In another blow to the controversial proposed financial transaction tax (FTT), finance ministers representing the 11 participating Member States failed to reach agreement on the proposal in advance of the December 2014 deadline, which they had committed to in May of this year.

The proposed FTT is intended to be implemented progressively with the taxation of transactions in shares and some derivatives to be implemented during the first phase with further steps to be taken when economic impact is duly considered.

On 4 December 2014, the EU Council’s Italian Presidency issued a progress report highlighting the key issues which still remain unresolved. These are set out below.

Scope of the FTT for derivatives

Further work is required in relation to the scope of financial derivatives transactions, particularly in relation to identifying the categories of derivatives to be subject to the FTT in the first phase.

A previous report issued by the EU Presidency on 31 October 2014 outlined that most participating Member States are in favour of taxing equity derivatives (where the underlying equity is within the scope of the FTT) in the first phase of the FTT.

Some Member States wish to include interest rate derivatives in the first phase of the FTT, while other Member States have expressed concerns about this.

A small percentage of Member States expressed a preference to tax certain types of credit derivatives in the first phase of the FTT.

Taxation principles for shares and derivatives

The matter of taxation principles has also yet to be finalised. There is still no agreement on whether to apply the issuance principle (FTT to be levied in relation to the place of establishment of the issuer) or the residence principle (FTT to be levied on the basis of the actual or deemed place of establishment of the parties to the taxable transaction).

In the October report, the possibility of combining the two principles to ensure a fair distribution of FTT revenues amongst Member States was proposed (i.e. applying the issuance principle to determine what FTT arises, and then allocating FTT revenues between Member States on the basis of a residency based allocation). This is yet to be agreed.

Collection mechanism

The mechanism for collecting the proposed FTT remains a contentious issue.

The UK Government challenged the proposed FTT in the Court of Justice of the EU (CJEU) in 2013. One of the arguments put forward by the UK was that non-participating Member States would be responsible for collecting and enforcing the tax which is contrary to EU law.

Although the UK’s challenge was rejected by the CJEU in April 2014 on the grounds that it was premature, this issue could still be raised again if and when the FTT Directive becomes a reality.

Next steps

Latvia, which assumed the Presidency of the Council of the EU on 1 January 2015, will be charged with moving the FTT initiative forward. As a non-participating Member State, it is unlikely that the FTT Directive will be a priority for its term of office but whether or not any progress on this initiative will be made may depend on the participating Member States deciding whether any real financial or political gain to be made from an EU FTT will be worth pushing ahead.