Diversity & Inclusion
The European Council Legal Service has issued an opinion that seriously questions the legal validity of the European Commission’s proposals for a financial transaction tax (FTT). The opinion finds that the extraterritorial application of the FTT’s “residence principle” (as described below) is contrary to European Union (EU) law as it:
The first two of these findings echo pleadings made by the United Kingdom in its own legal challenge of the FTT (see below).
On 14 February 2013, the European Commission issued a proposal for a FTT which is slated to be introduced in 2014. Eleven “participating” EU member states, including Germany, France and Italy but excluding the U.K., are currently planning on implementing the FTT via a procedure known as “enhanced cooperation.”
Broadly, the proposed FTT applies to a wide range of financial transactions and would subject any financial institution located anywhere in the world to FTT charges on any financial transaction to which it is a party where it:
The FTT rates are up to 0.01 percent for transactions involving derivatives and 0.1 percent for transactions involving other financial instruments. The FTT proposal has been widely criticised for both its extraterritorial application and lack of key exemptions, that can lead to a “cascade effect” where, as is common, there are a number of intermediaries involved (each of whom could be charged) in what is economically a single transaction. In addition, it is understood that participating member states have various concerns over the proposal, including the inclusion of sovereign debt within the scope of the tax and the practical mechanics of enforcement and collection of the tax.
The United Kingdom has already issued a legal challenge to the use of enhanced cooperation for implementing the FTT, pleading that the enhanced cooperation:
The first two of these findings are echoed in the European Council Legal Service’s opinion.
The European Council Legal Service’s opinion is a significant blow to the FTT proposals. Despite wide criticism of the FTT proposals from both governments and industry within and outside the participating member states, as well as the legal challenge by the United Kingdom and the reasoned opinion issued by Sweden, the European Commission has maintained that the FTT proposals are lawful. This latest development is likely to cause the European Commission to reconsider the scope of the proposals.
It is also interesting to note that it is the European Council’s authorisation of the use of enhanced cooperation that is being challenged by the United Kingdom, so this legal opinion may be a precursor to the European Council revisiting its decision to authorise enhanced cooperation.
Skadden’s Global Tax Controversy Practice combines the skills of experienced tax practitioners and dispute resolution lawyers. The group provides its clients with tactical and technical advice to ensure that tax disputes and investigations are resolved as effectively as possible through various methods such as negotiation, expert determination, or a hearing before the tribunals or the courts. The group also provides preventative advice allowing clients to ensure that their tax affairs are legally compliant with a view to avoiding lengthy and costly disputes. Members of the group are named as leading tax controversy lawyers in International Tax Review’s 2013 Tax Controversy Leaders Guide.
* * *
For earlier coverage of the FTT, please see page 51 of the “Financial Regulation” section of Skadden’s 2012 Insights.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.