Highlights

• The European Financial Transactions Tax (FTT) is happening, the debate now concerns finalising the details: which assets, what rates, date of introduction, size of revenue? The next twelve months will determine whether an ambitious FTT is achieved or the financial lobby succeed in watering it down.

• The German elections have produced a favourable result for the FTT.  Angela Merkel’s new coalition will see the anti-FTT Liberals replaced by the Social Democrats or the Greens, both of whom included a commitment to the FTT in their manifesto.  Negotiations over the precise make-up of the coalition could take some weeks, however there is much to play for: the new Government Programme may include a concrete commitment to allocate a proportion of FTT revenues to development.

• Whilst a legal question mark was placed against one aspect of the proposed FTT by the legal service of the EU Council of Finance Ministers, the legal validity of the FTT was swiftly and robustly affirmed by leading EU figures such as Tax Commissioner Semeta.

• The group of 11 countries proceeding with the FTT could see their number swell in coming months with the addition of the Czech Republic and Croatia.

Background

On 22 January 11 European states – including Germany, France, Italy and Spain – were given the green light to proceed with implementation of a Financial Transactions Tax (FTT) under the EU’s Enhanced Cooperation Procedure (ECP), which is estimated to raise approximately €34bn  each year (EU FTT Impact Assessment, p.23). Although there has been major pressure from the financial sector either to drop or water down the proposals, key European nations are targeting implementation of the tax during 2014. The 11 nations  are currently debating the details of the FTT legislation, starting with scope (i.e. which asset classes will be taxed).

1) Legal Challenge rebutted by Commissioner Semeta and others

The legal service of the EU Council of Finance Ministers (just a small part of the EU legal service) has produced a legal opinion suggesting that one element of the FTT’s proposed residence principle may be contrary to the legal principles of the EU, and therefore may have to be changed. Other parts of the EU legal service disagree, the European Commission disagrees, and the German government disagrees.

The leaked opinion produced dramatic headlines, engineered by opponents of the FTT, asserting that the FTT had ‘hit a wall,’ but Commissioner Semeta dismissed these claims noting that the “FTT is legally sound and fully complies with EU treaties and international law.”  He is also "confident that the Commission's arguments and arguments of the legal service of the Commission will demonstrate very clearly to our member states that the approach which has been taken in the proposal is the correct one and does not breach any provisions of the Treaty."

Owen Tudor of the TUC has produced a summary of the main reasons why this legal argument is not a serious one – in essence that this opinion is both non-binding and, in any case, only concerns the method of delivering an FTT rather than its innate legality.

2) The Impact of the German Elections

The German elections of 22 September  produced a victory for Angela Merkel’s CDU/CSU, with Merkel securing 41.5% of the vote and 311 seats. But this still leaves her short of a governing majority, and therefore reliant on securing a coalition with either the (pro-FTT) SPD or the (pro-FTT) Green Party. At present, it seems a Grand Coalition with the SPD is the most likely outcome but this is far from certain. Weeks if not months of negotiations over a joint programme will take place. However, there is a strong possibility, as reported recently in the Financial Times, that the SPD will require the FTT as part of the Coalition Agreement.

The result is good news for the FTT. Merkel’s previous coalition partners - the Liberal Party (FDP) - which opposed the FTT, gained no seats in the Bundestag for the first time in their history. The new coalition will be composed entirely of parties in favour of the FTT, and may even include in its Government Programme a concrete commitment to allocate some of the revenues to development.

Germany – a staunch proponent of the FTT over recent years – looks likely to become an even more forceful advocate.

3) Allocation of FTT revenues – France and Germany look towards an allocation to development and climate change

EC Tax Commissioner Semeta called the FTT ‘an attractive funding solution for our global challenges such as development and climate change…We continue to [push for this].’ French development minister Pascal Canfin has announced that 15% of their unilateral FTT will be put towards development and climate change causes. This builds on an earlier statement from Pierre Moscovici, the French Finance Minister, who stated that that "there are at least two things that can be covered: first part should be allocated to development and then a second part to the economy.”

In Germany, Angela Merkel has called for part of the FTT revenue to be used to promote European integration.  This may indeed be where part of the revenue goes, but promisingly, Sigmar Gabriel, the Social democrat leader, wishes to use the EU FTT revenues to reach the 0.7% commitment on ODA . The SPD included this within its election program . As mentioned above, negotiations over the coalition government’s programme could produce a more concrete commitment on this issue.

Belgium too stands as a nation in favour of direct hypothecation to development and climate change.

4) Driving the process forward

Having assumed the Presidency of the Council of the European Union in July 2013, Lithuania will be an important player for the remainder of the year, chairing the Working Party on Tax Questions. Although the country is not currently participating in the Enhanced Cooperation Procedure (ECP), it is by no means an opponent of the tax, has considered joining the ECP in the past, and has not ruled out participating in the future, though like its neighbour Latvia, will await further clarity regarding its scope.

When Greece assumes the Presidency in January 2014, it will be the first time one of the ECP-11 countries has held the Presidency since the ECP began, and the Greeks will do so in the immediate period leading to the European Parliament elections (22 may 2014). It is to be hoped that they use their Presidency to further increase the momentum behind the FTT.

5) Possible new ECP members – Croatia and Czech Republic

In a meeting with leaders from fellow participants Slovenia and Austria, Croatian Prime Minister Zoran Milanović declared that "we need a tax on financial transactions". With a high level of indebtedness and spending cuts to be made, as well as close ties to Germany, Croatia could well become the newest member of the ECP.

That is unless the Czech’s get there first.  Due to the collapse of the government in the Czech Republic in August, new elections will be held in late October, which are likely to bring the Social Democratic Party to power, possibly in coalition with the Communists, under Bohuslav Sobotka who has declared his support for an EU FTT. Indeed, in December 2012 the SDP dominated Senate passed a resolution supporting the use of enhanced co-operation to implement the FTT.

6) The scope of the FTT

The ideal outcome – both in terms of revenue and anti-avoidance – is for a broad-based FTT covering shares, bonds and derivatives. There has been some discussion about the best way to achieve this. On 22 June 2013, a report on the 11 nation ECP was formally voted through by the influential ECON committee of the European Parliament. The report supported the Commission's proposal for a wide-scope financial transaction tax, with stocks and bond trades taxed at 0.1% and derivatives trades taxed at 0.01% in 11 EU countries. However, it also proposed lower rates until January 2017 for trades in sovereign bonds and trades by pensions (to take place at 0.05%). A new legal ownership principle was also inserted to make tax avoidance more costly.