On October 23, 2012, the European Commission (the executive body of the European Union) proposed a Council Decision to enhance cooperation throughout the EU with a European Financial Transactions Tax (“FTT”). The Council Decision follows a litany of previously failed attempts to enact an EU-wide FTT.
The harmonized European Financial Transactions Tax could have significant advantages for the economies of participating Member States. Lithuanian Commissioner for Taxation Algirdas Šemeta explains:
“There are EU wide benefits to a common FTT, even if it is not applied EU wide. It will create a stronger, more cohesive Single Market and contribute to a more stable financial sector. Meanwhile, those Member States that have signed up for this tax will have the added bonus of new revenues and fairer tax systems that respond to citizens’ demands.”
The legal bases for the FTT are the enhanced cooperation provisions laid out in Article 20 TEU and Articles 326 to 334 TFEU. These provisions create a special decision-making procedure whereby a minimum of nine Member States is needed to reach a binding decision. The resulting legislation is binding only on those Member States that are parties to the decision. The October 23rd initiative is the most significant instance of a small group of nations moving forward without the rest of the EU. The only other times the enhanced cooperation provision has been used is in simplifying cross-border divorces and cross-border patents.
How the FTT will work
The tax would be levied on all transactions between financial institutions involving financial instruments when at least one party to the transaction is located in the EU, and would have to be paid by each party to a transaction. The exchange of shares and bonds would be taxed at a rate of 0.1%, and derivative contracts would be taxed at a rate of 0.01%. The decision is only meant to fix a minimum rate, and Member States would be free to apply higher rates. The FTT aims specifically at taxing the 85% of financial transactions that take place between financial institutions. House mortgages, bank loans, insurance contracts and other normal financial activities carried out by individuals or small businesses fall outside the scope of the Proposal.
The revenue from the tax would be shared between the EU and Member States. The portion that goes to the EU would partially reduce national contributions.
The Long Road to Enactment
In September 2011, the Commission had tabled a proposal for a common system of FTT. Two rationales were raised in support of the new tax. First, it would allow the financial sector to make a fair contribution to the costs of the crisis, after benefiting from very significant financial support from governments since the start of the current crisis. President of the Commission Manuel Barroso stated,
“That is important also from the political point of view, because it shows that we are asking the financial sector to also make a contribution. I believe it is right to do it, because the financial sector which has benefited from a lot of solidarity should now return the favor by showing greater responsibility. And it should also make a contribution that is clear from the citizens’ point of view. This is also why we need more responsibility in the financial sector.”
The second rationale for the tax was that a coordinated framework at the EU level could help create a stronger financial market by avoiding competitive distortions and discouraging risky trading activities. It would also be a strong signal to promote the introduction of such a tax at global level.
The FTT was solidly blocked by nations like the United Kingdom and Luxembourg, which have strong banking industries, and by Sweden, given its own bad experience with the tax after introducing it nationally in the 1980s.
The UK has never supported an EU-specific FTT, stating that any tax would have to be applied “globally” to prevent financial traders rerouting their transactions to countries outside the EU. In a highly critical report on the proposal published in March, the House of Lords described the tax as “flawed” and warned that its adoption by the UK would force banks to relocate away from the UK’s financial center in London.
Following intense discussions, consensus was reached at the ECOFIN (Economic and Financial Affairs Council) meetings in June and July 2012 accepting the fact that that unanimity would not be reached within a reasonable period. At that time, a strong core group of Member States expressed an interest in proceeding with a common system of FTT through enhanced cooperation.
On September 28th, 2012, exactly one year after the initial Commission proposal had been tabled, France and Germany sent a letter to Commissioner Šemeta, officially requesting enhanced cooperation to be authorized on the basis of the Commission’s proposal. Similar letters followed from Austria, Belgium, Greece, Italy, Portugal, Slovakia, Slovenia, Spain and, at the last minute, Estonia. The minimum number of States to activate the enhanced cooperation provision was therefore reached.
The Commission analyzed these requests to ensure they met the conditions for enhanced cooperation laid down in the Treaties and concluded, through the Proposal adopted October 23, 2012, that all legal conditions were met for the enhanced cooperation procedure to be allowed.
Next Steps
The next step for the eleven Member States to move forward is to adopt the Proposal by obtaining a qualified majority of Member States during the next meeting of Ministers for Economic Affairs and Finance, scheduled for November 13, 2012, as well as the consent of the Parliament.
The Commission has proposed that the tax become effective in 2014. In addition, any Member State that wishes to join at a later stage may do so under the same conditions as the Member States that have participated in the process from the start.