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Commission approves cooperation between ten EU states on financial transaction tax

Out-Law News | 24 Oct 2012 | 2:57 pm | 3 min. read

A proposed financial transaction tax (FTT) on transactions between 10 participating member states will contribute to a better-functioning Single Market for the EU as a whole, the European Commission has said.

The Commission's decision (12-page / 83KB PDF) that the states be allowed to proceed using the 'enhanced cooperation' procedure must now be approved by a qualified majority of EU member states and the European Parliament. States seeking to adopt the tax include France, Germany, Italy and Greece. The enhanced cooperation process can be used as a last resort where some member states wish to proceed with a Commission initiative in the absence of universal agreement, provided that at least nine countries participate.

The UK remains opposed to an FTT, either on an EU-wide basis or applying to a limited number of member states. A Treasury spokesman told Out-Law.com that the Government would need to "fully consider" the proposal and what any revenue would be used for before taking a firm view.

The Commission said that enhanced cooperation on the FTT would bring "immediate, tangible advantages" to those countries choosing to participate. It would also contribute to a better-functioning Single Market across the EU, it said. Austria, Belgium, Portugal, Slovakia, Slovenia and Spain have also committed to implement the tax.

"There are EU-wide benefits to a common FTT, even if it is not applied EU wide," said Algirdas Šemeta, Commissioner for Taxation. "It will create a stronger, more cohesive Single Market and contribute to a more stable financial sector. Meanwhile, those Member States that have signed up for this tax will have the added bonus of new revenues and fairer tax systems that respond to citizens' demands."

The Commission proposed a directive (31-page / 110KB PDF) aimed at introducing an EU-wide FTT last year, but a Council discussion in June revealed that there was insufficient support for the proposal. As originally proposed, the tax would have applied where financial instruments such as shares, bonds, securities and derivates were traded between banks where at least one party was located in the EU. The tax would have raised approximately €57 billion and resulted in a fairer contribution to the public finances from the "under-taxed" financial sector, the Commission said.

The participating member states plan to adopt an FTT which is very similar to the Commission's original proposals. However, some adjustments may be required to reflect the smaller number of countries that will be applying it.

The UK has never supported an EU-specific FTT, stating that any tax would have to be applied "globally" to prevent financial traders rerouting their transactions to countries outside the EU. In a highly critical report on the proposal, published in March, the House of Lords denounced the tax as "flawed" and warned that its adoption by the UK would force banks to relocate from the UK's financial centre in the City of London.

"We've consistently said the UK will not participate in an FTT introduced through the EU's enhanced cooperation procedure," a Treasury spokesman said. "As with an EU-wide FTT, an FTT amongst a smaller number of EU countries would still have damaging impacts on growth, jobs and financial activity in the EU. It would increase costs for pensions, for manufacturers. It could conceivably distort competition and fragment the single market. We are, however, not minded to block others from creating an FTT using the enhanced cooperation procedure, but before taking a firm view the UK would need to fully consider the scope of the new proposal and what the revenues would be used for."

The proposal concludes that a common FT system, shared by at least 10 member states, would reduce the number of different national approaches to financial sector taxation within the Single Market. In doing so it would lead to less competitive distortions, fewer tax avoidance opportunities, more transparency and information exchange between those taking part and less compliance costs for businesses operating across the EU. A less "fragmented" approach would also benefit those states not participating in the FTT, it said.

The Commission has proposed that member states participating in the tax use a portion of the revenue to fulfil some of their EU budget commitments. FTT money remaining in national budgets could be used to help consolidate public finances, invest in growth-promoting activity or meet development aid commitments, it said.

Tax expert John Christian of Pinsent Masons, the law firm behind Out-Law.com, said that the scope of the tax would be "far-reaching" despite only 10 members adopting it initially.

"A UK bank funding a business in one of the states is likely to have to apply the tax and there will be implications for UK insurers and pension funds," he said. "At least the limited adoption will give an opportunity to see if the impact of the tax on business is as great as the financial industry fears."