On 22 June the Economic and Financial Affairs Council considered compromise alternatives to the financial transaction tax proposed by the European Commission, namely the introduction of a tax similar to the UK’s stamp duty. Last March, at an informal meeting, Wolfgang Schäuble, the finance minister of Germany, presented a document considering a stamp duty as an “intermediate step”. The Commission has proposed a wide scope for the FTT, as it would cover transactions relating to all types of financial instruments. Wolfgang Schäuble’s plan would be to introduce a tax similar to the UK’s stamp duty on shares, as a first step then broadening it to bonds and derivatives at a later stage. The Commission's initial proposal has suggested that the exchange of shares and bonds shall be taxed at 0.1 per cent whilst derivative contracts taxed at a rate of 0.01%. At last Friday’s meeting, the EU finance ministers discussed a compromise text proposed by the Danish presidency, very similar to Wolfgang Schäuble’s plan, “a step-by-step approach”, under which a financial transactions tax “similar to a stamp duty” would be introduced and initially apply to “secondary market transactions with shares, bonds (but not government bonds) and possibly UCITS,” and then, “at a later stage”, to derivative transactions. Obviously, the UK could not accept such proposals, as they would entail further tax coordination by Brussels.

According to the Council’s conclusions “In the light of views expressed, the presidency concluded that support for an FTT as proposed by the Commission was not unanimous.” The EU finance ministers finally conceded that it is impossible to reach an agreement among all EU member states on the Commission proposal for a EU wide financial transaction tax. The UK, Sweden, the Netherlands and Denmark have been against the introduction of the FTT in the EU, as they fear investors would move from Europe. Moreover, there is widespread opinion that such tax won’t stabilise the markets and it would undermine economic growth. Nevertheless, the proposal for a EU-wide financial transaction would not be completely ditched. It was already known from the start that if unanimity was not reached, the FTT would be introduced through the so-called enhanced cooperation procedure. Hence, it does not come as a surprise that the Danish EU presidency “noted the support of a significant number of delegations for considering enhanced cooperation, which would allow a limited number of member states to proceed amongst themselves, making use of the EU institutions.”

In fact, last February, nine EU member states, including France, Germany, Austria, Belgium, Finland, Greece, Spain, Portugal and Italy sent a joint letter to the Danish government asking it "to accelerate the analysis and negotiation process" of the European Commission’s proposal for the FTT. Under the EU Treaties, nine is the minimum number of member states required in order to use the enhanced co-operation mechanism to adopt such proposal. The Member states that favour a financial transaction tax, led by France and Germany, have already announced their intention to move forward through enhanced co-operation. So, in order to by-pass UK’s veto, a group of nine, or more, EU Member States would have to write a letter to the European Commission detailing the scope and objectives of an enhanced cooperation proposal. It remains to be seen how many member states will sign up for such letter formally requesting the European Commission to prepare a legislative proposal for enhanced cooperation.

Following a request by the Member States that wish to establish enhanced cooperation, the European Commission will assess the viability of the proposal. Taking into account that Algirdas Šemeta, EU Commissioner for Taxation, has recently said that “enhanced co-operation is better than no result at all”, the Commission is likely to agree to submit a proposal to the Council to that effect. It is important to note that authorisation to establish enhanced cooperation would be granted by the Council, acting by a qualified majority on the Commission’s proposal and after the European Parliament’s consent. Hence, the UK would not able to veto and prevent other member states to press ahead with further integration.

The Commission is likely to present a proposal similar to the one that has now been rejected. It is important to recall that the Commission has defined 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". Consequently, it would also have an impact in 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. 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.” It is important to mention that the European Parliament has kept the "residence principle" proposed by the Commission, but it added to the proposal an issuance principle, which would have extended the scope of the proposal to transactions involving financial instruments issued in the EU.

The Commission's proposal was based 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.” The Commission has stressed that a EU wide financial transaction tax was necessary to ensure the proper functioning of the internal market. However, if enhanced cooperation is used to adopt the FTT, it can no longer be justified to avoid fragmentation in the internal market for financial services. In fact, enhanced co-operation would undermine the internal market. The European Parliament noted that “an introduction of FTT in a particularly limited number of Member States could lead to a significant distortion of competition in the internal market and comprehensive measures should be taken in order to ensure that such a move does not negatively affect the functioning of the internal market.” 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.