So far, 11 European Union (EU) member states are moving rapidly towards agreement on the introduction of a financial transaction tax (FTT), which is likely to start in January 2014. Now is the time for action. By the end of December we should have an idea of what the FTT will look like and, importantly, who will be the recipient of the taxes raised.
Although fiscal measures normally require unanimity, a new legal procedure called Enhanced Cooperation is being used for the first time to introduce a fiscal measure. This means that a smaller number of states can vote for taxation measures that will apply in these states only.
For the financial services (FS) community, this really is the time to make its voice heard to try to make the eventual shape of the FTT more sensible. In the Netherlands, for example, Dutch pension funds have managed to get the government to indicate its interest in the FTT but subject to an exemption for Dutch pension funds.
On November 13, 2012, the Economic and Financial Affairs Council (ECOFIN) (EU-27 Finance Ministers) considered developments regarding the introduction of an FTT in EU member states wishing to participate in Enhanced Cooperation, and discussed how to proceed. The EU Commission presented its proposal for a decision to authorize Enhanced Cooperation on the FTT.
The Commission’s proposal, submitted on October 23, 2012, would allow 11 member states to introduce the FTT via Enhanced Cooperation (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Spain, Portugal, Slovakia and Slovenia). In June, the European Council urged that a decision be made by December.
During the ECOFIN meeting, the Netherlands indicated that it would also be interested in participating, under certain conditions, namely that:
- Dutch pension funds would be exempt from the FTT;
- there would be no excessive concurrence with the existing Dutch bank levy; and
- FTT proceeds would go to the EU member states.
The Commission welcomed the new Dutch position.
Two member states not wishing to join the Enhanced Cooperation (Malta and the United Kingdom) wanted a more detailed assessment of its impact on the internal market before supporting the decision authorizing Enhanced Cooperation. In reply, however, the Council’s Legal Service pointed out that the two-phased procedural approach now followed by the Commission and the Council was the only correct one. Under this approach:
- first the formal authorization for the start of the Enhanced Cooperation procedure (ECP) must be fully finalized to create a new legal situation; and
- then the Commission will issue a new legislative proposal on substance intended for the participating member states, which will be accompanied by a Commission impact assessment.
The scope and objectives of the new legislative proposal will be based on the proposal submitted by the Commission in 2011. That proposal, which involved a harmonized minimum 0.1% tax rate for transactions in all types of financial instruments except derivatives (0.01% rate imposed on the notional value), had been heavily criticized, because it would arguably hurt market liquidity and drive business outside the EU.
Member states now face the challenge of identifying the least common denominator, because the 2011 proposal is unlikely to be acceptable in its current form. One suggestion, proposed by the German Liberal Democrats, is to introduce a UK-style stamp duty. Whether this could be enhanced to a full-scope FTT in a second step remains to be seen.
The authorization decision requires a qualified majority (QMV) for adoption by the Council, with the consent of the European Parliament. Adoption of the legislative act defining the scope and objectives (substance) of Enhanced Cooperation requires unanimous agreement by the participating member states and will be binding only on these participating member states.
Over the next week, it will be of utmost importance to the FS community to ensure that market experience with the UK stamp duty and the initial experience with the French FTT will be presented to, and used by, the legislators to shape the new tax sensibly.
Tentative FTT calendar