Tuesday, May 13, 2014

E.U. Court of Justice Rejects United Kingdom Challenge to Financial Transaction Tax

The E.U. Court of Justice has rejected a challenge brought by the United Kingdom against the decision authorizing eleven Member States to establish enhanced cooperation in the area of a financial transaction tax. The decision of the Court, while not a ruling on the substance of the tax, is an endorsement of the procedure being used by the eleven Member States to implement a financial transaction tax. In its ruling, the Court found that the arguments put forward by the United Kingdom were directed at elements of a potential FTT and not at the authorization by the E.U. Council to establish enhanced cooperation allowing a plurality of Member States to move forward to enact a financial transaction tax.

Now that 11 E.U. countries, including Germany, France, Spain and Italy, back the implementation of a financial transactions tax, the European Commission was able to move forward and make a concrete proposal for the European Parliament to consider. E.U. Tax Commissioner Algirda Semeta delivered a proposal for a financial transactions tax to the Economic and Financial Affairs Council (ECOFIN) in order to facilitate quick progress on this item. The Commissioner noted that, in addition to being a new source of revenue from a currently under-taxed sector, the financial transaction tax will encourage more responsible trading. Thus, aside from its revenue raising potential, a financial transactions tax could reduce harmful and speculative short-term and high speed trading and thereby link a trade more closely to the underlying fundamental economic market conditions and make financial markets less volatile.

Commissioner Semeta said that the proposal to ECOFIN is based on a Commission Directive proposed last year. The proposal recommends that a financial transaction tax be applied to all financial transactions, in particular those carried out on organized markets such as the trading of equity, bonds, derivatives, and currencies. The tax would be levied at a relatively low statutory rate and would apply each time the underlying asset was traded. The tax collection or the legal tax incidence should be, as far as possible, via the trading system which executes the transfer.

The proposed Directive defines a financial transaction as the purchase and sale of a financial instrument before netting and settlement, including repurchase and reverse repurchase and securities lending and borrowing agreements; the transfer between entities of a group of the right to dispose of a financial instrument as owner and any equivalent operation implying the transfer of the risk associated with the financial instrument; and the conclusion or modification of derivatives agreements.

The Court rejected the U.K. argument that the FTT should not go forward because it produces extraterritorial effects and read together with other Directives on mutual assistance and administrative cooperation in the area of tax, would impose costs on non-participating Member States. The Court said that the decision to allow enhanced cooperation contains no provision on the issue of expenditure linked to the implementation of enhanced cooperation. That issue can therefore not be examined before the formal introduction of the FTT. Irrespective of whether the concept of expenditure resulting from implementation of enhanced cooperation does or does not cover the costs of mutual assistance and administrative cooperation referred to by the United Kingdom in its plea, reasoned the Court, it is obvious that the question of the possible effects of the future FTT on the administrative costs of non-participating Member States such as the U.K. cannot be examined so long as the principles of taxation in respect of that tax have not been definitively established as part of the implementation of the authorized enhanced cooperation.

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