Finance: The proposed European financial transaction tax “is discriminatory”, exceeds member states’ jurisdictions, and is contrary to EU law, legal advisors to EU leaders have written in a leaked memo.
Lawyers for EU finance ministers have said the proposed European financial transactions tax is “is discriminatory and likely to lead to distortion of competition to the detriment of non-participating member states”, according to a leaked advisory memo.
In addition, the FTT proposal “infringes upon the taxing competences of non-participating member states”, the European Council’s legal service wrote on September 6 in an internal opinion for finance ministers, which was published by the Financial Times on Tuesday.
The FTT is currently in the process of being adapted by 11 European countries--including Belgium, France, Germany, Italy and Spain--with the aim of dampening risky financial engineering and providing a safety reserve for the financial sector and struggling government budgets. It is being pursued under the “enhanced cooperation” mechanism that allows nine or more member states to proceed with common rules when agreement cannot be reached at EU-wide level.
The UK, supported by Luxembourg, has launched a legal assault against the levy, which is sometimes called a “Tobin Tax”, before the European Court of Justice in Kirchberg.
“Exceeds member states’ jurisdiction for taxation”
The EU lawyers’ arguments focus on article 4 of the proposed regulations, which were drafted by the European Commission and introduce a “residence principle”. That means that the FTT must be paid by all parties and intermediaries in a transaction whenever at least one is based in the FTT zone.
But the council’s legal memo concludes that policy: “exceeds member states’ jurisdiction for taxation under the norms of international customary law as they are understood by the union”.
“In spite of some member states not participating in the enhanced cooperation, the FTT would be applied in their territories,” they wrote.
The European finance ministers’ lawyers believed that the legislation introduces an extraterritoriality issue not supported by EU case law. “The concern that the introduction of a FTT will cause migration of financial transactions to non-participating states does not justify in itself extraterritorial tax legislation.”
If only one party to a transaction is based in a member state, that country will receive both sets of tax payments instead of only one, the lawyers observed. And financial institutions outside the FTT zone will be paying taxes to the treasuries of participating member states, but those located in participating EU nations will never have to pay the levy outside their home countries.
“No part whatsoever in the crisis”
In addition to banks, the draft FTT rules would extend the levy to, for example, investment funds and on mutual fund transactions. The council’s lawyers stated that: “a substantive part of the financial institutions and of the types of transactions that would be taxed under that provision have had no part whatsoever in the crisis and are not liable to contribute to any crisis in the future”.
As of this writing, a spokeswoman for Algirdas Šemeta, EU tax commissioner (photo), had not returned Delano’s message seeking comment. However, Semeta wrote on his Twitter feed Tuesday afternoon: “#FTT is legally sound and fully complies with EU Treaties and international tax laws”.
The legal memo is purely advisory and EU leaders are not obliged to follow its conclusions.
The European Parliament widely supported the commission’s draft over the summer. The plan now must be finalised by the council itself.