The FTT is dying a death of a thousand cuts – this could be the final one

The EU’s Financial Transaction Tax has taken another big blow today – possibly a fatal one.

A leaked legal opinion by the European Council’s legal service has warned that the current set up of the FTT pursued by 11 member states “infringes” on and “is not compatible” with the current EU treaties (the FT’s Brussels blog has posted the full text and done a good round up of the issues at play).

The legal service was asked to look specifically into whether the FTT’s counterparty principle (taxation based on where the counterparty of the transaction is based) infringed on the right of member states which are not taking part in enhanced cooperation policy not to be affected by said policy (Article 327 TFEU).

The criticism is very much in line with complaints raised by the UK as well as by previous leaked documents (which we exclusively published) which showed growing concerns over the extraterritoriality of the FTT and that it may be discriminatory against non-participating members:

“Concerning the deemed establishment based on the counterparty principle, raises issues of extraterritorial exercise of jurisdiction, disrespect of non-participating Member States' rights under the Treaty, and compatibility with the principles of free movement of capital and non-discrimination.”

“[The counterparty principle] would constitute the exercise of jurisdiction over entities located outside the geographical area concerned by the legislation adopted under the enhanced cooperation.”

“The FTT proposed will be levied not only on risky activities but to a large extent also on activities with a genuine economic substance that are not liable to contribute to systemic risk and which are indispensable for the activities of non-financial business entities. Where activities are covered that can indeed be considered to be liable to contribute to financial markets' risk, it has not been demonstrated that the interests of Member States' are endangered to a point that the Union should divert from its attitude in principle of restraint as to extraterritorial exercise of jurisdiction.”

Those are just a few of the very clear and strongly worded arguments put forth by the legal service. Given the clarity and depth of the arguments presented it is hard not to see this as the final nail in the coffin for this (much maligned) proposal for the FTT.

Given the politics of this, there will have to be some form of 'financial transaction tax'. But, this is now likely to amount to a significantly watered down tax, possibly focused solely on equities and levied at a much lower rate only on those specifically trading the products (similar to the UK's stamp duty).

In any case, this is a big win for the UK – although how much credit it can take for it is unclear. In the end the combination of legal overstretch as well as the potential to inflict significant financial damage on fragile eurozone states has undermined the FTT. Equally this is a blow to the Commission and the European Parliament which have pushed hard and invested a lot of time resources into getting this version of the FTT through.

That said, the Commission has remained unsurprisingly steadfast, suggesting that it rejects the legal opinion and believes the current set up is compatible with the EU treaties. The German government has also suggested it will continue to pursue the FTT, but has said that it will seek to iron out all legal uncertainties first (though some in Germany have previously raised concerns about the substance of tax).

Ultimately, this may have to be decided in court. But the case for the FTT has certainly taken another hefty blow.