The European Court of Justice (ECJ) has today (30 April) rejected the UK’s challenge to the proposed implementation of the Financial Transaction Tax (FTT), which the UK says will produce extraterritorial effects and impose costs on non-participating member states.
Of the 28 EU member states, only 11 currently plan to move ahead with the FTT: Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain. However, these countries have not yet come to an agreement as to how the tax will work.
Just a year ago the UK asked the ECJ to annul a European Council decision made in February 2013 authorising the 11 member states to use the “enhanced cooperation procedure” to set up the FTT. The UK argues that the contested decision authorises the adoption of the FTT.
In a statement regarding its decision, the ECJ says that the UK’s arguments are “directed at elements of a potential FTT and not at the authorisation to establish enhanced cooperation, and consequently those arguments must be rejected and the action must be dismissed.”
Despite accepting that its challenge may have been “premature”, the UK announced plans to contest the implementing measure that will ultimately be adopted by the participating states.
The FTT, also referred to as “Tobin Tax”, aims to ensure that the financial sector makes a “fair and substantial contribution” to public finances and discourage financial transactions that “do not contribute to the efficiency of financial markets or of the real economy”. The minimum rates are 0.1 % for all financial transactions, other than those concerning derivatives agreements, and 0.01% for all financial transactions concerning derivatives agreements. The EU estimates this would generate revenues of €30-35 billion a year, or 0.4 to 0.5% of the GDP of the participating member states.
The European Commission first floated the FTT proposal for the whole EU in September 2011; however, by mid-2012 the EU finance ministers admitted that they wouldn’t be able to reach agreement for a EU-wide FTT in the foreseeable future.
Today’s ECJ ruling has reignited the debate surrounding the FTT. Although many in the opposing camp predicted this outcome, most believe that the UK was correct to challenge the February 2013 decision.
In a statement, Simon Lewis, CEO, Association for Financial Markets in Europe (AFME), says, “Given the seriously damaging implications of the proposed FTT, we are disappointed by the ECJ’s decision. However, the judgment is focused on procedural matters, and this has always been a possible outcome.
“We urge the 11 countries involved to take the opportunity to revisit the need for a tax that will act as a brake on economic recovery in Europe by increasing costs to investors and companies. All the evidence continues to show that the proposed transaction tax will have serious harmful economic effects for end users of financial markets throughout Europe, not only within the 11 member states that are considering it. Against this background, the UK was right to mount a legal challenge.”
TheCityUK, an independent body promoting the UK financial services industry, also highlights the extraterritorial reach of the FTT. Chris Cummings, CEO of TheCityUK, says: “The ECJ’s legal judgement focuses on the enhanced co-operation procedure. But what is really at stake here is the right of non-participating member states to promote economic growth in their own markets.
“The Commission’s own impact assessment has shown that the FTT is bad for savers and bad for investors. It is the exact opposite of the type of intervention that is needed at the moment if the European economy is to be stimulated and if we are to show international markets that Europe is open for business. It will have a particularly adverse effect on London as Europe’s financial centre.
“The impact of FTT will be to make the EU less attractive to international institutions, risking international financial services companies to relocate elsewhere, damaging the EU’s economic recovery and long-term growth.”
The CBI’s chief policy director, Katja Hall, echoes this sentiment: “This decision about legal procedure doesn’t change the fact that the FTT will damage growth, jobs and investment across Europe.
“As the UK’s largest single trading partner, a healthy European economy is in everyone’s interests so we urge that this damaging tax is re-considered.”
Not everyone is unhappy, however. UK Green Party MEP Keith Taylor, whose Green group in the European Parliament was instrumental in bringing about the FTT, believes that the decision by the ECJ is the right one. “This defeat for the City of London, and significant win for campaigners, takes us one step closer to introducing the FTT in Europe. It’s now time for the UK government to wake up to the fact that this tax is popular, redistributive and fair and should be introduced to the UK too.
“We must not let the spotlight on finance fade. The FTT goes someway towards making finance fairer, but much work is still to be done.”
Back in financial markets, David Woolcock, vice chairman, ACIFXC, stressses that the FTT will be damaging to European growth and innovation, as well as further weakening bank capital and having a knock-on effect on the real economy. In addition, it could have a negative impact on the FX market.
“Although the EU appears to be watering down the proposal, there is a threat that the FTT could be levied on FX, in particular spot. This is of great concern,” says Woolcock in an interview with Profit & Loss. “Currently, spot FX is ruled out in phase one of implementation; however, it could be included in a possible phase two. If implemented as is, the FTT will affect FX forwards, NDFs, swaps and options – as a result corporates and asset managers might end up running more financial risk, if they decide not to hedge their currency risk because of the passed on cost of the FTT.
“Lastly, FX is essentially part of the payments system and applying a tax to payments is a step in the wrong direction,” he adds.
Despite continued opposition to the levy from within the financial markets, 64% of EU citizens support the FTT, according to a 2013 Eurobarometer survey.