Brexit casts further doubt on the FTT

Member States are concerned over the impact of introducing an FTT on their ability to attract post-Brexit business.

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Further doubt has been thrown on the future of the proposed EU financial transaction tax (FTT) by reports that Member States have cancelled scheduled FTT meetings due to concerns over the impact that imposing such a tax may have on their efforts to attract London-based banks and other financial institutions post-Brexit. The planned FTT is being seen as a serious threat to the efforts of those Member States involved in the enhanced cooperation procedure (ECP) process to benefit from post-Brexit opportunities.

Background

In December 2015, an agreement in principle was reached on some of the main outstanding issues on proposals for an FTT to be taken forward via the ECP. A further meeting of Finance Ministers of the remaining ten participating Member States in Luxembourg during October 2016 resulted in an agreement in principle to progress the FTT, with the EU Commission being tasked with drawing up the legal text for the proposal.

However, there has been little or no progress since then and no word from the EU Commission concerning a further draft. According to press reports, conflicting approaches to the treatment of pension funds under the proposed tax appear to be undermining any progress, with several Member States considering withdrawing from the process amidst concerns over the impact on their chances of attracting any banking and other finance industry business moving from London in the wake of Brexit.

September 2017 ECOFIN meeting

Further press reports coming out of the informal meeting of Finance Ministers in Estonia on 16 September 2017 support the latter analysis. In particular, it appears that several meetings to progress the FTT have been cancelled during 2017 and that the Finance Ministers of the ten participating Member States have now agreed to further study whether to continue with the proposal in the light of Brexit.

France, Germany and other EU Member States have been lobbying intensively to attract London-based banks and other finance businesses to relocate some or all of their operations to their respective countries after Brexit. However, understandably, it appears that the prospect of operating the FTT in those jurisdictions is hampering their efforts.

More problems on the way?

Although the European Commission is reported as saying that the Finance Ministers “agreed on a way forward to progress on the FTT proposal on the basis of the agreed core engine and finding a solution for pension funds”, these not inconsiderable technical difficulties are compounded not only by Brexit but also by looming elections in Germany. It is far from certain that a future German administration would be supportive of an FTT in the absence of support from all Member States. With continuing uncertainty over the support of Belgium and Slovenia for the proposal, the future is uncertain. The ECP procedure requires a minimum of nine Member States to progress and with only ten Member States currently supporting the process, it would only take two more to back out for the ECP process to totally run aground.

Comment

It now appears far from clear whether the October 2016 agreement will lead to anything concrete. Not only do there remain significant differences amongst the Member States involved on points of detail, but there are now serious political questions over the ongoing level of support for the measure. Despite the fact that these issues of competitiveness were raised by many when the original FTT proposals were released, and then when certain Member States sought to move forward via ECP, Brexit and the opportunities that this may provide other Member States to attract banks and financial service providers have thrown this into sharper relief, such that the risk of the FTT being implemented appears to be receding once again.

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