OCTOBER 2013
Linklaters
21 which has not implemented the FTT,
because there exists EU legislation providing for cooperation within the EU for the recovery of taxes; by contrast, where the financial institution is established outside the EU, it will be difficult, in practice, to collect the tax. According to the Legal Service, this could give a competitive advantage to financial institutions in third party states. It should be noted, however, that in the case a financial institution outside the participating Member States fails to pay the tax, the Commission proposal makes the counterparty based in a participating state joint and severally liable.
The opinion also echoes another reproach articulated by the United Kingdom, which stems from the fact that this FTT is being put into place between certain Member States of the EU, pursuant to the enhanced cooperation set out in Article 327 of the TFEU;
this procedure restricts
binding neither on the participating Member States, nor the Commission nor the Court of justice. Nonetheless, it is a serious blow to the Commission, all the more so as some of the arguments it raises follow the same line of reasoning as that developed by the United Kingdom in its challenge to the Council decision to authorise the enhanced cooperation procedure. Also, the negative opinion of a group of experts who are seen as being unaffiliated with any lobby or with the participating or non-participating Member States, will fuel the fear that the legal grounds on which the Commission proposals are founded are shaky and that litigation will ensue if the proposal is passed in its current form. If there is no legal certainty that the tax is valid, and investors do not know whether they should pay it or not, this will have disruptive effects on the financial markets.
the
participating states from encroaching on the competences, rights and obligations of the non-participating states – which, both the UK and the Legal Service argue, would be the case with the FTT, as it would apply to financial institutions and transactions located within the territories of non- participating states.
As you see, the Legal Service does not directly equate the fact that only 11 out of 27 Member States will implement the FTT as discriminatory and as distorting competition – its criticism is directed to the connecting factors used to characterize a taxable transaction. That being said, the provisions at stake are at the heart of the mechanics of the FTT as outlined by the Commission and it will be difficult to amend them without penalizing financial institutions within the participating states as compared to financial institutions established elsewhere – which obviously the 11 Member States do not wish to see happen for fear of provoking the exodus of their own financial industry.
a leaked opinion from the European Union’s legal service contains warnings that the flagship policy is “not compatible” with existing laws and is also “discriminatory”. How much weight do you think this leaked document carries, given that it is just a legal opinion at this stage?
The legal opinion reflects only the opinion of the EU Council Legal Service and as such is
do you think that the 11 countries will press ahead given the legal opinion?
It is now extremely unlikely that the Commission proposal will be adopted in its present form. Even before the legal opinion of the EU Council Legal Service surfaced, certain participating Member States had expressed concerns about the reach of the proposed tax. Their fear is not so much the impact on firms in non-participating Member States as the potential impact on the cost of their sovereign debt, the adverse consequences on the financing of their economy and the risk that financial activities carried on within their borders will relocate in other jurisdictions. In that respect, the legal opinion will be another reason for overhauling the whole project but it will hardly be what killed the Commission proposal.
do you think any challenge raised by the UK government or firms would be successful (why/why not?) if they are taxed in one of the 11 countries?
The main challenge brought by the United Kingdom against the Commission proposal is the territorial connection between a transaction and the taxing state, more specifically the counterparty and issuance principles used for that purpose. The United Kingdom considers them too far-reaching and believes that they would impinge on the taxing competence of non-participating
Member States. Actually, this is a well- identified weakness of
the proposal,
which the Commission tried to address by introducing an escape clause allowing a transaction to be exempted from the tax if its economic substance lacks a sufficient link with the territory of any participating Member State. The problem, says the United Kingdom quite convincingly, is that the burden of proof is on the taxpayer and what constitutes a sufficient link is an excessively vague and amorphous concept.
That being said, there are very few cases relating to the territorial limits of legislation introduced under the enhanced procedure and it is difficult to predict how the Court of justice will rule. On top of that, it is likely that there will be amendments to the Commission proposal, and thus the EU legislation that the Court of justice will review, if the directive is actually adopted, will presumably be different
do you believe the tax will go ahead given that not all states are signed up?
This is a political question more than a legal one – the governments of some of the participating states have been pretty vocal in their support of the tax and giving up on this project at this stage would be a serious humiliation in the eyes of their constituents. At the same time, none of these governments have been very precise as to the mechanics of the tax they would like to put into place – a substantially revamped, and scaled-down version of the tax, which would no longer have the extra-territorial effects denounced by the United Kingdom and the EU Council Legal Service could possibly be worked out. But it is not clear this is what the participating Member States are embracing. France, for instance, has been pressing its partners to move the tax to an issuance principle, in line with the French financial transaction tax already in place, where transactions would be taxed where the underlying instrument has been issued in one of the participating states, whether the parties to the transaction themselves are established there or not. LM
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