European financial transaction tax

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European financial transaction taxEuropean Financial Transaction Tax

Still no breakthrough

12 November 2015

Participating member states have failed to reach a consensus on the introduction of the FTT following a meeting of European Finance Ministers on 9 November 2015. In public, Finance Ministers speak of real progress being made. However, there are still some major disagreements on the scope of the tax and how it should be levied. Also, some countries are making special requests which will inevitably prolong the process of reaching agreement. EU Finance Ministers meet again on 8 December and if political consensus is not reached at that meeting the prospects for an enhanced co-operation FTT look bleak. If there is consensus, the Austrian Finance Minister has stated that a commencement date of second quarter of 2017 is most likely.

Renewed political appetite and next steps

2 October 2015

Readers will have seen reports of some political progress on the Financial Transaction Tax (FTT). Participating Member States are understood to have agreed in principle to introduce a fairly broad-based FTT, initially covering equities and at least some derivatives. However, technical discussions are still needed for a range of points and the impact of the FTT will depend on the nature of the exemptions applied. Likely exemptions include bonds and other debt instruments (particularly government bonds), repos, unlisted shares and shares in small cap companies, but even these exemptions are not finally agreed. A wider range of derivatives is likely to be covered than is the case under the Italian FTT. Exemptions for derivatives over government debt and some sort of exemption or relief for so-called “real economy” hedging transactions are being actively discussed. Interestingly the taxability of pension funds is still uncertain, with the case for exemption depending on the range of other exemptions within the FTT. We expect any FTT to be issuance-based - at least for equities-. but the rate and collection mechanisms are yet to be agreed.

With so much still uncertain, readers may ask what progress has been made in the past two years. In reality, progress has been very limited. However, earlier in the summer the FTT appeared to remain in the long grass and there is a sense of renewed political appetite to implement the FTT in some form.

Moving forward, the Working Party on Tax Questions (Indirect Taxation) met on 29 September to discuss some of the issues noted above - in particular the impact on the “real economy” and pension funds. The next political discussions are likely to be at the ECOFIN meeting on 6 October. The French would like to reach political consensus before the Paris Climate Conference commencing on 10 November. Whether this is within reach is open to debate - we have been here before - but it seems likely that even if political consensus is reached quickly, technical discussions will run well into 2016. A commencement date on 1 January 2017 is still possible and therefore firms should still have contingency plans for implementation work during 2016. As noted previously the position should be clearer by the end of November this year.

EU FTT – still incubating…

5th August 2015

The pace of FTT news has certainly slowed and it has been a while since we have provided an update. In reality there is little specific to update.

Technical discussions have continued over the past few months and have led to conflicting messages. There appears to be much broader awareness among the participating member states of the key issues and options and of the ways in which these could be resolved. There has been less sign of an emerging consensus on a compromise solution on key areas – tax base, use of residence vs issuance principle, scope of derivatives tax and basis of calculation and collection mechanism. While Pierre Moscovici and others have continued to indicate expectations that the proposals will translate ultimately into action, proponents of the FTT who had hoped for political progress before the summer recess have been disappointed. For the time being, unsurprisingly, Greek matters have taken priority.

Our understanding is that the next political discussions on the FTT will be in the autumn. The question is how far and fast it then proves possible to move towards consensus. A commencement date of 1 January 2017 remains a realistic possibility, but will require significant progress in negotiations in the final quarter of this year. For those trying to assess budget requirements for any implementation programmes required during 2016, the prudent advice would be to keep a placeholder and reassess the position in late October/November, when it should become clear whether there is a willingness to compromise on scope and collection mechanisms in order to make 1 January 2017 implementation a realistic prospect.

No sign of consensus yet

13 March 2015

It has been a number of months since we last provided an update on the proposed EU FTT. However, little progress has been made.

Since our last update, finance ministers from the participating Member States released a joint statement renewing their commitment to an EU FTT. There was little information on the proposed scope of the tax beyond calling for a wide tax base and low tax rates. The finance ministers remain publically committed to a start date of 1 January 2016 but the majority of market participants are working on the assumption that this is not practicable.

The 28 Member States met at the end of February and it is clear that no progress has been made on any of the key issues. Following a request from the participating Member States, the European Commission is now providing more technical support; this may be causing the negotiations to be more protracted than they already are.

Despite a number of stakeholders arguing for a market makers exemption, the European Commission is understood to be arguing that taxing market-making activities would complement and support existing financial market regulation (although it may have something to do with the fact that the European Commission sees the taxation of market makers as a key source of revenue).

The European Commission is still arguing in favour of the ‘residence principle’. Very broadly, this is where the tax applies to financial institutions depending on where they (and/or their counterparties) are located.

There is clearly no agreement on how the tax revenue will be collected and how collection mechanisms would apply to financial institutions resident outside the EU. We understand some Member States have also complained that the collection mechanism is being discussed before agreement has been reached on the scope of the tax.

We understand the next FTT working group is not scheduled to meet again until May. This leaves very little time to agree on the scope and mechanics of the EU FTT and the proposed start date of 1 January 2016 looks increasingly unlikely.

EU FTT state of play – self-imposed deadline likely to be missed

11 December 2014

The ECOFIN Council held a press conference on Tuesday morning and discussed progress on the EU FTT. The Italian Presidency also presented a report on the state of play relating to the EU FTT proposal. Download the state of play report.

As we have noted in our previous blog posts, the next Presidency of the Council of the European Union is Latvia. As Latvia is not one of the 11 participating Member States, some believe the proposed EU FTT will not sit high on its agenda and negotiations may falter. The report shares the Italian Presidency’s views on how to progress and encourages the incoming Presidency to give the issue “political attention”.

The report notes specific areas where further work is still required. The following fundamental issues remain outstanding:

The scope of the FTT for derivatives;

The taxation principles for shares and derivatives;

A decision as to whether the residence and/or the issuance principle should be followed; and

The possible tax revenue collection mechanisms (which the original proposal was oddly silent on).

The French Finance Minister briefly spoke at the press conference and reiterated that the group of 11 participating Member States remains “collectively committed” but he admitted that agreement will probably not be reached until the first half of 2015. The Italian Presidency had originally hoped for agreement to be reached by the end of 2014. With the repeated deferral of self-imposed deadlines for a compromise, it remains to be seen whether a revised EU FTT will ever be agreed upon. It will be interesting to see how much attention the Latvian Presidency pays this issue early next year.

EU FTT negotiations – are you keeping up?

10 November 2014

News about the negotiations between the participating Member States continues to emerge at a fast pace. Currently, it is difficult to assess how strong the prospects are of some form of FTT emerging in time for implementation by January 2016. And if this does happen, the key question is how wide the scope might be.

It appears the proposals are currently proceeding in a less than predictable way. Early last week it looked as if the most likely outcome would be a narrow-based FTT, similar to UK Stamp Duty Reserve Tax (SDRT) and French FTT. Implementation in 2016 appeared likely due to German acceptance that a narrow-based FTT would be better than none at all. Questions about exemptions, revenue sharing, collection mechanics and the position of market makers remained. However it sounded as though a pragmatic compromise was in prospect.

The end of the week saw an unexpected turn of events, which will concern both EU Member States outside the FTT zone and other non-EU countries. News has emerged that Austria appears to be seeking to drive the discussions of the participating 11 countries back in the direction of an FTT which applies to a much wider range of instruments. Under this proposal, the FTT would be residence based, applying to counterparties depending on location tests, rather than applying only to securities issued in the 11 participating states. It appears that Hans Joerg Schelling, the Austrian Finance Minister, has publicly stated a position in favour of a wider tax base, although with rates possibly lowered from the original proposed rate. It was known that there was concern about the possible impact of an issuance based tax on the Austrian stock exchange. However, no-one had predicted the emergence of Austria as the unlikely champion of a broad based FTT. The only exemption Austria is known to be advocating is one for government bonds. It became clear shortly after the initiation of the original 2013 enhanced cooperation process that a number of participating States were being advised by their own government debt management offices. They were being advised that the original FTT proposals would increase the cost of government bonds and this message appears to have been taken into account.

Many observers were placing their bets on a political compromise to get a narrow-based FTT in place by the start of 2016. However, the latest news suggests that there is still a risk that proposals for a much wider tax base may be pushed through at the last minute. Now seems to be time for stakeholders to make one more vigorous attempt to ensure any FTT proposals that are pushed through do not damage the health of fragile markets. Bank research in April and August 2014 suggested that the Italian FTT had resulted in a decline of 20%-30% in Italian equities trading, notwithstanding a market maker exemption. Therefore a tax directed towards the original broad based EU FTT proposals could be expected to have much more damaging and permanent effects.

Is the EU-FTT going to be deferred again?

22 October 2014

It appears that participating Member States are struggling to make much progress with proposals for the EU Financial Transaction Tax (FTT). Earlier this year, the 11 participating Member States, the Italian Presidency of the European Council and President-elect of the European Commission, Jean-Claude Juncker, all expressed the desire to see real progress with the proposed EU FTT.

Although the Italian Presidency has sought to give the EU FTT renewed momentum, it is now becoming clear that fundamental differences of opinion between the EU-11 remain.

We understand these differences to be:

It is still not agreed whether the EU FTT should have a broad scope, in line with the position publically adopted by the German Government or a narrow scope similar to existing French and Italian FTTs.

There is also a continuing debate around whether the residence or issuance principle should prevail or a combination of the two. Smaller Member States are also concerned that an issuance-based tax will raise little revenue for them.

Revenue Allocation

There has been discussion of alternative allocation models and potential sharing of revenues, but as yet we understand that no agreement has been reached. Whilst some detailed work has been undertaken on collection mechanisms, the fundamental question of what revenues should be allocated to smaller Member States has not been resolved.

It now seems unlikely that the Italian Presidency will be able to make the substantive progress hoped for earlier in the summer. Indeed the FTT was taken off the agenda of a recent ECOFIN meeting. Unless there is a last minute political compromise (which could probably only be reached on a narrow based FTT, taking some of the more controversial elements off the table) a start date of 1 January 2016 is unlikely. The next two presidencies of the European Council, Latvia and Luxembourg are also not participating Member States and it remains to be seen whether substantive progress is possible in 2015.

Participating member states reiterate their commitment to a FTT – but not much more!

The member states participating in the FTT-enhanced co-operation process have reiterated their intention to implement a FTT in a statement given to the ECOFIN meeting today. The statement confirms that:

Work will focus on a progressive implementation of the tax, likely starting with shares and ‘some’ derivatives

The aim is to finalise proposals by the end of 2014 with the first step being implemented no later than 1 January 2016

Participating member states may be permitted to include additional products from commencement

This matches our expectations but the statement’s lack of detail suggests that the participants may be far from agreeing some of the key aspects of the tax. These include whether to keep the residence principle (although this is uncertain), how far the final directive commits to a progressive implementation, what type derivatives are included on day one and the sort of transaction and entity level exemptions which may be introduced. Clearly, a lot of work is still required. Slovenia did not sign the statement following the collapse of the government over the weekend. If Slovenia dropped out of the process, it would take the participating group closer to its minimum threshold of nine member states.

Member states that have so far been strongly opposed to the FTT (including the UK and Sweden) have today reiterated their opposition. The possibility of a further legal challenge from the UK remains.

UK's legal challenge dismissed

30 April 2014

The Court of Justice of the European Union (CJEU) has released its judgement (external link) on the UK’s request to annul the European Council’s decision to authorise the use of enhanced cooperation procedure to implement a FTT. The CJEU concluded that the UK’s challenge was premature and must be rejected.

The UK argued that use of the enhanced cooperation to introduce an EU FTT (as proposed by the Commission on 14 February 2013) would have extraterritorial effect and would result in non-participating member states incurring implementation and collection costs under the mutual assistance Directive. The UK claimed this would infringe European law on use of the enhanced cooperation (particularly Articles 326 and 332 Treaty on the Functioning of the European Union (TFEU). The CJEU rejected the UK’s request on the basis that its arguments were founded on the draft Commission Directive, which was not part of the decision to authorise the use of enhanced cooperation. The challenge was therefore premature. The CJEU did not consider the UK’s specific arguments on the draft Commission Directive. It simply noted that if and when an FTT is adopted under enhanced cooperation, it may be possible to challenge the measures at that point.

The UK government has always made clear that the original challenge was being made to protect its position (see our update on 19 April 2013 ). The CJEU’s judgement suggests that a subsequent challenge could be admissible, depending on the form and scope of any FTT. Given the direction of travel of continuing political discussions on an EU-11 FTT, it may be that a legal challenge proves not to be necessary. As a result, the UK government may be relaxed about the decision.

In terms of the wider debate, it appears likely that the EU-11 FTT may initially involve a tax on equities and equity derivatives only (i. e. similar to the Italian FTT), with a possible wider scope tax at a later stage. However, much remains to be agreed, particularly on further phases of the tax and the position of smaller member states. Further details may be available after The Economic and Financial Affairs Council (ECOFIN) meeting on 5/6 May 2014. It is still possible that a limited scope or first phase FTT could be in place from 1 January 2015 but that is no means certain. Watch this space as more should emerge over the next few weeks given political drivers to have an announcement ahead of the European elections.

Whilst many continue to question whether the proposed European FTT will happen, it was reported last week that some progress was being made.

France and Germany have reportedly agreed on the shape of the tax but the level of support for the proposals from the nine other participating member states is unclear. It is not obvious how much will be done to mitigate the concerns of both the financial sector and industry about the tax’s economic impact. Whilst changes to the existing draft Directive are likely, we understand some derivatives will stay within scope (although their type is unclear) and the tax will be implemented over two stages – a phased introduction. A phased introduction and significant modifications may also raise legal issues under the enhanced cooperation process.

For the time being, it seems the residence principle and issuance principle will remain. There has been no indication of whether the controversial counterparty principle (involving charging entities not in the FTT zone where they transact with counterparties which are) will be removed. However, from a European Commission update to its FTT webpage this month it appears the Commission is seeking to defend this from legal challenge.

Separately, another paper from the European Council’s Legal Service (CLS) came into the public sphere last week. This time, it briefly argued that the inclusion of spot currency transactions would “not necessarily be incompatible” with EU law. However, the CLS opinion admits that the inclusion of spot currency transactions would “exceed the Council’s power of amendment” and if pursued, the entire enhanced cooperation process would have to start again. The European Commission has also consistently stated the taxation of spot currency transaction is not legal.

A surprising development came on Tuesday of last week when a Brussels-based journalist tweeted that the European Court of Justice is expected to rule, without a hearing, on the UK’s legal challenge on 30 April. This has not been confirmed officially, but if accurate, suggests the legal challenge is unlikely to succeed.

The Taxation Commissioner, Algirdas Semeta, recently stated in an interview he was “cautiously optimistic” a revised proposal would be issued before May’s European elections. However, to most observers autumn seems a more realistic timeframe. It looks as if an EU FTT in some form retains strong political backing in key member states. It may well be driven forward despite continuing concerns about the potential impact on both the financial markets and wider economy.

February FTT news

24 February 2014

At a press conference on 19 February 2014, both Angela Merkel and Francois Hollande expressed continued support for an EU financial transaction tax (FTT). They also showed support for the pursuit of political agreement before the European elections in May at the conference, which followed a French/German government meeting. Merkel said good progress was being made and although there isn’t yet EU-11 consensus Hollande stated he would “prefer an imperfect tax to no tax at all”.

Both the French and German Finance Ministers have also hinted a staggered introduction is possible, though both parties will probably have different objectives. France is known to support the exemption of derivatives (and deferral may help achieve this) although Germany (particularly the Social Democratic Party) wants full inclusion. It is likely that a deferred introduction would suit both parties.

On Tuesday 18 February, the Economic and Financial Affairs (ECOFIN) convened and the FTT was due to be on the agenda. However, the official discussion was postponed and only informal discussions took place amongst the EU-11. There is clearly political will amongst major participating member states for an FTT but so far, this has not translated into a workable compromise

The European Commission now appears to accept that a phased introduction is a distinct possibility. Taxation Commissioner, Algirdas Semeta, conceded in a speech to the European Parliament that “there would be nothing wrong with a gradual implementation of the tax”.

We believe a possible compromise will be to introduce a FTT covering equities and potentially equity derivatives with a phased addition for some other asset classes.

However as noted in previous posts, a phased introduction is not necessarily an easy solution – and would create practical difficulties for implementation. There would also be legal question marks. It is debatable whether all the elements of the tax would need to be identified in the FTT Directive, with different start dates to various financial instruments/transactions. Would the general principles of the next steps be sufficient? It is also unclear whether a substantially changed FTT would be challenged as it is not within the original enhanced cooperation legal framework. With all the legal and political questions remaining, even political agreement before May 2014 seems a challenging objective.

Update on continuing FTT discussions

20 January 2014

An informal meeting of the EU-11 took place on 16 and 17 January. A couple of papers prepared in advance of these discussions suggest that the discussions focussed on some of the key design elements of the tax. These include, whether the residence or issuance principle should be adopted, the merits of exemptions for unlisted shares and small caps, public and private bonds and notably a partial exclusion or phased introduction for derivatives. A technical paper also suggests that an exemption for repos and securities lending is under active consideration.

Whilst this confirms that many of the obvious exemptions from the FTT are under consideration, the implication is that there isn’t much evidence of a more radical rewrite or shelving of the original Commission proposals at this stage. Indeed, the material we have seen coming out of the Greek Presidency proposes only a light redraft of the current Commission proposal, although acknowledging that key design issues are yet to be resolved. The Greek Presidency also propose that existing and proposed regulatory reporting requirements (e. g. under MIFID, MIFID II/MIFIR, and EMIR) should be capable of supporting FTT implementation, reporting and enforcement.

In terms of timing, the Greek Presidency is expected to give momentum to the political process and has already pencilled in an ECOFIN debate on 18 February and political agreement for an ECOFIN meeting on 6 May. This is an extremely challenging timetable given the current lack of political consensus and the legal uncertainties highlighted by the UK legal challenge and the previous legal opinion from the Council’s legal service. It seems likely that discussions may well extend into 2015 with a 1 January 2016 commencement date more likely than 1 January 2015.

Given European parliamentary elections, and the difficulties in securing political consensus, it may be that a phased introduction would be an attractive compromise. This however raises some important questions as to whether a phased introduction is permissible under the existing enhanced co-operation procedure. If upfront agreement is required on the full scope of the tax, this presents obvious political difficulties. The alternative of leaving the design of certain aspects of the tax (e. g. inclusion of derivatives) to be agreed at a later date is also problematic. Under this route additional measures may be introduced under delegated or implementing acts with the Commission responsible for initiating that process.

Renewed discussions on the continent

16 December 2013

FTT discussions amongst participating Member States have been picking up momentum in recent weeks. Discussions during an informal EU-11 meeting at the end of November reportedly focussed on the scope of the proposed tax as well the possibility of phased introduction. We understand there was discussion of the negative legal opinion produced by the Council’s Legal Service in September (see our 11 September post). It is widely known that the Commission Legal Service has produced a “non paper” in response to this opinion, and has dissented from the arguments set out by the Council Legal Service. The “non paper” has not been officially published.

The Commission working party on the FTT met on 12 December. The Lithuanian presidency prepared a paper suggesting that exemptions for portfolio compression, collateral transfers, repos and sovereign debt would be discussed. It is noteworthy that these discussions are still framed by the existing Commission proposal and it seems that little progress is being made on wider political agreement.

Germany will still be instrumental in driving the FTT forward and it is noteworthy that the Coalition agreement pledges support for swift implementation of a European FTT with a wide tax base and low tax rate.

Interestingly, the coalition agreement states that the EU FTT should include foreign currency transactions which had been exempt from FTT under the current draft proposal. The European Parliament’s Committee on Economic and Monetary Affairs (ECON) had recommended inclusion of spot currency trades in June – but in July the European Commission responded by saying this would be contrary to international law. So the apparent attempt to include this suggests there is anxiety about tax base and revenues.

In contrast to Germany’s position, France and Italy are known to support an EU-FTT with a narrower scope - possibly limiting the scope of the tax to the “issuance” principle only. Others (particularly smaller participating Member States) are concerned an “issuance” based tax will disproportionately benefit larger states and therefore still favour the Commission’s proposal.

It is clear there is still life in the FTT proposals – but with major questions of scope, impact and national interest to be negotiated, as well as potential legal challenges, nothing is likely to take effect before 1 January 2015. Given the lack of progress to date 1 January 2016 may be a more realistic target! The form of any eventual compromise is difficult to judge at this stage.

House of Lords report on EU FTT - "alive and deadly"

13 December 2013

On Tuesday, the House of Lords European Committee on Economics and Financial Affairs published a short report on the proposed EU FTT. Whilst the content of the report will not come as a surprise to many, some of the revelations made by key people within the EU Commission as part of the Committee evidence are of more interest.

Heinz Zourek, Director General of Taxation and Customs Union at the European Commission, and the person responsible for taxation and customs department within the European Commission admitted to the Committee on 2 October that the Commission has “yet to collect all of the information necessary to conduct a thorough analysis”. Mr Zourek also argued during his evidence to the Committee (to some disbelief) that stock exchanges in third countries would benefit from a financial incentive in return for assistance in collection of the tax.

The Committee also expresses surprise at the claim made by Manfred Bergmann (Director of Indirect Taxation and Tax Administration at the European Commission and Heinz Zourek’s number two in respect of FTT) that there would be no legal obligation on UK authorities to collect the tax. This claim appears to be in direct contravention to the UK’s obligations under the Mutual Recovery Directive and indeed contradicts what Heinz Zourek gave in his own evidence in October.

The report ends with a brief discussion of the recent legal opinion produced by the European Council’s Legal Service (see our blog post from 11 September 2013) and finds the opinion “highly persuasive”. The Committee concludes that in its response to the CLS opinion, the European Commission has relied on “assertions which are not backed by the detailed reasoning which the Council Legal Service opinion calls for”. The Committee did not have the benefit of reading the Commission Legal Service “non paper” which robustly defends the Commission’s view that the current FTT proposals conform to customary international law and EU law.

The House of Lords report is expected to be debated in the House of Lords at a later date.

German coalition support for EU FTT - will it rekindle process?

31 October 2013

In the last 24 hours, it’s been reported that a “grand coalition” between Merkel’s CDU/SDU party and the SPD will seek further EU FTT progress. Before the German elections in September, many commentators said the EU FTT’s fate lay in Germany’s hands. It now appears - perhaps unsurprisingly - that the next German government will continue to lend support.

Lead negotiators for both the CDU and SPD have shown support. Commenting on the second round of coalition talks on 30 October, SPD negotiator Martin Schulz said “we agreed to push ahead with the financial transaction tax”.

He added: "When a government is formed and begins work in the coming weeks, it will launch this initiative at the next European summit."

"Three big, grand coalition parties are placing this on the agenda and pushing it," said Herbert Reul, the CDU's lead negotiator on Europe. Interestingly, Herbert added that the 11 interested nations still need persuading and have to "do their homework."

There are rumours that the “grand coalition” want an FTT with a broad scope and low tax rates (with exemptions for pension funds and small investors). However, with a German coalition not expected before Christmas, it is likely to be some time before any renewed momentum translates into outcomes. In the meantime, timetable and the form of any amendments to the scope of the draft Directive remain unclear.

Legal obstacles to EU FTT in its current form

11 September 2013

The EU Council legal service has issued an opinion expressing the unqualified view that the FTT proposals are not compliant with EU law. The opinion is confined to a question raised in the Working Party on Tax Questions – Indirect Taxation, specifically about the deemed establishment principle. This is, broadly, the provision which deems an entity outside the FTT zone but which is transacting with an FTT zone entity as itself established in the counterparty state, and requires both parties to pay FTT to that state. It is this principle which means, for example, that a UK bank, US bank or Chinese bank transacting with, say, a Spanish bank in US securities is liable to pay Spanish FTT. This is one of the most significant extra territorial elements of the FTT. The legal service has concluded that this

Breaches international law norms required to be respected under the Treaty on European Union (Maastricht Treaty)

Is not compatible with Article 327 TFEU as it infringes the taxing competencies of non-participating member states

Is discriminatory and leads to distortion of competition

The UK’s legal challenge (PDF 714KB) to the reference of FTT to the enhanced cooperation process (see our 19 April post) relied expressly on point 2 (though potentially more broadly expressed and not confined to the deemed establishment principle) – so that, indirectly, the opinion supports the UK legal challenge. The other issues in the legal challenge are less clearly tied to the points covered by the conclusions of the Legal Service but there is an overlap in the issues considered.

The role of the Council in the context of the enhanced cooperation process is important, as it was the Council which referred the FTT to enhanced cooperation (Council Decision 2013/52/EU). It is therefore the Council which is potentially subject to legal challenge, and against which the UK has brought its action.

The opinion considers the supporting arguments for the conclusion reached in more detail. However, it should be noted that because the opinion is expressly confined to the validity of the establishment principle, it leaves wide open the question of whether on fuller analysis the tax would breach EU law on other grounds as well.

The opinion and extent to which it has been reported are likely to mean this legal analysis will present a further significant hurdle for the EU FTT to clear. When added to increasing concern about the practical impact of FTT, it is bound to make it difficult to progress the proposals in their current form. This reinforces the likelihood that the proposals will be substantially watered down before adoption. One possible outcome would be the reduction of FTT in scope to the issuance principle, which would give a clear nexus between the charging state and the transaction, and would fit with UK SDRT, French and Italian FTTs. But either this would need to be confined to securities, or a solution would need to be found to the derivatives problem, as OTC derivatives are not issued and are not easy to catch except by complex mechanics relating to the underlying security.

Alternatively it may be necessary to confine the residence principle to entities established in participating member states on more conventional tests (and it is also possible that some of the other tests would be subject to challenge). Any exemptions are likely to have to be much more clearly defined and workable than the current provision to exclude transactions which can be demonstrated to have no effective connection with a participating member state. The problems with this are noted by the opinion, which dismisses the carve out as unworkable in practical terms.

So, the challenge of redesigning the FTT could be considerable. However, the drive to raise revenue and the political capital invested in the current proposals may well make it too difficult to abandon the tax entirely, while a series of national FTTs or similar taxes subject to different national rules would not be welcome for taxpayers either. The next few weeks, particularly after the German elections, may give a better sense for how the conflicting pressures will be resolved – and what the timescale will be.

Signs of shifting positions.

The European Parliament (“EP”) today adopted the ECON opinion on the Commission’s draft FTT directive. This was expected but it is important to note that the EP only has a consultative role in relation to the FTT.

What is more significant is that during the debate in the EP, Algirdas Semeta (the EU Commissioner responsible for the FTT) acknowledged publicly for the first time that the Commission will consider amendments to the current proposals. Although the Commission could not accept the EP’s proposals to include spot currency transactions and introduce a “transfer of legal title principle”, citing “legal reasons”, Semeta was prepared to consider proposals for lower initial rates for government bonds and pension funds, and that the application of the FTT to market makers and non-financial companies, particularly SMEs should be further examined. However the tone of the comments was that the EP’s proposed amendments form a useful basis for continuing discussions with member states, rather than being accepted en masse.

Turning to specifics, the EP’s opinion (PDF 314.KB) and the publication by the commission of a QA on the current proposals (PDF 277KB) highlight some softening positions from even the FTT’s strongest supporters:

Market makers: There is recognition that where a market maker is providing liquidity that FTT exemption may be appropriate. However the Commission still struggles to distinguish between activities “useful for market liquidity” from proprietary trading activities and therefore seem to be lukewarm on an exemption.

Government bonds: The Commission is still resistant to an exclusion but is prepared to consider a lower rate and perhaps a delayed introduction.

Pension Funds: Again the Commission is resistant to an exclusion but is prepared to consider lower rates – although perhaps only for transactions involving the pension fund itself (rather than intermediary transactions)

Repos: The Commission’s QA suggests that the rate could be proportionate to the term of the repo where the maturity is less than one year (see example 59) and the EP propose a rate of 0.01% for financial transactions with a maturity of up to 3 months.

However there is little evidence of a public change of stance on some other important issues:

Derivatives: Neither the Commission nor the EP proposed exclusions for derivatives, although the Commission shows no enthusiasm for the significant extension to the issuance principle proposed by the EP.

CCPs: The Commission argues in its QA that one should “look through” CCPs. It is debatable whether this is correct in terms of the current wording of the directive but would mean that the interposition of an FTT-zone CCP wouldn’t taint transactions between non FFT-zone financial institutions but likewise a non-FTT zone institutions trading with the FTT zone would not be able escape FTT on its leg of the transaction merely by clearing through a non-FTT zone CCP

Collateral: The Commission is of the view that a legal transfer of collateral is separately subject to FTT, suggesting instead that collateral should be pledged rather than legally transferred.

Economic substance: The Commission has failed to provide any clarity on what sort of transactions may not be subject to the FTT as a result of there being no link between the economic substance of the transaction and a FTT jurisdiction.

Counterparty identification: The Commission ducks the real issues on this, instead hoping trading platforms will “apply relevant IT tools and other solutions” to resolve this!

Accounting and reporting: The Commission clearly expects non-FTT zone member states to assist collection under mutual co-operation mechanisms. This places London at a significant disadvantage compared to (say) New York and Hong Kong.

In reality, we still expect much more radical rewrite of current proposals, but Semeta’s comments are an important first step.

Update from the European Commission

The European Commission have updated their FTT webpage (external link). This confirms a delay to the previously published commencement date of 1 January 2014.

However the Commission appear to be still of the view that if political agreement is found before the end of 2013 the FTT – in some shape - could still enter into force towards the middle of 2014. The Commission make no comment on the actual future shape of the FTT or the sorts of concessions that are currently under discussion. We have commented on these in previous posts.

In addition the Commission have formally published a couple of QA documents on the current FTT proposals. Some of this material has previously been in circulation but the papers nevertheless contain some useful insight into the Commission’s proposals. We will comment further in a future update.

European Parliament ECON vote

On 18 June the European Parliament’s Committee on Economic and Monetary Affairs (ECON) voted in favour (albeit with some proposed changes) of the Commission’s FTT proposals. It has always been recognised that the European Parliament is a strong supporter of the Commission’s proposals. However, the ECON’s opinion is not binding and although the proposed changes suggest that the committee recognises some of the key concerns with the current proposals they are unlikely to adequately address those concerns. It remains likely that on-going discussions between Member States and the Commission will produce much more substantial change.