In recent years, the governments of Europe have repeatedly considered and debated the application of a financial transaction tax (“FTT”) on bond, equity and derivatives transactions for purposes of generating revenue and discouraging excessive risk-taking.[1] Most recently, the European Commission (“EC”) published an FTT directive on February 14, 2013.[2] This directive follows the FTT directive initially published by the EC on September 28, 2011, which failed to attract the necessary unanimous support of the twenty-seven European Union (“EU”) member-states. Eleven EU member-states subsequently applied, through an “enhanced cooperation procedure” approved by the European Parliament on December 12, 2012, to impose an FTT themselves, which resulted in the revised directive.[3]

The revised directive is to become effective on January 1, 2014. However, the participating member-states themselves continue to debate fundamental points regarding its scope and substance. Moreover, the United Kingdom has filed a lawsuit challenging the enhanced cooperation procedure used by the participating member-states, arguing that, under the Treaty on the Functioning of the European Union, use of this procedure requires, among other things, that the cooperation not distort competition with non-participating member-states.

If implemented as currently proposed, the FTT would apply, generally, to each financial transaction (whether traded on exchange or over-the-counter) in which at least one party is a financial institution and either (i) at least one party is “established”[4] in a participating member-state or (ii) the financial transaction is in respect of a financial instrument issued by an entity established in a participating member-state. The revised directive proposes that participating member-states set tax rates of at least 0.1% of the consideration paid or owed in a financial transaction other than a derivative transaction, and at least 0.01% of the notional amount of a derivative transaction; individual participating member-states would be able to apply higher rates if they elected to do so. The FTT would be payable by each financial institution involved in a relevant transaction and would be payable to the participating member-state in which the financial institution is deemed to be established; the same transaction would be taxed twice if between two financial institutions.

For purposes of the revised directive, the term “financial institution” generally includes banks, investment firms, regulated markets, insurers and reinsurers, undertakings for collective investment in transferable securities, alternative investment funds, pension funds, and securitization special purpose entities. However, transactions with the European Central Bank, the central banks of EU member-states, the European Financial Stability Facility and the European Stability Mechanism are excluded from the scope of the directive.

The term “financial transaction” includes the purchase and sale of a “financial instrument”[5] before netting or settlement; the conclusion of a derivative contract before netting or settlement; repurchase agreements, reverse repurchase agreements, securities lending and borrowing agreements; certain intra-group transactions transferring risk associated with a financial instrument but not constituting a purchase or sale; the exchange of a financial instrument; and material modifications of any of the foregoing. Certain transactions, however, are excluded, including credit and loan transactions, primary market transactions, spot foreign exchange transactions, physical commodity transactions, and the underwriting of shares, mortgages, and consumer credit.

In light of the ongoing and active debate surrounding the revised directive and the legal challenge against it, the FTT ultimately may become effective, if at all, in a form substantially different from that currently contemplated, and perhaps well after the proposed January 1, 2014 effective date.[6]

In the United States, bills were introduced in both the House and the Senate on February 28, 2013 that would impose a tax of 0.03 percent on certain financial transactions.[7] Both bills remain in committee and face opposition. Moreover, concern exists in the United States over the possible extraterritorial reach of a European FTT. In response to a question from the House Ways and Means Committee in April, Treasury Secretary Jack Lew expressed his concern over the application of such a tax on transactions in the United States, stating: “I think the design element you’re describing is a very troubling one.”