Alternative Investment Management Association Representing the global hedge fund industry
In September 2011, the European Commission issued a Proposal for an EU-wide Financial Transaction Tax (FTT) Directive, at 0.1% for transactions in bonds and equities, and 0.01% for derivatives transactions (on notional value) and with effect from January 2014.
The proposed FTT included these features:
After prolonged negotiations and discussions among Member States (MS), by June 2012 and absent unanimous approval for the FTT, alternatives including introducing FTT by Enhanced Cooperation Procedure (ECP) among a minimum nine MS began to be explored. In October 2012, the Commission published a draft proposal, supported by 10 MS, to implement a FTT in broadly similar terms to that proposed in 2011 and to be effective at some point in 2013. That proposal was debated by the Council and authorised in January 2013, to allow FTT to be implemented by several EU MS rather than on an EU-wide basis. The working group allowed all MS to present opinions and concerns, although only those involved in the ECP were entitled to vote on the proposal (AIMA’s summary of the proposal).
In the Commission’s view, a common FTT applying among a group of MS would be “both timely and beneficial” “ensure a fairer contribution from the financial sector to the public purse” “create a more level playing field between the financial sector and other sectors in covering the costs of the crisis” and “make financial markets more efficient, by steering them away from casino-type trading to more stable activities which support the real economy”. Although 11 initially supported the ECP proposal any other may join at a later stage (under the same conditions as apply to those who participate from the outset).
The proposal included design features, such as an “issuance principle” (to apply to instruments issued in the common FTT area or derived from securities based in that area) – which would ‘catch’ transactions linked to a participating country (even if counterparties and the traded instrument were outside the participating country). A "residence principle" was also included. Most equity, debt and derivative instruments would be in scope, where there is an "established link" to the FTT zone; a link between the economic substance of a transaction and a zone jurisdiction is required.
The UK challenged the legality of the Council decision to authorise enhanced cooperation and the scope and objectives of the initial Commission proposal (Case C-209/13 UK v Council). The UK claimed that the Council decision had illegal extra-territorial effects and did not respect the rights of non-participating Member States. The UK’s legal challenge was dismissed by the European Court of Justice (EUCJ) on 30 April 2014, on the grounds that the Council had simply authorised use of ECP and did not bring about the potential legal or financial consequences outlined by the UK; any such consequences would flow from a FTT Directive itself (if or when adopted) and not from the Council's decision to authorise ECP. Although the Court declined to rule on the substantive questions raised by the UK, it has left open the possibility for the UK or other MS to challenge the substantive elements of any future Directive.
See below links to commentaries by AIMA law firm members on the Court’s decision.
The 11 ECP MS remain strongly committed to the FTT and willing to advance it, although no final agreement has been reached yet. During 2014, ECOFIN and the Council Working Group (CWG) have held several meetings to resolve critical issues regarding a viable text. The main issues to date concern:
AIMA is closely following and will closely analyse the final terms, which may be agreed later this year (2014), under Italy’s Presidency.
European Commission proposal for FTT by ECP (October 2012)
European Commission Consultation on financial sector taxation (February 2011)
Case C-209/103 United Kingdom v. European Council (April 2013)
House of Lords feasibility report on FTT (March 2012)