By Chas Roy-Chowdhury, head of taxation, ACCA
The news about the proposed Financial Transaction Tax, for the 11 EU member states that have signed up to adopt it under the procedure of “enhanced cooperation”, being potentially illegal, has created a lot of debate.
The tax, although to make sure that the financial sector makes a fair and substantial contribution to public finances and pays back at least part of what the European taxpayers had to pre-finance during bank rescue operations, could have quite the opposite effect.
The legislative proposal – should it ever come into effect, as the timeline foreseen for adoption of this controversial proposal by 2014 is not likely to be met – suggests to levy the tax on all financial transactions, provided that one of the parties is domiciled in one of the 11 participating countries. If one of the parties concerned is outside the FTT system, the taxing country – an FTT participant – would collect the tax to be paid by the institution as well as the tax paid on its own territory. The result could be that member states willing to adopt the measure will essentially be limiting their trade with countries which have not adopted it
A global approach needs to be agreed on to implement some form of FTT that would work for all, and help economic recovery by encouraging global trade.
The tax in its current form, as proposed by the European Commission, , while up to each participating country, would need to be tightly ring-fenced to be within their own territories and not extra-territorially as currently proposed, otherwise, according to the Council’s legal service opinion dating 6 September, this situation would be “discriminatory” in certain respects, and could result in “a distortion of capital movements” as well as in the unjustified exercise by participating countries of their jurisdiction “over entities outside the area concerned by the legislation.
In addition, the FTT as it stands, could risk being footed by the consumer rather than the banks it was intended to levy.
In a Financial Times article last week, it came up with some points on the legal debate of the implications in introducing an FTT:
- This is an unusually clear, blunt and damning legal opinion on a flagship European Commission proposal. Most Council legal service opinions are a model of equivocation. To be as forthright as this, the service needs to be absolutely confident about the legal argument, or enjoy a permissive political backdrop to make the case (i.e. important finance ministries either agree or are not displeased to see the opinion published).
- It is non-binding. This is not formally the end of the FTT — the talks go on. The Commission legal service completely disagrees with the Council’s viewpoint and will likely respond. Such differences are not unusual, far from it. What is rare is for the differences to be put to paper so starkly. This is not a happy moment for the Commission, especially given the political capital it spent on promoting this proposal.
- The politics was already moving against the most ambitious models for a Eurozone FTT. Many of the 11 euro area states looking to agree an FTT have been public about their reservations — France, Italy, Spain and (to a degree) even Germany. This opinion will likely accelerate the process of scaling back the original Commission proposal. That applies to its reach beyond the Eurozone, the range of transactions it covers and the rate that is applied.
- This may well be the death-knell for the so-called “residence principle”. This Commission-designed provision basically meant that financial institutions were taxed according to where their headquarters are based, rather than where the trade is executed. It was the crucial anti-avoidance provision that meant the FTT covered trades in London, Singapore and New York. The Council legal service basically argues that one of the core parts of that provision is unlawful because of its impact on states outside the FTT zone.
- An FTT could still emerge, albeit in far less ambitious form. The legal attack on the residence principle naturally gives a boost to those countries that are happier to see a stamp duty style tax. That imposes a levy depending on where the instruments are issued, rather than where the people trading it are based. The trouble is that it is much harder to design a stamp duty for derivatives — the instruments the FTT was primarily intended to target.
- This is a big win for the UK, which has long been making the case that the FTT is illegal and extraterritorial. That said, the legal challenge lodged by the UK strictly addressed a different issue — the process by which the 11 Eurozone states decided to move ahead as a vanguard to agree a tax that other EU states rejected. Nevertheless it is almost certain that the UK would sue over the residence principle as well, if it ever emerged in practice.
This tax was always going to be difficult to agree and implement. The Commission will now have to present solid arguments to member states and may potentially have to narrow the scope of its proposal. FTT should ideally only be implemented after global agreement otherwise it may cause those member states adopting the tax to lose financial sector businesses and jobs. In addition the Commissions own calculations showed that if FTT were introduced across the EU it would reduce growth by 0.3%. If such a growth reduction were to occur across only eleven member states then the negative growth could be even greater for the adopters.