactions are exempt. These taxes can be avoided by trading outside
the country. Rates have been reduced since 1985.
The seller of securities pays an FTT of 30 basis points on the sale of
shares and 10 basis points on other transactions. This tax rate was as
high as 60 basis points prior to 1993.
There is no FTT. The Securities Exchange Commission charges a modest fee
and some states levy small taxes. Until 1965 the United States levied
a stamp tax on the issue and transfer of equities and bonds. The rate
was 10 basis points or less.
A stamp duty of 50 basis points applies to the sale of stock and other
securities. This duty applies only to domestic securities and a previous
government budget proposed the elimination of this duty.
FLIGHT FROM TAXATION: LESSONS FOR CANADA
Financial products are probably
the most mobile of any goods or services offered by the economy. Modern
telecommunications and information-processing technology is making the
industry even more footloose. Since these types of transactions can take
place without any physical contact between parties, without any physical
contact with intermediary agents, and without any physical product moving
from one party to another, a Canadian investor can deal almost as efficiently
and expeditiously with a broker in New York as with one in Toronto. What
is important is that the investor must have confidence that trades take
place at agreed-upon times and prices and that ownership of securities
can somehow be enforced. Investors also demand competence and market knowledge
from their traders and financial advisors. The American financial market
has all these characteristics to some extent.
The most dramatic modern
example of such migration was the development of the Euro-dollar market
in response to American government attempts to control capital exports
and place other regulations on the banking system. A financial market
dealing in American dollars and American dollar denominated securities
developed in London, bypassing completely the United States and American
government control. This market grew from US $20 billion in 1964 to over
US $3 trillion in gross size by 1988.(12)
The migration of Swedish
financial transactions was discussed above. But Switzerland, a world banking
centre, also suffered from financial migration. Its relatively high transactions
on money market funds hindered the development of such an internal market.
Its stamp duty also caused the mutual fund business to migrate to Luxembourg
and the Eurobond and equity business to go to London. By 1993, 22% of
trading in Swiss companies was taking place in London, up from 16% only
two years earlier. In 1993, the Swiss government abolished the 15% stamp
duty on a wide variety of securities to stem such migration.(13)
The FTTs impact on
the location of financial transactions was also felt in Germany and France.
In 1989, before the elimination of Germanys taxes, 30% of trading
in German government bonds and 50% of trades in other DM-denominated bonds
took place in London, as did 80-90% of trades in floating rate DM-denominated
about one-third of the trading in French and German public companies took
place in London, where almost one-half of the daily volume of trades is
in shares of foreign companies.(15)
The City of London has had
great success in attracting financial services activity from other countries
as a result of regulation and taxation. Thus it is no wonder that one
of the most ardent supporters of an American FTT is the London financial
The fact that an FTT drove
a significant part of Swedish equity trading offshore is very significant
for Canada, which, like Sweden, is a relatively small economy with a large
and well developed financial market nearby. Canada is even more sensitive
to a potential movement of trading and investment activity because of
its long history of open capital borders and American investment and the
fact that it shares a common language with the U.S.
The Toronto Stock Exchange
includes a small number of foreign listings such as British Airways, Fosters
Brewing, Benetton, etc. An FTT that made Canadian transactions costs very
much more expensive than American could prompt these firms to withdraw
their listings here. More importantly, though, about 200 Canadian-based
securities are interlisted on the TSE and American exchanges. Some of
the prominent Canadian companies with significant foreign trading include:
Barrick Gold, Cognos Inc., Cominco Ltd., Gandalf Technologies, Moore Corp.,
Magna International, Newbridge Network, Northern Telecom, Placer Dome,
and Royal Oak Mining. Only 58% of the volume and 55% of the value of trades
of these 200 securities took place in Canada during 1995. The rest took
place elsewhere, primarily on the New York Stock Exchange, which itself
accounted for 29% of the value of trades for Canadian-based firms.(17)
The total value of trading of Canadian securities in the United States
was $113 billion, representing 45% of equities transactions in Canada,
all without an FTT.
Canadian stock exchanges
are well aware of the need to be competitive with their American counterparts
and are cognizant of their loss of market share. They are seeking to increase
addition, the Toronto Stock Exchange in 1994 reduced its maximum trading
fee from $1,000 to $100 to win back market share from its American competitors.(19)
The close economic and financial ties between Canada and the United States
ensure that Canada would not be able to avoid the movement of financial
transactions to other jurisdictions, as happened in other countries that
A basis point is equal to one-one hundredth of a percentage point.
"Brazil: Financial Transactions Tax," International Tax Digest,
Vol. 5, No. 3, May-June 1993.
P.B. Spahn, International Financial Flows and Transactions Taxes: Survey
and Options, IMF Working Paper WP/95/60, International Monetary Fund,
Washington, D.C., June 1995.
The primary source for this information is K.A. Froot and J.Y. Campbell,
Securities Transactions Taxes: What About International Experiences
and Migrating Markets?, Catalyst Institute, Chicago, Ill., July 1993.
Froot and Campbell (1993), p. 18.
S.R. Umlauf, "Transaction Taxes and the Behavior of the Swedish Stock
Market," Journal of Financial Economics, 33 (1993), p. 227-240.
Ibid., p. 229-30.
L.H. Summers and V.P. Summers, "When Financial Markets Work Too Well:
A Cautious Case for a Securities Transaction Tax," Journal of
Financial Services Research, 1989, p. 261-86.
Y. Masayuki, "Legal and Tax Aspects of Securities Lending Transactions
in Japan," Worldwide Directory of Securities Lending, 1995-96.
C.S. Hakkio, "Should We Throw Sand in the Gears of Financial Markets?"
Federal Reserve Bank of Kansas City, Economic Review, Second Quarter;
1994; J.M. Schaefer, C. Hildebrandt and D.G. Strongin, "The International
Trend away from Transaction Taxes: Lessons to Be Learned," Securities
Industry Trends, Vol. XX, No. 4, 18 August 1994; P. Kupiec, A.-P.
White and G. Duffee, "A Securities Transaction Tax: Beyond the
Rhetoric," in G.G. Kaufman, ed., Research in Financial Services:
Private and Public Policy, JA1 Press Inc., Greenwich, Conn., 1993;
and Spahn (1995).
Kupiec, White and Duffee (1993), p. 61.
M. Goodfriend, "Eurodollars," in Federal Reserve Bank of Richmond,
Instruments of the Money Market, 1993; and "The Way We Were,"
The Economist, 3 October 1992.
"Swiss Finance: On Deaf Ears," The Economist, 28 August
1993, p. 72 and 74; and A.W. Lo and J.C. Heaton, Securities Transaction
Taxes: What Would Be Their Effects on Financial Markets and Institutions?,
Catalyst Institute, Chicago, Ill., December 1993.
Kupiec, White and Duffee (1993).
Schaefer, Hildebrandt and Strongin (1994).
J.A. Grundfest, "The Damning Facts of a New Stocks Tax," The
Wall Street Journal, 23 July 1990.
Toronto Stock Exchange, Review, Vol. 61, No. 12, December 1995,
Toronto. See also Toronto Stock Exchange, Official Trading Statistics,
C. Clark, "ME Would Lose Stock-Trading to Toronto under Co-operation
Plan," The Gazette (Montreal), 25 January 1996; and "ME
Plan Could Offer Escape from the Balkans," Financial Post,
25 January 1996.
The Toronto Stock Exchange, Annual Report, 1994, Toronto, 1995.