Friday, April 05, 2013

U.K. Parliamentary Committee Questions Extraterritorial Reach of E.U. Financial Transaction Tax

In a letter to Treasury Financial Secretary Greg Clark, the U.K. Parliament’s European Union Committee warned that the financial transaction tax being implemented by eleven E.U. member states, including Germany and France, under the principle of enhanced cooperation could have a significant impact on non-participating states through the residency and issuance principles embedded in the tax.

The European Parliament has approved the European Commission’s proposal for a financial transaction tax, which would impose a 0.1% tax for shares and bonds and a 0.01% tax for derivatives. The adopted text includes an issuance principle under which financial institutions located outside the E.U. would be obligated to pay the financial transaction tax if they traded securities originally issued within the E.U.

The issuance principle means that financial instruments issued in a participating state will be taxed when traded even if those conducting the trade are outside the financial transaction tax zone. For example, the tax would apply when a U.K. pension fund purchased German shares from a U.S. bank. Manfred Bergmann, Director of Indirect Taxation and Tax Administration for the European Commission, told the Committee that the issuance principle was a key element of the financial transaction tax and an important anti-avoidance measure. Director Bergmann estimated that the issuance principle would bring another 4 percent of trades within the scope of the tax, with the other 95 percent already covered by other criteria. The Committee remains concerned about the scope of the issuance principle.

More broadly, the Committee believes that the proposal for a financial transaction tax does not satisfy the criteria for enhanced cooperation, in particular the requirement to respect the rights and obligations of non-participants. The Committee finds it particularly unacceptable that a full analysis of the impact of the tax on non-participating member states was not made available before the vote on enhanced cooperation was taken. The Committee urged Treasury to consider challenging the tax in the European Court of Justice.

Director Bergmann also assured the Committee that there would be no legal obligation on U.K. tax authorities to collect the financial transaction tax. He said that U.K. and U.S tax authorities might be invited to collect the tax, but it would be entirely voluntary. In theory, the financial institution in the participating member state could be requited to pay the tax.

Despite this assurance, the Committee was concerned with possible adverse consequences for U.K. financial institutions. For example, in the case of a financial transaction involving German shares between a U.S. and a U.K. financial institution, application of the issuance principle would mean that a financial transaction tax would be imposed on both parties payable to the German tax authorities. Given that collecting the tax from the U.S. financial institution may prove difficult, the German tax authorities could impose joint and several liability for both instances of the tax on the U.K. entity and recover the entire amount using the E.U. mutual assistance regime.

The Committee also took a skeptical view of the European Commission’s belief that the E.U. financial transaction tax would pave the way for a global financial transaction tax. While it is true, as pointed out by Director Bergmann, that the eleven E.U. members implementing the tax represent 90 percent of the eurozone economy, it does not follow that it will be difficult for other world financial centers to resist the tax. The Committee stated that it is almost certain that the U.S. will never enact a financial transaction tax and, indeed, may even view such a tax with hostility as an extraterritorial tax.