EU FTT: back from the dead?

Olivier Hermand 22 January 2015


EU Financial Transaction Tax (“FTT”) finally implemented?

During the last two months of 2014, a number of meetings were held both between the EU-11 and between the EU-11 and other EU Member States, with the aim of reaching consensus on the EU FTT. Despite the commitment of the Italian EU Council Presidency to the EU FTT project, the EU-11 were not able to agree on a number of fundamental points.

One important area of disagreement was the scope of the tax. The EU-11 had committed in May to introducing a tax on “shares and some derivatives” as a first step. However, whilst some members of the EU-11 wanted a broad based tax on derivatives France, eager to preserve revenues from its derivatives industry, wanted a narrow derivatives tax to be included. In November, the French Finance Minister proposed that the tax on derivatives should be limited to those that encourage “speculative and extremely dangerous behaviour”.

Notwithstanding the Italian EU Council Presidency urging the incoming Latvian Presidency to keep the EU FTT high on the political agenda, by the end of 2014 the disagreement between the EU-11 had led some commentators to call the death of the tax.

A new proposal

Earlier this month the French President, Francois Hollande, announced his strong support for the EU FTT project. In what was a surprising shift of position, given France’s desire for a narrow based tax during the 2014 discussions, President Hollande called for a broader based EU FTT with a large range of financial instruments included in the scope, combined with lower tax rates. The French President also called for the proceeds of the tax to be used to fight climate change.

Following this announcement, we understand a number of meetings were held in the first half of January between French Finance Minister Sapin and French issuers, the French banking industry and NGOs.

Why this sudden French shift??

Early in December 2015, France will be hosting a climate change summit (COP 21) in Paris. To ensure that the meeting will be a success, the French Government has committed to finding 1 billion Euro for a “Green Climate Fund” to help fight climate change, which would be funded with revenues from the EU FTT. By proposing a tax with a broad base but low rate, presumably France considers that the regime would not be detrimental to its derivatives industry.

In addition, a French tax policy objective is to successfully implement an EU FTT under the enhanced cooperation procedure (“ECP”), so as to set a precedent for the use of ECP in other EU fiscal measures. We understand that the EU Commission’s Common Consolidated Corporate Tax Base (“CCCTB”) proposal might be one such measure.

What’s the position of the other PMS?

We understand that France is ultimately seeking a harmonised FTT for all EU Member States. Given the very strong opposition to the EU FTT voiced by a number of States outside of the EU-11, including the UK, achieving this goal seems unlikely. More important to implementing an EU FTT is the positon of France’s fellow States in the EU-11.

The new French position is more aligned to that for the German Finance Ministry, as reported by the German press. In Germany, the Finance Ministry has re-assigned its former press-speaker, Mr. Narzynski, to work on the EU FTT proposal, which may be seen as an indication of increased attention to this from a political perspective.

We understand that Italy is actively supporting France on this revised initiative, with Spain neutral on the proposal.

The French position is broadly echoed by recent comments from the Austrian Finance Minister. Dr Schelling referred to a “broad assessment basis” which would include derivatives, although it was noted that a lower rate for derivatives than originally planned was conceivable.

The French proposal is also likely to be more aligned to that sought by the smaller EU-11 Member States.

What happens next?

Although by mid-January no new documents or compromise proposal had been circulated to the EU-11, President Hollande is intent on reaching an agreement on the EU FTT with the EU-11 as soon as possible in 2015. With respect to the implementation date for any new proposal, this would still be based on the political commitment made by the participating States on 6 May 2014 – a first phase of the EU FTT to enter into force by 1 January 2016. However, given what remains to be done to agree and implement the tax, this timeframe appears highly ambitious. Indeed, it is understood that the proposed timetable agreed between the Austrian Finance Minister and his German counterpart, Wolfgang Schäuble, was for the introduction of a stock-exchange levy on equities from 2016 as a first phase. This would be followed by a tax on other transactions from 2017.

We understand that EU-11 Finance Ministers will meet either informally in the margins of the Eurogroup meeting on 26 January or the ECOFIN Council on 27 January.

We also understand that part of the French plan is to give the European Commission under the aegis of the French EU Tax

Commissioner Pierre Moscovici a more active role in working out a final compromise text for the EU-11, running data analyses and proposing amendments to the Commission’s own draft EU FTT Directive. This role is normally performed by the 6-monthly rotating EU Council Presidency, however, none of the current or incoming EU Presidencies until the second half of 2016 (Latvia, Luxembourg and The Netherlands) are members of the EU-11, so this move could be seen as a way of preventing further delays.

Does this mean we’ll finally see an EU FTT?

The shift in the French position does make an EU-11 agreement on an EU FTT seem more likely. However, even if all EU-11 Member States support the revised scope of the tax and revised rate, there remain a number of important aspects of the EU FTT to be resolved. Amongst these, the question of whether the tax is based on where instruments are issued, or where the parties to the transaction are based (or some combination of the two) has proved impossible to agree in the previous discussions and will be difficult to resolve.

That said, the sense in Brussels is that if the EU-11 can agree on the scope of the tax, the other aspects may be agreed upon too, if there is a strong political will to do so.

As we’ve highlighted in previous Newsflashes, even if the EU FTT project does ultimately fail, other measures to tax the financial sector may be revisited, and in our view a real risk of additional unilateral FTTs introduced by various Member States would remain.