On 22 January 2013, the Council of the European Union adopted a decision authorising eleven countries - Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia — to proceed with the enhanced cooperation procedure to enact a Financial Transaction Tax (FTT). It is the first time that such a procedure has been launched in the area of taxation. This effectively clears the way for these countries to establish a levy based on the ideas of economist James Tobin, but hitherto nowhere implemented, to recoup the cost of the financial crisis from financial institutions.
The Commission will now make a proposal defining the substance of the enhanced co-operation, which will have to be adopted by unanimous agreement of the participating Member States. The original 2011 proposal for introducing an FTT throughout the EU received insufficient support within the Council. That proposal envisaged that a 0.1% tax would be imposed on trades in stocks and bonds and 0.01% on derivatives on transactions between financial institutions based in the EU.
There are a number of key areas of discussion ongoing. Firstly, as expected, the Commission is considering expanding the original scope of the tax to include transactions involving instruments issued in the EU. If such a proposal is adopted, a trade between two parties based outside the EU could be subject to the FTT if the traded instrument was issued in the EU. Certain instruments, such as derivatives, which are not “issued” are expected to fall outside this principle. Secondly, there remains uncertainty regarding the treatment of UCITS and pension funds and whether any exclusion will apply. Thirdly, there is an open question as to whether any exemption will be available for chains of transactions. Although no such exemption was originally proposed, there are now suggestions that repos and stock lending transactions may be viewed as a single transaction and that overnight interbank repos may be exempted.
As will be seen from the above, although the tax could come into effect as early as 1 January 2014, what remains unclear at the moment is the detail and scope of the new proposed FTT. FTT’s already implemented on a national level in countries such as France have so far been much narrower in scope. Neither is there agreement as to the amount of tax revenue which could be expected from the FTT. While the EU’s Taxation Commissioner hopes for a proportional share of the predicted income from an EU-wide FTT, amounting to EUR 57bn, France has estimated that the income will be a mere EUR 10bn. There also remains uncertainty as to how the income from the tax will be shared or used.
The approval by the Council of the enhanced cooperation procedure has thus, in some respects, raised more questions than it answers. For now, the ball is in the eleven Member States’ court to work out the details although it is open to other member states to join the procedure or comment as to its proposed scope.
From a practical point of view, pending further clarification and guidance, any persons carrying out significant financial transactions in the participating jurisdictions or trading financial products issued in the selected jurisdictions will need to monitor how the FTT is implemented on a jurisdiction by jurisdiction basis. Thought should be given to achieving compliance with the FTT requirements in each jurisdiction and to ensuring that internal systems and those of trading partners are geared up for the new regime.
On a related point, across the Atlantic, congressional democrats have responded to the EU’s decision by reviving proposals to introduce a similar financial transactions levy in the US. However, given the limited support the measure received in the US first time around, it is not expected that their efforts will be successful.