A proposed EU financial transaction tax (FTT) could discourage use of the foreign exchange (FX) market by typically raising costs of doing business by up to 700 percent, a report said on Monday.

The report by the Global Financial Markets Association (GFMA) said that due to the double-sided nature of the proposed tax, transaction costs for pension funds would increase by around 1,500 percent. And they could reach as high as 4,700 percent for some FX products such as those that involve short-dated swaps with a very low transaction cost.

FX transactions are used for a variety of purposes, such as issuing a bond to international investors, purchasing raw materials abroad, exporting goods overseas and protecting the value of pension investments made in other currencies.

There are concerns that an FTT levied across 11 EU member states might discourage European businesses and funds from trading FX products.

James Kemp, managing director of the GFMA's Global FX Divison (GFXD), said: "Given the need for Europe to kick-start economic growth, it is crucial to ensure that European companies of all sizes are able to compete internationally. FX products are central to their ability to do this.

"In addition, the proposed tax risks becoming a disincentive for businesses to hedge risk which could increase their earnings volatility and business risk," he said.

"We urge the European Commission and those countries involved to reconsider the scope of any proposal to proceed with the FTT and, on the basis of the work undertaken by the GFXD, its application to FX instruments."

Eleven EU states, led by Germany and France, agreed to push ahead with the tax last year after failing to convince all 27 EU member states to sign up to it. The tax aims to force banks to contribute to the cost of cleaning up after the financial crisis but doubts are growing among regulators about its efficacy.

Reflecting such concerns, EU officials working on the FTT told Reuters in late May that they were set to drastically scale back the levy, slashing the charge by as much as 90 percent and delaying its full roll-out for years.

The revisions had yet to be formally proposed, but would represent a major victory for banks opposed to the FTT.

The European Commission recognised in 2011 that including FX spot transactions in the FTT would inhibit the free movement of capital under the Treaty on the Functioning of the European Union. It also raised concerns about including other products.

The GFXD has since suggested that FX swaps, forwards, options and NDFs also be excluded from the scope of the FTT proposal.

The Economic Times