Margarida Vasconcelos: enhanced cooperation on the FTT would not only negatively affect the functioning of the internal market, but also the rights and competences of non-participating Member States

In September 2011, the European Commission proposed a directive aimed at introducing a financial transaction tax (FTT) in the EU. The UK is home to Europe’s biggest financial centre, such tax was, therefore, considered an attack on the City of London. The UK had a veto over this damaging proposal and the Government has used it. Other Member States, such as Sweden and Luxembourg have been against the introduction of the FTT in the EU, as they fear investors would move from Europe. Hence, in June 2012, the Economic and Financial Affairs Council conceded that was impossible to reach an agreement among all EU member states on the Commission proposal for a EU wide financial transaction tax. As it was impossible to achieve unanimous support for the draft proposal, the solution found, at the Council, was to proceed through enhanced cooperation. In fact, it was already known from the start that if unanimity were not reached, the FTT would be introduced through the enhanced cooperation procedure. Thus, the proposal for a EU-wide financial transaction has not been completely ditched.

There is widespread opinion that the FTT won’t stabilise the markets and it would undermine economic growth. As Dr Kay Swinburne, MEP noted, "a FTT will lead to job losses, slow growth, and businesses leaving the EU altogether.” Nevertheless, a group of 11 EU Member States, Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia have decided to go ahead with enhanced cooperation to by-pass the veto of other Member States in order to put in place a financial transaction tax. They have written to the European Commission formally requesting to be allowed to proceed with a EU FTT, on the basis of the Commission’s original proposal and asked it to prepare a legislative proposal for enhanced cooperation. Following such request, the European Commission has assessed the viability of the proposal and, unsurprisingly, it has agreed to submit a proposal to the Council to that effect. It is important to note that authorisation to establish enhanced cooperation must be agreed by the Council, acting by a qualified majority on the Commission’s proposal and after the European Parliament’s consent. Hence, the UK was not able to veto it and prevent other member states to press ahead with further integration. The European Parliament gave its consent last December and the Council gave the green light for enhanced cooperation in January 2013.

As expected, the European Commission has recently put forward a legislative proposal defining the substance of the enhanced cooperation.
The draft proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax will apply to the above mentioned 11 EU Member States, other member states may decide later to participate, which would be required to charge FTT in accordance with this proposal.

This present proposal is very similar to the Commission’s original proposal, in the scope and objectives are the same.
It is important to note that the proposal is based, as the original one, on Article 113 TFEU whereby the Council, acting unanimously, shall adopt “provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation” but only if such “harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.” As the original proposal, the present draft directive is intended to “ensure a fairer contribution to public finances from the financial sector” and “reduce the fragmentation of the Single Market.” The European Commission has stressed, “that enhanced cooperation on FTT would contribute to a stronger Single Market, with less barriers and competitive distortions”. According to the European Commission “A common system of taxing the financial sector, even if not applied by all Member States, is preferable to the fragmentation that would result from 27 different national systems.” However, one could say that by using enhanced cooperation to adopt the FTT, it can no longer be justified to avoid fragmentation in the internal market for financial services. Despite the Commission has asserted the opposite, enhanced cooperation on the FTT is likely to lead to a significant distortion of competition in the internal market, and it would not only negatively affect the functioning of the internal market, but also the rights and competences of non-participating Member States.

The Commission proposal will harmonise the participating Member States’ taxes on financial transactions. It will apply to “financial institutions operating financial transactions”. Under the Commission proposal the scope of the tax would be broad, because it would cover transactions relating to all types of financial instruments. As under its original proposal, the Commission has proposed “minimum tax rates”. The exchange of shares and bonds would be taxed at 0.1 per cent whilst derivative contracts taxed at a rate of 0.01%. The participating Member States would not be, therefore, allowed to maintain or introduce taxes on financial transactions other than the FTT or VAT.

It is important to recall that in November 2011, Algirdas Semeta, Commissioner responsible for taxation, confirmed to the Economic and Monetary Affairs Committee MEPs that “it would be possible to use enhanced cooperation, with the tax being imposed on all institutions headquartered in the participating countries, thereby also taxing their activities outside.” In fact, he said to the Financial Times that a FTT would be “designed in such a way that it doesn’t matter where transactions are taking place. I think that London will lose out.”

The Commission has defined, in the original proposal, the FTT´s territorial application on the basis of the “residence principle.” Hence, "The tax would not be based on where transactions take place but on the parties involved". A financial transaction would be taxable in the EU, if one of the parties to the transaction is established in the territory of a Member State. Taxation will take place in the Member State where the establishment of a financial institution is located, if this institution is a party to the transaction, acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction. A transaction would not be subject to FTT if the establishments of the financial institutions, parties to the transaction, are located in a third country, however the third-country financial institution will be deemed to be established in the EU if one of the parties to a transaction is established in the EU and, in this case, the transaction would become taxable in the Member State concerned. In a note further explaining the residence principle and the territoriality of the proposal, the Commission said “The only possibility for EU resident entities to avoid the proposed tax is to relocate themselves to third countries completely or through the formation of subsidiaries and in both cases give up their European customer base, a strategy which it is unlikely to be adopted.” The European Parliament has kept the "residence principle" proposed by the Commission, but it added an issuance principle, which would extend the scope of the proposal to transactions involving financial instruments issued in the EU. The European Commission has taken on board the European Parliament’s suggestion, as it introduced the “issuance principle” to the present proposal.

The Commission proposed that the draft directive implementing enhanced cooperation in the area of financial transaction tax would apply “to all financial transactions, on the condition that at least one party to the transaction is established in the territory of a participating Member State and that a financial institution established in the territory of a participating Member State is party to the transaction, acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction.” As in the Commission original proposal, the residence principle will continue to apply. Hence, as the Algirdas Semeta said "the tax will be due if any party to the transaction is established in a participating Member State, regardless of where the transaction takes place”. Consequently, it would have an impact on the City of London, as the tax would apply to any transaction involving investors based in the participating member states, even if it was executed in London.

However, the Commission wants to prevent investors from moving from the 11 participating member states to avoid the FTT. Hence, the Commission has decided to complement the residence principle with the issuance principle, in order to prevent relocation, as “it will be less advantageous to relocate activities and establishments outside the FTT jurisdictions, since trading in the financial instruments subject to taxation under the latter principle and issued in the FTT jurisdictions will be taxable anyway.”

Under the Commission’s proposal a financial transaction would be subject to FTT, even if “none of the parties to the transaction would have been “established” in a participating Member State”, but they are trading in financial instruments, such as shares, bonds and equivalent securities, money-market instruments, derivatives, issued in that Member State. Hence, due to the issuance principle, financial institutions will have to pay FTT in the participating Member State in which the issuer is located. Article 4 of the draft proposal, specifies that a financial institution or a natural person would not be deemed to be established in the territory of a participating Member State, if those liable for payment of FTT are able to prove that there is no link between the economic substance of the transaction and the territory of any participating Member State. Consequently, they would be liable to pay FTT if they are deemed established within a participating Member State because there is a link between the transaction and the territory of any participating Member State. Hence, under the enhanced cooperation proposal the FTT would apply to financial products, even if they are traded outside the FTT area or outside the EU, but they are issued from the participating countries, in order to prevent relocation from the participating member states to other financial centres.

The Commission also noted that by complementing the residence principle with the issuance principle would also supplement the tax revenues. According to the European Commission this “could assist participating Member States in fighting evasion and relocation and catch another significant portion (about 10%) of financial transactions in shares issued by EU11 entities and of transactions in debt securities issued by EU11 entities58 (not captured by using the residence principle)., which would yield as revenues EUR 0.39 bn. from taxing shares and 0.83 bn. from taxing bonds and bills”.

Obviously, London as well as Amsterdam and Luxemburg, being important financial centres, are concerned that certain activities would be subject to the FTT. In fact, as the Commission has stressed “transactions involving financial institutions deemed to be established in the FTT jurisdiction would be taxable, independent of whether they were carried out in Frankfurt, London, New York or Zurich.” By using both principles it would have as effect making additional transactions taxable. Thus, one could say that enhanced cooperation on FTT does not respect the rights of non-participating Member States.
No participating member states would be affected by the enhanced cooperation on the FTT. According to the EuropeanVoice the Luxembourg's government is against the use of enhanced co-operation “as a tool to impose on financial institutions established in non-participating member states a tax on which an agreement could not be reached on the level of the 27 member states”.

The Commission proposal has also raised concerns of double taxation, as traders outside the FTT jurisdiction would be liable to pay the tax. Thus, if a UK trader trades with a financial institution in one of the participating member states it would be liable by the UK's stamp duty and the FTT. According to the Euobserver, Chas Roy-Chowdhury, head of taxation for the Association of Chartered Certified Accountants, has accused the Commission of "deliberately seeking to taint transactions and products so that non-FTT states may be impacted by the tax." In fact, the European Commission has conceded that a common system of FTT at the level of EU11+ is not as “effective as the same policy implemented at the level of EU27” as “it will not be possible to avoid all incidents of double taxation within the entire EU27”.

Moreover, according to The Financial Times, a coalition of US business groups has sent a letter to the European Commission complaining about "the unilateral imposition of a global financial transaction tax". According to the group, "These novel and unilateral theories of tax jurisdiction are both unprecedented and inconsistent with existing norms of international tax law and long-standing treaty commitments".

As above mentioned, several non-participating member states are concerned about the impact of the enhanced cooperation proposal on the single market. Particularly, they are concerned about the impact that the FTT might have upon them, as under the present proposal financial instruments would be subject to the tax, if they are issued in a member state participating in the FTT, even if the entities involved in the trade are non participants. However, it is important to note that although the non participating member states may participate in the discussions they have no say, as solely the member states participating in enhanced cooperation are allowed to vote. In fact, the proposal must be agreed unanimously by the participating member states. The European Parliament will be consulted, but the member states are not bound by the Parliament’s opinion.

It is important to recall that under Article 326 TFEU enhanced cooperation “shall not undermine the internal market or economic, social and territorial cohesion. It shall not constitute a barrier to or discrimination in trade between Member States, nor shall it distort competition between them.” If these criteria are not complied with, the use of enhanced cooperation could be challenged at the ECJ. In fact, according to the EuropeanVoice the Luxembourg’s Government said in a statement, “Luxembourg reserves the right to seek all legal remedies available in case it considers that the future tax does not respect the relevant treaty provisions on enhanced co-operation or is incompatible with the good functioning of the internal market.”

It is important to recall that the Commission put forward a proposal for a Council Decision on the EU’s system of own resources, where it has identified the FTT as a new own resource to be entered in the EU budget. At the time, the Commission noted that the revenues of the FTT could be around €57 billion every year in the whole EU. One could wonder why the Commission has defended so vehemently its proposal to introduce a EU wide FTT. The FTT proposal was essential to the Commission’s plans for funding the EU’s multiannual financial framework for 2014 to 2020. According to the European Commission “Assuming that the volume of taxable transaction will follow the evolution of the EU GNI, that €57bn will become €81bn in 2020.” The Commission proposed, therefore, that two thirds of that €81bn be used to fund EU’s budget, which amounts to €54.2bn whilst the remaining one third would be reserved for member states.

The Commission has recently estimated that the FTT’s revenues could be around EUR 30 and 35 billion every year in the whole 11 participating Member States. It has proposed that part of receipts generated by the FTT shall constitute an own resource for the EU budget, which could “imply that the GNI based resource drawn from the participating Member States would be reduced accordingly.” According to the European Council’s conclusions from 8 February 2013, the participating Member States on the enhanced cooperation on the FTT, “are invited to examine if it could become the base for a new own resource for the EU budget.” It is important to stress that taxation is a key part of Member States sovereignty and such proposals would encroach on national tax sovereignty. In fact, several member states want such revenues to go to national budgets. The Commission and the European Parliament want the revenue to contribute to the EU's budget.
But, there is no agreement yet among the participating member states on where the proceeds from the FTT should be used.