During Leaders Questions in the Dail this morning, Deputy Eamon Gilmore raised the issue of Contracts for Difference (CFDs) and the change proposed by the Revenue Commissioners in their tax treatment in 2006 which was reversed by me as Minister for Finance. He specifically asked who had lobbied me at that time in relation to the proposal.
I made clear to the House that I followed official advice in relation to the reversal of the proposed change by the Revenue and the Department of Finance has confirmed that.
A contract for difference (CFD) is a financial instrument that enables investors to bet on share price performance, without owning the shares. Stamp duty relief applies to share dealings involving CFDs (see attached note for information).
The Department of Finance has confirmed that in March 2006, the Revenue Commissioners announced that they proposed to change the existing practice whereby stamp duty reliefs were being applied to shares bought to cover CFD exposure.
Following the announcement by Revenue, the Department of Finance received representations that there would be severe consequences for the liquidity of the Irish Stock Market and, therefore, on the ability of Irish companies to raise capital here.
In particular, representations were made to the Revenue Commissioners and the Department of Finance by the Irish Stock Exchange and by the London Investment Banking Association. The issue was also raised by Davy Stockbrokers and Price Waterhouse Coopers.
The representations made by the London Association reflect the fact that the majority of the CFD business concerned originates with London-based firms. A survey of Irish Stock Exchange member firms conducted by the Exchange indicated that the aggregate value in 2005 of trades in Irish shares associated with CFD contracts represented 30% of the overall value of trades on the Irish Stock exchange for that year.
On the basis of submissions received from my officials at the time, I considered carefully the representations made as they seemed to have substance, taking account of the international nature of stock markets. In the circumstances, and having regard to the fact that the relevant stamp duty legislation predated the development of the CFD market, I decided to have the matter reviewed in advance of the next Budget and I issued a statement to that effect.
The issue was subsequently addressed in the context of Finance Bill 2007, with the introduction of 'Intermediary Relief', which was debated fully in the Oireachtas.
Ends
(See attached Briefing Note re CFDs)
Contracts for Difference - Information Note
A contract for difference (CFD) is a form of derivative instrument that enables an investor to take a position on stock and its likely performance, without owning the shares. Because they don't own the shares, they pay no stamp duty.
The seller of the CFD then is exposed to a risk that the price for the share concerned will move. To cover this risk, he purchases the share itself. Institutions relied on the application of either market maker or broker/dealer relief to avoid a stamp duty charge.
In March 2006 Revenue issued a clarification note on the stamp duty implications of buying shares to cover exposure under CFDs which stated that, in its view, these reliefs did not apply to shares bought to cover CFD exposure.
Following the announcement by Revenue, the Department of Finance received representations that there would be severe consequences for the liquidity of the Irish Stock Market and, therefore, on the ability of Irish companies to raise capital here.
In particular, representations were made by the Irish Stock Exchange and by the London Investment Banking Association. The representations made by the London Association reflect the fact that the majority of the CFD business concerned originates with London-based firms. A survey of Irish Stock Exchange member firms conducted by the Exchange indicated that the aggregate value in 2005 of trades in Irish shares associated with CFD contracts represented 30% of the overall value of trades on the Irish Stock exchange for that year.
The Minister for Finance at the time, Mr Cowen, considered, on the basis of submissions received from his officials, the representations made carefully as they seemed to have substance, taking account of the international nature of stock markets. In the circumstances, and having regard to the fact that the relevant stamp duty legislation predates the development of the CFD market, the Minister decided to have the matter reviewed in advance of the next Budget and he issued a statement to that effect.
The Minister was advised by the Revenue Commissioners that, in the light of the planned review, with a view to Budget 2007 announcements, and of the surrounding circumstances, they had decided to allow the existing practices of CFD issuers to continue pending the review. The Commissioners further advised that, in those circumstances and given the likelihood of that business transferring to non-Irish shares, it was unlikely that there would be any real loss of stamp duty arising from allowing the existing practices to continue pending the review.
The issue was subsequently addressed in the context of Finance Bill 2007, with the introduction of Intermediary Relief.
This provided that an intermediary is a person who carries on a bona fide business of dealing in securities and the entering into derivative agreements referenced directly or indirectly to securities shall be treated as carrying on a business of dealing in securities. This measure ensured that the purchase of shares related to a CFD would not attract stamp duty in these circumstances.
A CFD in itself does not attract a stamp duty liability and there was never any question that it would.
CFDs made up a significant proportion of financial instruments, as evidenced by the reactions in March 2006. Changes to the system in this regard could have had a negative impact on the securities market.
18 February 2009