Financial Transaction Tax (FTT) – As the dominoes start to fall…

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At the request of eleven EU Member States, the Financial Transaction Tax (FTT) looks set to be introduced by a limited number of the EU Member States, as a result of the first use made in EU tax matters of the process of "enhanced cooperation" . It is likely that the Commission will make a proposal to the European Council for the enhanced cooperation procedure to be approved at the next meeting of EU finance ministers, on 13 November.

Current status

It is expected that the proposal will be largely based on the EU Commission’s Directive proposal published in September 2011 for a broad-based FTT (as opposed to a narrow based tax such as the UK stamp duty). Effectively, the levy would be introduced on the purchase and sale of financial instruments and all derivative transactions, with a 0.1 percent rate for share and bond trades and a 0.01 percent rate levy for derivative trades.

Introduction of the Directive in all 27 EU Member States (including the 17 Euro-zone countries) failed earlier this year after significant disagreement among Member States, most notably the United Kingdom and Sweden. Germany and France had been encouraging other Member States to support the enhanced cooperation process in recent weeks, including sending a joint letter to all countries. Up to now, a total of eleven Member States have voiced their support (which means that the necessary amount of Member States for the enhanced cooperation process to be initiated, i.e. nine, has been met). The eleven countries are Austria, Belgium, France, Estonia, Germany, Greece, Italy, Portugal, Slovenia, the Slovak Republic and Spain.

Procedural remarks

It should be noted that all Member States have a say in whether or not to authorize the enhanced cooperation process, even those Member States that do not intend to take part in the enhanced cooperation. A qualified majority is necessary, i.e. at least 14 of the 27 Member States representing at least 255 of the 345, in order for the enhanced cooperation process to be authorised. In the current situation, the 11 Member States, that already expressed interest represent 175 votes.

In other words, if the Member States opposing the proposal represent at least 91 votes, the enhanced cooperation process would be blocked. In this regard, it is useful to point out that a number of Member States have already indicated that they will be looking carefully at the scope and potential impact of the proposed enhanced cooperation for the FTT before giving it authorisation to proceed, and that those Member States have more than the 91 votes required to constitute a ‘blocking minority’. Consequently, it may be necessary for the terms or scope of the proposed FTT to be amended before it gains approval, even at this stage of the procedure.

Progress to be closely monitored

The news that the enhanced cooperation procedure may be used is a key development in making a European FTT a reality. Accordingly, political developments now require close monitoring by the business community, and companies should consider the commercial and operational consequences.

Apart from the direct tax charge itself, the proposed FTT would require that companies have the systems in place that are needed to comply with it. This will involve separating financial transaction counterparties by location and status within the FTT rules and having systems to report to and account to the tax authorities of the participating countries, who may not necessarily set the same rates or procedures for their operation of the tax.

Impact to be felt beyond the mere financial services industry

Additionally, the impact of the proposed FTT can be expected to be felt beyond the financial services industry. In particular, it could also affect group treasury operations. The proposed FTT would apply to financial transactions where one (or both) of the parties is a ‘financial institution' and at least one of the parties is established in a Member State which enacts the FTT. The term ‘financial institution’ also includes “undertakings carrying on a significant amount of activity in financial instruments”.

Based on this broad definition, it seems that all major corporate treasury companies would be included in the scope of application, as well other businesses involved in significant risk management activity, whether this covers foreign exchange, interest-rate, counterparty credit or commodity price risks (and regardless of their industry character, e.g. utility companies, transport undertakings, food manufacturers and distributors).

The proposed FTT may also give rise to significant indirect costs for non-financial firms as a result of the FTT costs being passed on to them by their (financial) counterparties. And together with an overall increase in the costs of bank borrowing (resulting from the FTT on banks’ operations which support business lending), potential liquidity problems can be expected in certain parts of financial markets due to the potential reduction in volumes.

How can EY help?

We have an experienced and dedicated tax team which is well positioned to assist you with any question or need you may have in relation to the FTT, both from a financial services perspective and from a corporate tax treasury point of view.

Do not hesitate to contact your usual contact person or one of the people listed under contacts