Starting out as an ambitious proposal in 2011 for a European Union-wide tax on all financial transactions between financial institutions where at least one party is established or deemed to be established in the European Union (EU), it quickly became obvious by 2012 that the financial transaction tax (FTT) proposal could not garner EU-wide support. Even among the remaining 10 Participating Member States (Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain), there continues to be much disagreement about the scope and mechanical operation of the tax, resulting in multiple extensions of the anticipated introduction date and numerous reports of disparaging statements from various EU institutions. What started out as a bold new way of extracting compensation from the financial sector owing to its alleged responsibility for the financial crisis of 2007-2010 had, by the start of 2018, looked unworkable.

This remained the narrative until, after years of stalemated negotiations about the tax, France and Germany proposed to revive the introduction of the FTT in a Franco-German roadmap document for the Euro Area in June 2018. The stated intention was to base a revamped FTT on France’s existing financial levy, the primary focus of which is taxing transactions of domestically issued shares. Further developments in 2019, discussed below, have attempted to resuscitate the FTT project further.

The Original FTT Proposal

In September 2011, the European Commission published a proposal for an EU-wide financial transactions tax. This proposal included plans to harmonize the tax base and set minimum taxation rates for all transactions in financial instruments and derivatives carried out over-the-counter or on organized financial markets between financial institutions where at least one party is established or deemed to be established in the EU.

However, the original FTT proposal failed to obtain unanimous support from all EU Member States. Eleven remaining Member States (each a Participating Member State) applied to continue the implementation of the FTT under the rarely used “enhanced cooperation” procedure. The result was a proposed Council Directive implementing enhanced cooperation for a financial transaction tax (the Commission Proposal), which was published by the European Commission in February 2013.

While Estonia quickly dropped out of the group of eleven Participating Member States, the Commission Proposal has continued to have broadly the same scope and objectives as the original FTT proposal made in 2011. The Commission Proposal involves a minimum 0.1% tax rate for transactions in all types of financial instruments, except for derivatives, which would be subject to a minimum 0.01% tax rate.

The proposals for the FTT would apply where at least one party is a financial institution and at least one party is established or deemed established in a Participating Member State. Furthermore, under the Commission Proposal, the principle of establishment is augmented by the “issuance principle,” intended as a “last resort” determination of where a financial institution is deemed to be established. Under the “issuance principle,” the financial transaction will fall within the scope of the proposed FTT if, broadly, the financial transaction involves a financial instrument “issued” within a Participating Member State.

The scope of the proposed FTT is not limited to trade in organized markets, such as regulated markets, multilateral trading facilities or systematic internalizers, but also includes other over-the-counter trades. The FTT tax charge is not limited (like many stamp taxes) to the transfer of financial assets, but rather seeks to tax the point at which a legal obligation is entered into, mirroring whether or not the party concerned assumes the risk implied by a given financial instrument.

Stalemate, But Not Checkmate

The ambitious Commission Proposal proved to be too controversial to create consensus among the Participating Member States. The date of introduction, which was initially identified in the Commission Proposal as being 1 January 2014, has been extended on multiple occasions.

Why the stalemate? Part of the problem is that the FTT, as set out in the Commission Proposal, seeks primarily to tax cross-border financing transactions and, as a secondary matter, impose a territorial taxation liability to the cross-border tax point. This is a novel method of taxing transactions but, given the nature of modern international financing transactions, the political ideology behind the tax is simpler than the precise application.

Key problematic issues with the original FTT proposal include:

  • Extra-territoriality – The “issuance principle” and the “establishment principle” bring financial transactions within the scope of FTT even where one or all of the parties are outside the Participating Member States. Given this base of taxation, problems regarding the enforcement of the FTT in extra-territorial situations have been inevitable.
  • Double taxation – It was unclear on how to eliminate the risk of double taxation where the FTT would be operating alongside non-Participating Member States’ tax regimes (for example, stamp duty in the UK).
  • Pension funds – Conflicts over the treatment of pension funds under the proposed FTT have been difficult to resolve among the Participating Member States.
  • Derivatives – The application of FTT in relation to derivatives has been particularly controversial. Many commentators have suggested that subjecting derivatives to the FTT risked causing significant disruptions in financial markets.
  • Brexit – Concerns have been reported in the press that some of the Participating Member States have concerns that any migration of banking and other financial services from London after Brexit might be problematic if European financial centers – including Paris, Frankfurt and Madrid – were subject to the FTT.
  • Distribution of revenue – Significant disagreement was understood to exist among the Participating Member States on how to distribute FTT revenues. It is possible that this has somewhat receded, owing to a meeting of finance ministers of the Participating Member States on 11 March 2019 that resulted in an agreement that FTT revenues generated should be distributed by way of a compensation mechanism.

The Resuscitation – Life After (Near) Death

The problems listed above regarding the original proposals for the FTT appear to have stimulated a different approach by France and Germany. In a press release of the outcome of the European Council Meeting on 14 June 2019 (the Council Outcome), the Council described in greater detail the Franco-German proposals for a revised FTT.

The main features of the revised FTT, as described by the European Council, are:

  • The FTT would be assessed by reference to transactions in equity issued by larger EU publicly listed companies only, and would exclude derivatives and non-equity securities – The revised FTT would be levied on the acquisition of shares of listed companies which have their head office in a member state of the EU and market capitalization in excess of €1 billion on 1 December of the preceding year.
  • Levied on the transfer of ownership – The revised FTT would be levied on the transfer of ownership when shares of listed public limited companies are acquired.
  • Exemptions – Initial public offerings, market making and intraday trading would not be taxable.
  • Tax rate – The rate of FTT would be “no less than 0.2%,” although the press release provided no further detail of the consideration on which the tax rate would be calculated.

Further work was promised by the European Council “to ensure that the competences, rights and obligations of non-participating EU member states are respected.”

If these proposals were to be applied to the original FTT, the revised proposal for the tax would look very similar to a domestic stamp tax or levy. The new proposal also would avoid some of the more controversial aspects of the Commission Proposal. This may be more palatable to the Participating Member States and even other EU non-participating Member States, while still serving the political ambitions which have consistently underpinned the FTT project.

The Franco-German architects of the resuscitated FTT will be hoping that the more modest proposals do not lead to the dislocation of financial services and the deracination of financial institutions and intermediaries from the Participating Member States in the event that the tax is introduced.

It seems unlikely that the story of this most politicized of taxes is over just yet.