EU financial transaction tax will not be introduced until 2016

Out-Law News | 09 May 2014 | 9:56 am | 3 min. read

Ten eurozone countries have committed to introducing the proposed European Union financial transaction tax (FTT) by 2016, according to the Financial Times. 

Finance ministers from 10 eurozone countries, including France and Germany, have agreed to the introduction of a joint levy that would “first focus on the taxation of shares and some derivatives”, the newspaper reports.

However the politicians have been unable to agree on how the tax will be applied, a situation which the Financial Times said reflects "deep divisions" among those in favour of the tax, which has also faced opposition by a number of EU states, including the UK.

According to European Voice, Germany and France have agreed to move forward with the FTT in conjunction with Austria, Belgium, Estonia, Greece, Italy, Portugal, Slovakia and Spain. The newspaper said the states confirmed the agreement in a joint statement, but did not release further details.

Ahead of the meeting in Brussels, German finance minister Wolfgang Schaeuble said: "The interests of the participating countries are so different that we can only implement a limited taxation of shares and some derivatives in the first step,"

The proposed tax, which has faced a legal challenge from the UK government, would apply where financial instruments such as shares, bonds, securities and derivatives are traded between banks where at least one party is established in a participating member state regardless of where the transaction itself takes place or where that financial instrument is issued in a participating member state. Although it would not directly affect the value of savings, it will have a substantial impact on the value of the equity and debt holdings that underpin them. It has been reported that trading shares and bonds would be taxed at 0.1%, while derivatives would be taxed at 0.01%.

The European Commission announced its plans for an EU-wide FTT in 2011, stating that it would ensure that the financial sector makes a "fair contribution" towards covering the cost of government bailouts for failing financial institutions. The Commission said at the time it believed the FTT could raise up to €57 billion a year. However the Commission had to abandon the proposals after they received insufficient support. However, under the 'enhanced cooperation' procedure nine or more member states can take their own plans for an FTT forward.

According to Reuters, Germany and France have pledged to reach a broad agreement ahead of the European Parliament elections on May 25, in the belief that it will be attractive to voters.

According to European Voice a number of EU finance ministers who are not backing the FTT  have said the agreement between the 10 states in favour has "a lack of transparency". Dutch finance minister Jeroen Dijsselbloem said: "You have decided you must come out with something before the [European Parliament] elections, but we [the finance ministers from non-particpating member states] need to know more,” according to the newspaper.

Luis Guindos, Spain's finance minister, said that the deal was a “minimum outcome” and the tax was “sensible and prudent”, reported European Voice.

Last week the Court of Justice of the European Union (CJEU) rejected a challenge brought by the UK against the proposed introduction of an FTT. The UK has opposed the FTT from the start of the process, arguing that any such tax would have to be global in order to stop traders from simply routing their deals to financial centres outside of the EU.

In its legal challenge the UK claimed that the plans as currently proposed do not respect the rights of countries that are not participating as they will apply to UK firms trading with businesses based in a participating state. The UK acknowledged in its submission to the CJEU that its challenge could be considered premature, however it decided to bring an action for the annulment of the authorisation for enhanced cooperation "as a precaution ... in order to preserve its right to challenge" future implementing measures.

Dismissing the UK's challenge, the CJEU said it was "directed at elements of a potential FTT" rather than the European Commission's decision to allow participating states to develop one under the 'enhanced cooperation' procedure. The CJEU said that its judgment did not prevent the UK from issuing a subsequent challenge against the proposals themselves once these were fully developed.

Following the CJEU's judgement industry body the National Association of Pension Funds (NAPF) said that the financial institutions and banks that manage the investments of UK-based savers and pension scheme members would "undoubtedly" have to pass the cost of compliance onto their customers.

The UK Treasury has indicated that it will challenge the FTT at a later stage if the final tax was "not in our national interest and undermines the integrity of the single market".

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, has described the UK government's situation as "heartening" in light of the likely effect of the tax on UK pensions and savings.

"The government has been pulling out the stops to encourage pension saving; through auto-enrolment, and proposing new flexibility in how pensions can be taken from April 2015," Tyler said following the CJEU dismissal of the UK government's challenge. "It would be a real shame if a dampener came along in the shape of an additional tax charge for pension savings."