Last week the UK officially launched a challenge against the European Commission in the European Court of Justice in respect of the proposed Financial Transactions Tax (“FTT”), and there are hints that Luxembourg will join the UK. There are also signs of unease even among the eleven member states participating in the FTT through enhanced co-operation (the E-11).
In recent weeks, the UK Chancellor George Osborne has stated that he is “concerned about the extra-territorial aspects of the European Commission’s proposals”. The exact contents of the complaint are not yet known, but it is likely that the UK will argue that the criteria necessary for the enhanced co-operation procedure are not being met as the competences, rights and obligations of non-participating states are not respected.
It is easy to see what it is about the proposed directive that is irksome to the UK, determined to protect its financial services industry. The draft directive was published by the European Commission on 14 February 2013 and contains very broad definitions of the activities it will cover. As proposed, a transaction carried out between a UK financial institution and a financial institution in a participating member state would see the UK institution liable to pay the FTT. Further still, a transaction between two financial institutions, one in the UK and one in the United States (ie, neither party to the transaction is a member state which has signed up to the FTT) may still be caught if the financial instruments being traded were issued in a participating State (eg, stocks in a German company). The exact payment and collection mechanism is still unclear, but, in principle, a non-participating member state would be obliged to aid in collection of the FTT, despite not benefiting from the tax.
Enhanced co-operation is not a frequently used procedure, and in the sole instance in which its use was challenged, Spain and Italy failed in their attempt before the European Court of Justice. However, the challenge by the UK will focus on an argued lack of “neutrality” of treatment of non-participating member states in the wake of imposition of the FTT in an extra-territorial manner.
One reminder, the extra-territoriality (manifest through the imposition of tax on the basis of either issuance of the instrument, or residence of a counterparty) is thought to be necessary to prevent capital flight from the EU.
It is not just the UK who is questioning the FTT. There are a myriad of other potential problems (capital flight, price increases, lower yields, joint and several liability, increased costs of sovereign borrowing) affecting many other countries, many of which have been discussed in a previous update. On 16 April 2013 the E-11 submitted a lengthy series of questions and requests for clarification to the European Commission. Even Angela Merkel, one of the strongest proponents of the tax, is facing political pressure to soften the proposals from her junior coalition partners (the Free Democrats).
As it currently stands, the E-11 are to bring themselves in line with the proposed directive by 31 December 2013, with the Directive itself coming into force in January 2014. While that is now just over 8 months away, there is still a very long and winding road for the FTT to travel.