What next for the EU Financial Transaction Tax?

What next for the EU Financial Transaction Tax?

The Financial Transaction Tax (FTT) will exceed member states’ tax powers, the EU Council Legal Service has concluded in its recent legal opinion. While the opinion is non-binding, the strength of the legal objections is likely to accelerate moves to scale back the design of any common levy. Dan Neidle, partner at Clifford Chance, comments on the implications this could have on the future of the FTT.


What’s the issue?

The European Commission’s proposal to introduce a €35bn eurozone levy with global reach would both exceed national jurisdiction and infringe on EU treaties and discriminates against non-participating states, according to the EU Council Legal Service. On the other hand, Algirdas Semeta, EU tax commissioner, stated that the proposal is legally sound and fully complies with EU treaties and international law.


In general, why would a legal opinion be sought, as was the case in relation to the FTT?

The meetings of the EU Council FTT Working Group are not open to the press or the public, so one cannot be sure—but it seems a number of member states expressed doubts about whether aspects of the FTT were compatible with EU law, and sought the opinion of the Council Legal Service. These doubts have been gathering ever since the EU FTT was first proposed back in 2011. While the Commission insists the FTT is compliant with EU law, this has never amounted to more than an assertion. So this seems to be the first time member states were provided with legal analysis by an EU institution—which makes the Council Legal Service’s conclusion so incendiary.


What were the main points of interest and what does this mean for the proposals relating to the FTT?

The EU FTT has always been based around the ‘residence principle’—the idea that entities established in the ‘FTT zone’ are subject to the FTT on their worldwide financial transactions, and entities outside the FTT zone are deemed established in the FTT zone if they transact with someone within it, and then taxed on that transaction.


The Council Legal Service concluded that the ‘residence principle’ is contrary to EU law on four separate grounds:

• discriminating against non-participating member states

• infringing their taxing competency

• violating the norms of customary international law, and

• restricting the free movement of capital

Some of these points are more persuasive than others, but a marker has been set that cannot now be undone. The recent EU law challenges to UK stamp duty have cost the UK government billions in refunded tax and interest. Would the 11 [participating member states] really risk a repeat of that experience, on the far larger scale of the FTT?


Presumably UK markets should welcome this development—but are there any concerns?

It’s hard to predict what will happen next. One possibility is that the FTT continues, but with the residence principle removed. That would leave the FTT applying only to securities where the issuer is in the FTT zone (ie the ‘issuance principle’).


There would still be many questions as to how the tax would work—in particular the scope of the exemption for intermediaries, the application of the tax to cleared instruments, and the joint and several liability principle. These would create a number of challenges for those in the UK dealing in FTT zone securities—but the good news would be that others would hopefully not be affected.


Another possibility is that the project is quietly shelved. The focus may then turn to other novel ways of taxing the financial sector, whether changes to VAT or new taxes such as financial activities taxes—but the Commission may hesitate before proposing taxes with extra-territorial effect on the UK and other non-participating member states.


We also can’t discard the possibility that the eleven participating member states proceed with the current proposal and risk successful EU law challenges from taxpayers. But this would seem astonishingly reckless.


Looking beyond the markets, are there benefits in a wider context?

Pension funds, unit trusts and other consumer investment vehicles have always been fully subject to the proposed EU FTT—and that’s aside from the likelihood (according to those pension funds I speak to) that their market counterparties would pass FTT costs onto them. So clearly good news if its scope is to be reduced.


What is the likely timetable for the FTT to come into effect?

If there is rapid agreement to proceed with a narrower issuance-based FTT then it is just about possible it could be implemented by mid-2014, but that would be very challenging. Early 2015 is probably more realistic.


What steps would you recommend for firms who might be affected?

Given the uncertainty I would say it is still too early spend management time and adviser fees preparing for the tax. Better to keep a close eye on developments, provide input into representations from industry bodies, and be ready to move quickly for when (and if) the final form of the tax becomes clear.


This was first published as a Legal News Analysis piece in LexisPSL Financial Services. The views of our New Analysis interviewees do not necessarily represent the views of the proprieter.

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