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Council Legal Service Opinion Stalls Financial Transaction Tax (September 13, 2013)

Financial institutions worldwide may get a reprieve from the proposed EU financial transaction tax (FTT) that has been progressing through the Commission since 2011.  A Council legal service opinion pointed out serious flaws with the proposed FTT that could stall or even kill the proposal.

The Commission’s  FTT proposal to tax financial institutions and their counterparties trading in certain financial instruments immediately gained supporters and opponents.  Slovakia was one of the very early proponents of the FTT.

The Commission supported the FTT proposal by claiming that EU states and their citizens want to ensure that the financial sector makes a fair and substantial contribution to public finances and returns money that the taxpayers paid to rescue banks. Regardless of one’s position on the efficacy of these claims, recent development shows that the FTT has hit a legal wall.

A recently published opinion of the EU Council legal service found significant problems with the FTT. Asked to opine on specific questions, the Council legal service concluded that the FTT is incompatible with EU law in that it:

  • exceeds Member States’ jurisdiction through extraterritorial taxation;  
  • infringes on the taxing rights of non-participating Member States; and
  • discriminates and likely distorts competition to the detriment of non-participating Member States.

 

Under the proposed FTT, each party to a transaction with a Member State financial institution would be jointly and severally liable to pay tax on the underlying consideration. One of the more controversial provisions analyzed in the Council legal service’s opinion is that the applicability of the tax is based on the residence of a financial institution party to the transaction, rather than where the trade was executed.  The result is that parties from non-Member States doing business with Member State financial institutions could be taxed, even if the transaction was not executed in a Member State.

However, the FTT is not scrapped just yet.  The Council legal service opinion is not binding and it has been reported that the Commission legal service disagrees with the opinion.  However, due to the serious and forthright concerns presented in the Council legal service opinion, it is reasonable to assume that the tax will be significantly amended.

Please stay tuned - we will continue to follow developments regarding the FTT and keep you updated.