The threat of the financial transaction tax (FTT) being introduced in part of the EU has re-emerged as a reality following a meeting of Finance Ministers from participating Member States. The ten remaining Member States party to the enhanced co-operation procedure (ECP) for taking forward plans for a new FTT are claimed to have made a significant step towards realisation of the tax, according to press reports. Finance Ministers of the ten countries met in Luxembourg on 10 October 2016 and, apparently, reached an agreement in principle on some of the core features of the tax. “A final agreement has never been closer,” EU Commissioner Pierre Moscovici said after the meeting.
Proposals for an FTT to be taken forward via the ECP appeared to have all but stalled in 2015 with little or no progress being made. However, despite the withdrawal of Estonia from the list of participating Member States, a December 2015 meeting saw an agreement in principle on some of the outstanding issues reached.
The deadline of June 2016 for further progress was, however, missed and a state of play report prepared for the EU Council and published on 03 June 2016 highlighted this lack of progress, leading to calls by the Austrian Finance Minister for Member States to make a final decision on their participation by October 2016.
Agreement in principle?
According to press reports, Finance Ministers of the ten participating Member States met during the regular Eurozone meeting in Luxembourg on 10 October 2016. This 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 in the coming weeks.
German Finance Minister Wolfgang Schaeuble told reporters that, “The countries that had reservations last time have withdrawn them, so some countries now want to take a look at the possible consequences of the text” that will be drawn up by the European Commission. “We want to have a decision by year-end, a positive one, if possible.”
The agreement in principle which has been reached is apparently based on Austrian compromise proposals. It is understood that these proposals deal with the “core principles”, though leave further details to be worked on by the EU Commission. In the past, it has been the detail of the proposals that participating Member States have found it hardest to agree.
The Austrian proposals, which have not been made public, apparently include agreement on certain core aspects of the FTT proposal (many of which follow the December 2015 document).
Share transactions will, in principle, be taxed where either the residence or issuance tests are met. However, initially the FTT will only apply shares originating in the participating Member States. However, after an unspecified transitional period, the tax would be widened to all shares “unless participating Member States decide otherwise”
It is understood that, as suggested in the December 2015 document, all transactions in a chain will be taxed. However, market makers will be taxed at a reduced rate.
Derivative transactions will, it seems, be taxed based on the original and controversial Commission proposal based on a combination of residence and issuance (presumably including the particularly extra-territorial “counterparty principle” which taxes derivatives entered into with a counterparty in the FTT zone). However, exceptions have been agreed for repos and reverse repos and transactions of “public debt managers”. Transactions in derivatives over public debt will initially also be excluded from the scope of the FTT.
The EU Commission has now been asked to draw up new text for the FTT based on this agreement by the participating Member States. EU Commissioner Pierre Moscovici confirmed by tweeting: “Financial Transaction Tax: Core elements agreed. We'll prepare a complete legal text for further discussions.” He said agreement on the tax may be reached later this year.
The territorial scope of the proposed FTT is, of course, a particularly significant issue. The original EU Commission proposal suggested adopting a very wide approach under which all transactions should be caught by the tax where any party to the transaction was based in a participating Member State, raising substantial concern from non-participating States and potential legal challenges to the validity of the proposed FTT. The suggestion from the Austrian proposal is that this will indeed by adopted in relation to derivatives, despite doubts as to its legality. As regards share transactions, even though the FTT seems initially to be limited to shares issued by issuers in the FTT zone, the assumption appears to be that this will be widened out to all share transactions involving an FTT zone party at a later stage.
Of course, cynics will say that we have been here before and each time reaching agreement on the detail has proved too difficult. Much, therefore, will depend on the text to be drafted by the Commission and the attitude and appetite of the ten participating Member States to reach some form of resolution.
On the other hand, this agreement indicates that the political will to progress the FTT may remain - and may potentially have been reinvigorated by the Brexit vote. However, the agreement on these “core” features leaves many details left to be agreed still and it seems likely that there will be further stumbling blocks ahead for the FTT. The EU Commission has been quick to highlight the announcement as a major breakthrough, but the more measured response of the German Finance Minister indicates that it is far from certain that a final agreement will emerge. In any event, given the past record of progress on the FTT, the Commission’s speculation that agreement might be reached by the end of 2016 appears somewhat optimistic to say the least.
Simmons & Simmons will be holding a conference call on the revised EU Commission proposal when it is released.
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