Earlier this month, Christian Noyer, the Head of the French Central Bank, was quoted in an interview with the Financial Times as saying that “the Commission’s proposal [for an EU FTT] is a non-starter and needs to be entirely revised”. This echoes previous comments made by other Central Bankers around Europe following the release of the proposed Directive for an EU FTT under the Enhanced Cooperation Procedure (“ECP”) by the EU Commission on 14 February 2013.
At a recent public meeting, a representative of the German Ministry of Finance stated at a public meeting, that the political decision to have an FTT in Germany had been taken, it was “just an issue of how” the regime would be introduced.
Press reports last week on the coalition negotiations between the political parties in Germany suggest that the introduction of an FTT in Germany remains high on the agenda. Indications are that if the coalition talks between the Christian Democratic Union (“CDU”)/Christian Socialist Union (“CSU”) and the Social Democratic Party (“SPD”) are successful, new momentum will be given to the EU FTT initiative. It has even been suggested by SPD partisans that if the ECP negotiations were to fail, Germany may look to introduce a domestic FTT on a unilateral basis. Other countries, such as Spain and Portugal, are waiting in line for the ECP to produce a result and might act unilaterally if no consensus is found.
Against this background, Financial Institutions continue to focus on dealing with the existing FTT regimes which have been introduced in France and Italy.
In this Newsflash, we look first at the most recent activity in Brussels, before reflecting on developments in Germany and the other countries within the ECP-11 in an attempt to look through the speculation and to predict what is likely to happen in the coming months.
What is the latest from Brussels?
Following the leak of the EU Council Legal Services opinion in September (which raised doubts about the legality of the proposal given its extra- territorial scope) , there has been relatively little public comment from the EU Commission on the proposed EU FTT Directive. That said, the EU Commission is trying to keep the EU FTT moving forward and has included it as a priority in its 2014 work programme which was published in mid-October.
Now that the first reading of the Proposed Directive has been finalised, the next step is either for the ECP-11 to present the EU FTT Council Working Group (“WG”) with a compromise text or for the EU Presidency to prepare a compromise text for submission to the WG. Any compromise text is likely to be subject to scrutiny to ensure that the content is sufficiently close to the original text to enable the Participating Member States to move forward under the existing ECP mandate.
Given the need for a compromise text to be considered by the WG, it is significant that there is no WG meeting planned by the Lithuanian EU Presidency for November. This fact (together with the status of the German coalition talks, discussed below) suggests it is unlikely that any revised draft Directive will be made available until January 2014 at the very earliest.
We understand that the ECOFIN Council and European Council (EU Summit) meetings scheduled for 10 and 12 December will include discussion on tax issues. There may therefore be an update on the status of the EU FTT and the likely timetable for implementation of the regime in the December Council Conclusions, but we do not expect anything more substantive to come out of those meetings at this stage.
The position in Germany
Following the German Federal elections in September, negotiations are on-going to form a coalition Government.
With German politicians having been focused in recent months on the elections, it appears that Germany has not been pushing the EU FTT project forward. For this reason, those monitoring the progress of the EU FTT project are keenly awaiting the outcome of the coalition negotiations and the new Government’s stance on the proposal.
With the CDU vetoing “normal” tax increases, and the SPD pushing for an increase in spending on infrastructure and education, the EU FTT could be seen as representing a compromise solution, with a likely design somewhere between current French/Italian FTTs and the existing EU-Proposal.
The CDU and CSU have indicated publicly that they want to push for an EU FTT but so far a unilateral German FTT has been rejected by the CDU.
The coalition negotiations are expected to continue for a further 3-4 weeks, with a new Government in place shortly before Christmas. Given the importance of the German position for the ECP negotiations, this would again indicate that significant progress at the EU-level is highly unlikely until early next year.
A recent legal opinion from the legal services of the Bundestag rejected the merits of the UK challenge against the EU FTT. In light of this, we believe that any compromise solution will primarily be driven by political, not legal, considerations. As such, an exemption for repo-business (suggested by the European Central Bank), a grandfathering of pension investments from EU FTT, etc. might be more likely than a completely new draft of the currently proposed EU FTT Directive.
How will this impact domestic FTTs?
Turning to the domestic FTTs, the potential introduction of new domestic FTTs and the likelihood of changes being made to the existing regimes in France and Italy are heavily dependent on whether the ECP process is successful and the speed at which negotiations progress.
We set out below a brief summary of the current position across specific countries:
Portugal: On 15 October 2013, the Portuguese Government submitted to the Portuguese parliament the draft proposal of the State budget law for 2014. Regarding a Portuguese FTT, the Government is requesting the parliament to authorise it to introduce an FTT in 2014 (in the same way as it had obtained authorisation for a 2013 introduction). In our view, this simply represents a procedural step to extend the deadline to introduce an FTT. It is stated in the Portuguese budget report that the introduction of an FTT is dependent on the ECP process for an EU FTT to avoid market distortions. On this basis, it currently appears more likely that Portugal would not introduce its own FTT if the EU initiative ultimately fails.
Spain: Spain also produced an outline regime for a domestic FTT. We understand that Spain continues to support the introduction of an EU FTT and is unlikely to seek to introduce a Spanish FTT in the short term.
France: Perhaps motivated by lower than forecast revenues, earlier this month a proposal was made to amend the 2014 Finance Bill to subject intra-day transactions to the French FTT (such transactions are outside the scope of the current regime). However, this proposal was subsequently repealed by the National Assembly.
Italy: It is anticipated that amendments to the Italian FTT regime will be included in this year’s budget, which is currently under discussion. The precise nature of these changes is as yet unclear. There is no fixed timeline for the release of the text of any proposed changes, but this could be available before the end of the year based on last year’s budget.
What happens next?
In light of the developments outlined above, the status of the EU FTT remains fluid. Given the importance of Germany’s stance on the proposed tax, the German developments referred to above could be seen as providing new momentum to the ECP. Whilst we await the outcome of the German coalition negotiations, there will likely be limited movement on the topic in the coming months.
With respect to the final form of the regime, it is increasingly clear that any revised proposal will be narrower in scope than the draft Directive of February 2013, perhaps focusing more on subjecting equity transactions to FTT, which would bring it closer to the UK stamp duty rules. The design of any regime continues to present a difficult balance between addressing legal concerns over the extra-territoriality of the existing proposal and the desire to prevent avoidance of the FTT through migration of financial transactions outside of the ECP-11.
What should FS institutions be doing now?
The conundrum that financial institutions face against this backdrop is to what extent they continue to rely on the tactical fixes, which are often quite inefficient, that have been put in place from an operational perspective for the French and Italian FTTs, or look to refine these ahead of an EU FTT. The longer it takes for consensus to be reached amongst the ECP-11, the less attractive it will be for institutions to continue to rely on the existing tactical solutions. Alongside this, there is significant concern that if the timetable for an EU FTT slips further, institutions may need to implement responses to additional domestic FTT regimes at short notice.
Whilst these considerations present difficulties from a business and project planning perspective, it would seem likely that an equities based tax will form at least part of any EU FTT regime ultimately introduced. The same could be said of potential new domestic FTTs, based on the models that were proposed by Spain and Portugal. For this reason, the best practice now evolving in the industry is for institutions to assess their current response to the French and Italian regimes and to refine these, having regard to what would be required to deal with similar equities based regimes across multiple jurisdictions.
With any EU FTT regime unlikely to be introduced before 1 January 2015 at the very earliest, adopting the above approach should ensure institutions use the additional time available most effectively.