The governments of Europe continue to consider the application of a financial transaction tax (“FTT”) on bond, equity and derivatives transactions.[1] On February 14, 2013, the European Commission (“EC”) published a directive (the “FTT Directive”) that would apply to eleven member-states through an “enhanced cooperation procedure” approved by the European Parliament on December 12, 2012.[2] Most recently, on July 3, 2013, the European Parliament, which has a consultative role in the process,[3] approved the FTT Directive, subject to several proposed amendments.
At its heart, the FTT Directive would continue to provide for participating member-states setting tax rates of at least 0.1% of the consideration paid or owed in a financial transaction other than a derivative transaction, and at least 0.01% of the notional amount of a derivative transaction. However, the European Parliament proposed, among others, the following amendments to the FTT Directive: (i) having lower “transitional” rates apply until January 1, 2017 on (x) trades relating to sovereign bonds, including a rate of 0.005% on derivatives and (y) stocks, bonds and derivatives traded by pension funds; (ii) permitting participating member-states to apply higher tax rates to riskier “over the counter” trades; (iii) having reduced rates of 0.01% apply to short-term (i.e., maturities of three months or less) repurchase transactions and reverse repurchase transactions; (iv) providing an exemption for market-makers (referred to as “liquidity providers”); (v) clarifying that the critical definition of “financial transaction” includes contracts for difference, speculative forward transactions and currency spots on FX markets; and (vi) clarifying that branches of financial institutions that have their registered office in a participating member-state fall under the scope of the FTT Directive.
Despite the European Parliament’s approval of the FTT Directive, the content of the FTT—and the date of its effectiveness—are far from resolved. The FTT Directive originally was to become effective on January 1, 2014, but that seems highly unlikely now,[4] especially since the participating member-states themselves are still not in agreement as to the scope of the FTT.
Significantly, on July 16, 2013, French Finance Minister Pierre Moscovici lamented the current lack of support for the levy across all EU member-states and recommended that the scope of the tax be widened to include currency transactions. In addition, he advocated that the “issuance” principle be applied to the tax, to ensure that transactions are taxed in the place where the financial product is issued; this is in contrast to the FTT Directive, which favors application of the “residence” principle, under which taxes are imposed where parties to the transaction are established. Moscovici also argued that “repo” transactions should not fall within the scope of the FTT Directive because doing so would pose significant risk to the credit markets due to the central role of such transactions in the liquidity balance between commercial banks.
[1] FTT initiatives and developments have been addressed previously in Derivatives in Review. See “Financial Transaction Tax Developments” posted on June 11, 2013; “Europe Proposes Financial Transaction Tax” posted on October 15, 2011; and “Financial Transaction Tax” posted on February 15, 2012.
[2] European Commission, Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax, 2013/0045 (CNS), Brussels, 14.2.2013. This directive was published after an earlier attempt to impose an FTT in 2011 failed to attract the necessary unanimous support of all of the EU member-states. After this failure, eleven EU member-states applied to impose an FTT themselves, which resulted in the FTT Directive. These eleven member-states are: Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain. These states account for the vast majority of the Eurozone’s gross domestic product.
[3] “Financial Transaction Tax under Enhanced Cooperation: Commission sets out the details,” European Commission – IP/13/115, February 14, 2013 (available at: http://europa.eu/rapid/press-release_IP-13-115_en.htm) (noting, among other things, that during the discussion period for the FTT Directive, “[t]he European Parliament will also be consulted.”)
[4] The EC’s FTT webpage itself hints that a six-month postponement is possible. Specifically, this web site provides that “[o]nce agreed upon at European level, participating Member States will have to transpose the [FTT Directive] into national legislation. If agreement is found before the end of 2013, and there is a speedy transposition into national law by the participating Member States, this common framework for an FTT could still enter into force towards the middle of 2014.”