Editorial: Taxing times

Asia's response to the EU's proposed financial transaction tax is a sign of the region's refusal to accept the extraterritoriality of western regulations willy-nilly

The European Union has undoubtedly brought some significant benefits to its members – the ease of travel across borders for its citizens being an obvious example. But the latest financial transaction tax proposal from 11 members of the union may not be wholly beneficial.

The decision by those 11 states to imperil their financial sectors with the FTT should only be of concern to those in Asia invested in eurozone bank stocks. However, the decision to levy the FTT globally potentially sucks Asia's financial sector in, according to a London-based senior management source from a European bank. "This is the extraterritoriality aspect. If you deal with [a European security], it doesn't matter if an Asian bank is dealing with an Asian bank, they have to pay the FTT. At the same time, if an Asian bank deals with a European bank, out of the European branch, it would be fully subject to the FTT," he says.

Even if the EU wanted to collect its winnings from levying the FTT globally, it would struggle to enforce it in Asia and it's doubtful that this is the intention of eurozone policy-makers. Instead it is another example of the parochial failure to even consider the impact of European financial regulation beyond its borders which is also evident in the European Market Infrastructure Regulation (Emir). Emir's failure to provide for alternatives for clearing trades in countries where the domestic CCP has not reached equivalency with the EU threatens to drive European banks out of markets where local clearing of some products is mandated.

News that India is considering not bothering to apply for equivalency may be driven as much by irritation at being dictated to, as being a realistic assessment of the potential to successfully bring the country's insolvency and netting laws into line with European determined norms within the few short months available. If so, it is welcome sign of a more muscular approach from Asian authorities to dealing with the attendant demands of resolving a financial crisis that was born in London and New York, not Mumbai or Singapore.

The OECD's 2013 South-east Asian Economic outlook report predicts healthy 5.5% average growth for its 11 member states over the next five years. With prospects for the rest of Asia also looking brighter than in Europe it would be unfortunate if economic growth was jeopardised by disruption of the region's capital markets due to ill-considered regulation born in Brussels.

Aaron Woolner