Saturday, October 21, 2006

Stamp Duty

When Tata Steel of India buys Corus for £5 billion (assuming that Corus thinks the bid is high enough and doesn't extract even more money from them), they will pay the Treasury £25 million in stamp duty for the priviledge. When Dubai Ports bought P&O, or when Santander Bank bought Abbey National, cheques were dispatched from them to the Treasury for stamp duty in respect of the purchase.

Not only is the LSE attracting a lot of foreign bids for domestic companies, but London also remains the premier choice for foreign firms seeking an International Listing for the first time - If you are an Austalian, South African or Russian company seeking to raise money in a public listing, London is the place to go, and when their shares are bought by investors, a cheque is despatched to the Treasury in respect of the stamp duty. A large proportion of the investors buying these shares on the LSE are foreign firms too eg the American Brandes Investment, CALPERS etc. London is where people go when they seek diversification. All these investors too send cheques to the treasury for stamp duty when they buy shares.

Britain tends to be relaxed about all this foreign activity, in contrast to the USA where they got panicked at the Dubai ports takeover of P&O, which affected Ameircan ports as well as British ones, and banned outright the takeover of Unocal Corp by the Chinese - or France, which got panicky at the very suggestion that there might be a bid for Danone. The reason we're relaxed is because there is something in it for us; all these foreign firms send cheques to the Treasury - if they didn't then what's the point?

The Tories want to scrap stamp duty and meet the shortfall by taxing some other aspect of British life. The want to save Tata Steel some money and dump the cost on some poor Brit. The spurious justification is that stamp duty hinders the City's progress - I'm not sure how they can make such a claim with a straight face when the City is romping ahead of all it's rivals as though it was on steroids. Stamp duty is one of our oldest taxes, dating back to 1694, and has never hindered us (and is not hindering Hong Kong which is now the premier listing exchange for Chinese shares, and where stamp duty was introduced by the British and where it remains). There is no sensible justification for scrapping it.

6 comments:

Mark Wadsworth said...

1. What makes you think that Tata haven't some up with a cunning wheeze to avoid the Stamp Duty, like buying the Dutch holding company instead? Corus = merger of British Steel & Hoogovens. The Dutch got rid of Stamp Duty 1.1.06.

2. When there is a listing, no Stanp Duty is due on the issue of new shares to the public.

3. Many fund managers and so on are setting up funds that are listed in Dublin to save the Stamp Duty.

4. Although your facts are usually quite reliable, this time you are a bit off piste. I am not going to bother arguing with your conclusions.

snowflake5 said...

Tata also have to buy the UK listed shared to own Corus, so they will be paying Stamp Duty

Take your point about a new listing, but when the shares are subsequently traded, it generates income for the treasury.

As for fund managers setting up funds in Dublin - they may save on tax on the profits the funds generate, but I very much doubt that these funds are exclusively trading shares on the Dublin exchange. Like the American based funds, if they trade shares listed on the LSE, they will pay Stamp Duty to the treasury, because it is a transaction tax. This also applies to funds that are based in Bermuda and elsewhere. I think you are confusing corporation tax with stamp duty (and in a comment a few posts back you were arguing in favour of raising corp tax, so not quite sure what your point is!)

Mark Wadsworth said...

I know a heck a lot more about tax than you do.

The "Dublin" funds that I am talking about are of course set up and run from London, but the shares (or units) are traded in Dublin. This is largely a Stamp Duty saving device, the same goes for "Amercian Depositary Receipts" and so on.

snowflake5 said...

Sorry Mark, but the Exchange Traded Funds you are referring to are worth only £8bn, compared to the £1.6 trillion value of the shares traded on the LSE. It's peanuts.

Throwing away stamp duty on £1.6 trillion worth of LSE shares because you are worried about a piddly group of ETFs is like a diamond dealer discounting sharply just because someone else has opened a small cubic zirconia shop nearby. It's a different league.

There will always be a market for actual trading on the LSE, and companies involved in takeovers can't do them via derivatives. When other markets approach the size of ours, then perhaps the Uk may look at stamp duty again - but at the moment we're pulling away from the rest in size, and the amount of trading on the LSE is increasing, - if your thesis were true, it would be shrinking wouldn't it?

Come back and argue when the value of ETFs matches the value of the shares on the LSE (Hint, you'll be waiting a few decades, possibly forever).

Mark Wadsworth said...

As ever, you have all the statistics at your fingertips, thanks.

I must admit, although Stamp Duty is a bad tax in principle, it is very difficult to show what its distortionary effects are, i.e. how much more trading would be done in UK if it were scrapped; probably because the effect isn't that big.

Which of course begs the question, is all this trading in itself a Good Thing? What about "buy and hold"?

snowflake5 said...

You are correct in that there is a lot of churning of shares, some of which is un-necessary. On the other hand, anyone who bought and held in 2001 when the FTSE100 was at it's all time high has probably burnt their fingers.

I think govts should stay out of trading decisions and leave it to the fund managers to decide for themselves. Certainly stamp duty hasn't deterred churning (possibly because brokers earn fees larger than the duty on every transaction, so nothing will deter them).

Is it a good tax? It's levied on people who can afford to pay it, many of whom arn't Brits and therefore arn't voters! That makes it one of the best taxes there is.