Robin Hood (tax): really an EU outlaw?

Alin Fouladvand, MSc Risk and Finance, London School of Economics

Marco Guerra, LLM University of Milan; LLM Student, King’s College London


1. Introduction

On 28 September 2011, the European Commission proposed a harmonised Financial Transaction Tax (FTT) aimed, among other reasons, at the reduction of competitive distortions in the single market[1]. In the absence of an unanimous agreement between all EU Member States, a subgroup of them (the so-called FTT Zone) engaged into a procedure of “enhanced cooperation” for a common FTT[2], authorised by the European Parliament on 12 December 2012 and by the EU Council on 22 January 2013. On 14 February 2013, the European Commission published its detailed proposal, approved by the European Parliament in July 2013 and expected to enter into force on 1 January 2014.


The FTT will be levied to financial transactions between financial institutions charging 0.1% for the exchange of shares and bonds and 0.01% for derivative contracts, on the requirement that at least one party to the transaction is established in FTT Zone and that a financial institution established in the FTT Zone is party to the transaction. The United Kingdom, supported by several EU members, challenged this proposal urging the opposition to the tax due to its risk of damaging feeble economic growth and its compatibility with European Union treaties[3].Over all, the United Kingdom criticised the residence principle that forced the financial institutions to be treated as resident in the participating member states and therefore to have to make tax declarations and to pay tax, simply because they enter into transactions with other financial institutions resident in a participating state, establishing there the infrastructures for meeting those tax liabilities[4].


2. The EU Council’s opinion

On 6 September 2013 the European Union Council’s legal service published a (not binding) opinion where it is stated that this type of levy “would constitute an obstacle to the free movement of capital as well to the freedom to provide services[5],[6]. In the following part we would aim at understanding more widely the reasons that could have inspired this position starting from the analysis of the treaties to clear if the FTT contravenes the free movement of capital.

According to the Article 63 of the Treaty on the Functioning of the European Union (hereafter, TFEU), 
”[…], all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited“.

The jurisprudence of the European Court of Justice has developed a three-step approach to verify the compatibility of a provision in the light of the TFEU freedoms[7]. With reference to the FTT, this test involves the following questions:


(i)     Does the FTT fall under the scope of the free movement of capital?

(ii)  If so, does the FTT constitute a restriction of the free movement of capital?

(iii)                        If so, is the FTT justified?


Considering the first question, we observe that the TFEU does not define the term “movement of capital”. In the case Trummer and Mayer[8] the CJEU has indicated that, “its meaning should be determined by reference to the nomenclature in Annex I to Council Directive 88/361/EEC of 24 June 1988”, that covers “all the operations necessary for the purposes of capital movements: conclusion and performance of the transaction and related transfers[9]. Given the above we can conclude that the FTT falls under the scope of the Article 63 of TFEU.

With reference to the second, and more critical, question we note that the legal opinion published by the European Union Council’s legal service expresses concerns that the proposed Directive would render less attractive financial transactions with financial institutions located outside the participating Member States, since these institutions would have to pay the FTT at different rates in different countries and the counterparty may be unwilling to be liable to that tax and to face, on these grounds, legal uncertainty and possible disputes with the authorities of the participating Member State”.

In other words, the FTT would impose a duty on those transacting with entities in the FTT zone and, therefore, restrict the free movement of capital guaranteed by TFEU by producing “an effect equivalent to that of a duty imposed in return of the possibility to enter into a transaction with an institution located in a participating Member State[10].

Further into the second question, the proposed Directive applies the “counterparty” factor in a discriminatory manner. The question of free movement of capital rises due to the fact that these rules limit issuing of financial instruments by a party from a participating Member State in non-participating Member States. The reason being that these transactions would be subject to taxation with the FTT, in clear contrast to transactions to which the tax does not apply. It results from Sandoz[11] that imposing a barrier to investment in other Member States is a restriction on free movement of capital and Article TFEU 63.

In addition, the FTT is indirectly discriminatory, because it makes more expensive for a company based in a “non-FTT” state to conduct business in a “FTT state” (and vice versa) in comparison to its local competitors.


3. The debate on the FTT

Contrary to the Council’s opinion, it has been observed that the FTT does not constitute a discriminatory restriction of the free movement of capital. This is because the levy applies to each financial transaction with determined elements and no distinctions are made between cross-border and domestic capital transactions[12]. As explained by the jurisprudence of the Court of Justice of the EU (CJEU) the discrimination can arise through the application of different rules to comparable situations or through the application of the same rule to different situations[13]. However, this opinion is not universally accepted between scholars. It is believed that the FTT could limit the circulation of the capitals in the common market and, furthermore, it is “considered as a high tax level since in some cases […] it will tax non-existent wealth[14].

Nevertheless, the European Commission’s own legal advisors refused the Council’s legal opinion, observing that, actually, every single tax levied on a cross-border transaction limits the movement of the capitals[15]. They observed that “[…] the fact that FTT would [not] exist outside [the] FTT area, is merely a disparity which is neutral from the perspective of the Treaty freedoms”.

The last question refers to the two derogations stipulated by Article 65 TFEU, whereby these measures should not be in the form of arbitrary discrimination or disguised restriction on free movement of capital. The first derogation, stipulated in Article 65(1)(a) TFEU is specific to tax and stipulates acceptable tax provisions that existed at the end of 1993 and, thus, it is not applicable on the FTT. The second set of derogations is stipulated in article 65(1)(b) TFEU and consists of three possible general derogations to the free movement of capital: to prevent illegal tax evasion, for the purposes of administrative or statistical information, and on grounds of public policy or public security. Clearly the FTT does not carry the prerequisites for the first two. For the latter to be applicable, the CJEU has determined that it is necessary to identify and prove “a genuine and sufficiently serious threat to a fundamental interest of society[16]. The FTT aims to curb speculation and this is in the interest of public security, however the latter derogation should be used carefully. In Albore[17] the CJEU stated that a reference to public policy or security was not in itself sufficient to justify restrictive measures. It must be proven that alternative treatments would expose the Member State to real risks that could not be countered by other, less restrictive measures.[18] Although the economic rational behind the FTT is understandable, the threat to national security is not clearly defined and the risk seriousness of not adopting a FTT is not possible to answer at this point. Also, according to Verkoojen[19] a restriction of a fundamental freedom can be only admissible if it justifiable in virtue of the general interest, excluding thus purely economic reason[20]. This makes the derogation in article 65(1)(b) TFEU far from applicable. To conclude, none of the express derogations in article 65(1) TFEU are applicable to the FTT.


4. Conclusion

Currently the question of the legitimacy of a FTT is still open also within the European institutions; responding to the question posed by the EU member of Parliament Marc Tarabella on the potential violation of the free movement of capital as observed in the above mentioned legal opinion, the Council answered that “a position has not been reached[21].

Thus, it clearly appears how the debate on the compatibility of the financial transactions’ taxation with the EU Treaty is not yet solved. We can only observe that if there is not a definitive juridical approach in the academic debate, a consideration can be expressed exclusively based on the tax policy.

As known, since 2013 Italy implemented a tax on financial transactions; accordingly, several Italian operators started to move their business to other countries where the tax was not levied and the expected revenue fell considerably[22]. The same it was already happened in Sweden where, after the introduction of a transaction tax in 1984[23].

In conclusion, the protection of a market (the capitals’ one, in our case) is not only a legal issue but should be faced considering the real effects on the economy. After all, since the Chicago School, economic arguments have been developed to claim that taxes are costs that burden the functioning of the financial markets. However, no legal principle prevents sovereign states from introducing (even stupid) taxes if they democratically decide to[24].

[1]          See IP/11/1085, Financial Transaction Tax: Making the financial sector pay its fair share, European Commission, Press release. For a technycal analysis of the proposal see Adam Blakemore, Proposal for a European Union Financial Transaction tax, Journal of International Banking and Financial              Law (2012) 2 JIBFL 104.

[2]               The subgroup includes Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia,             Slovenia and Spain.

[3]           See Case C-209/13, Action brought on 18 April 2013 by United Kingdom of Great Britain and Northern Ireland v Council of the European Union.

[4]               Thomas Richter, Financial transaction tax will “damage” economy, Financial Times, 8 September 2013.

[5]               Council of the European Union, Opinion of the legal service, 2013/0045 (CNS), § 40.

[6]               Huw Jones, 5-EU lawyers say transaction tax plan is illegal, Reuters, 10 September 2013; Louise               Armistead, EU lawyers say financial transaction taxi s illegal, The Telegraph, 10 September 2013.

[7]              Dennis Weber, Otto Marres,  Taxing the Financial Sector: Financial Taxes, Bank Levies and More, IBFD,  2012, p. 124.

[8]               ECJ, 19 March 1999, Case C-222/97.

[9]               Furthermore, the CJEU has also indicated that transactions not listed in the nomenclature may          nonetheless constitute a capital movement.

[10]             Council of the European Union, Opinion of the legal service, 2013/0045 (CNS), § 40.

[11]             Case C-439/97, Sandoz GmbH v. Finanzlandesdirektion für Wien, Niederösterreich und Burgenland, para. 19. –       ECR 1999, p. I-7041.

[12]             Dennis Weber, Otto Marres,  Taxing the Financial Sector: Financial Taxes, Bank Levies and More, IBFD, 2012,         p. 131.

[13]             Inter alia, see Case C-279/93 (Schumacker) and Case C-148/02 (Garcia Avello).

[14]             Pablo A. Hernandez Gonzalez-Barreda, On the European way to FTT under Enhanced Cooperation: Multi-speed Europe or Shorcut?, Intertax, Vol. 31, Issue 4, 2013.

[15]             Non-paper by the Commission services, Response to the opinion of the legal service of the Council on the legality of the counterparty-based deemed establishment of financial institutions.

[16]             Case C-54/99 Eglise de Scientologie [2000] ECR I-1335, para. 18.

[17]             Case C-423/98 Albore [2000] ECR I-5965.

[18]             Case C-423/98 Albore [2000] ECR I-5965, para. 22.

[19]             Case C-35/98, Staatssecretaris van Financien v. Verkoojen, para. 46. – ECR 2000, p. I-4071.

[20]             Case C-311/97, Royal Bank of Scotland v. Greece, para. 48.

[21]              Question E-010636-13, 11 November 2013.


[23]         M. Wiberg, We tried a Tobin tax and it didn’t work, Financial Times, 15 Aptil 2013. Contra, B. Ségol, Europe’s Tobin taxi s designed to work, Financial Times, 17 April 2013.

[24]             Federico Fabbrini, The financial transaction tax: legal and political challenges towards a Euro-zone Fiscal    Capacity, Centro studi sul federalismo, October 2013.


Towards a Financial Transaction Tax: the Commission’s proposed Directive of February 14

Pierre-Antoine Klethi

LLM Candidate, King’s College London


The issue of introducing a financial transaction tax (hereinafter – FTT) at the EU’s border came back in the frontline in the aftermath of the financial crisis, as an option to “moralise capitalism”. However, the idea appeared to be highly controversial, so that no agreement could foreseeably be reached on an EU-wide basis.

As a result the process for enhanced cooperation in this area was launched. Following the request of eleven Member States – Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain – on 22 January 2013, the Council adopted Decision 2013/52/EU[i] authorising enhanced cooperation in the area of financial transaction tax. Consequently, on 14 February the Commission issued a proposal for directive[ii]. For us, it is the occasion to (re)discuss the concept of enhanced cooperation (I), the competences of the EU in fiscal matters (II) and the idea of FTT itself (III).

I. How does enhanced cooperation work?

The enhanced cooperation procedure (see also the article of Jose Manuel Panero Rivas on this blog), was first introduced by the Treaty of Amsterdam of 1997. It aims at enabling Member States that wish to deepen further the integration to do so without being held back by the opposition of other Member States, which is particularly problematic in situations where the Council must vote unanimously to adopt a decision. The possibility of enhanced cooperation is currently regulated by Article 20 TEU[iii] and Articles 326 to 334 TFEU[iv].

The scope of enhanced cooperation can only be “within the framework of the Union’s non-exclusive competences”, since for EU exclusive competences, there can be no distortion of rules. In the FTT case, fiscal policy is indeed a non-exclusive Union competence (see part II below). To avoid distortions to the internal market that could appear following the adoption of national measures taxing the financial sector, the Commission decided to make use of Article 113 TFEU, which gives some competences of harmonisation to the Council regarding tax matters.

Furthermore, the enhanced cooperation procedure “shall aim to further the objectives of the Union, protect its interests and reinforce its integration process”. It is also evident that “any enhanced cooperation shall comply with the Treaties and Union law”, “shall not undermine the internal market”, nor “distort competition between [Member States]”. In the present case, the main aim is to “ensure the proper functioning of the internal market and to avoid distortion of competition”. But one may also think of the objective of building a “social market economy”, which could entail the fact that all economic actors shall pay a fair share of taxes.

In addition, enhanced cooperation is a solution of last resort, to be used only if “the objectives of such cooperation cannot be attained within a reasonable period by the Union as a whole”. Regarding the FTT, this was noted by the Council in June 2012, as there was no unanimous support to the proposal of introducing an EU-wide FTT.

Furthermore, in conformity with the Treaties, at least nine Member States could ask the Commission to make a proposal of enhanced cooperation to the Council. In the case of the FTT, they were eleven (see above).

In principle, having received a request to make proposal for enhanced cooperation in certain area, the Commission may refuse to make the proposal; in that case, it shall explain the reasons for it. Enhanced cooperation needs to be approved by the Council, after having obtained the consent of the European Parliament. In the field of the Common Foreign and Security Policy (CFSP), there are some specific rules set in Article 329(2) TFEU.

It should be noted that participation must remain open to any Member State wishing to join it at any time. In that case, the State shall notify the Commission of its will; the Commission then has four months to assess whether the conditions are met. The TFEU even requires that participation in the procedure be promoted. The “competences, rights and obligations” of non-participating Member States shall be respected; on the other hand, these Member States “shall not impede [the] implementation” of enhanced cooperation.

All Member States participate in the discussions, but only those participating in the enhanced cooperation procedure have the right to vote. Naturally, only the participating Member States are bound by decisions adopted under enhanced cooperation, and these rules do not form part of the acquis communautaire that candidates to EU membership are required to accept.

Enhanced cooperation is already being used in divorce law (by 14 Member States, which will be joined by Lithuania next year) and will be used for the creation of an EU patent (all Member States but Italy and Spain agreed to join).

II. The Union’s fiscal competences

In this context it is worth to quickly remember a few facts about the Union’s competences on fiscal matters.

On the one hand, the Union is competent to legislate on indirect taxes (i.e. on consumption, e.g. the VAT which has been subject of many directives). Article 113 TFEU, which is referred to in the present case about enhanced cooperation on the FTT, states that: “The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.”

On the other hand, the Union is not competent to harmonise direct taxes (i.e. on production of goods and services, e.g. corporate tax), except if the Member States unanimously decide so. However, although direct taxation falls within their competence, Member States must none the less exercise that competence consistently with Community law[v]. Thus, in the area of free movement, not only are the custom duties and charges having an equivalent effect prohibited (Article 30 TFEU), but internal taxation measures must also be applied in a non-discriminatory manner to domestic and foreign (EU) products, so as to avoid protection of some products (Article 110 TFEU).

III. The Financial Transaction Tax: pros and cons

The proposal of the Commission[vi] is to establish a levy of 0.1% on transactions of bonds and shares and 0.01% on transactions of derivative contracts. Using these numbers, a Union-wide FTT could bring in nearly €60 billion, which could potentially enhance the Union’s own resources in its budget.

Only transactions between financial institutions would be taxed, not those involving businesses and citizens (the latter being involved in a minor share of all financial transactions), nor those involving the States managing their public debts. In addition, it is worth noting that primary market transactions in shares and bonds (i.e. when these financial instruments are sold for the first time by their issuers) will remain tax free. Furthermore, the FTT would be applied to all transactions of instruments issued in a Member State, even if the ulterior transactions take place outside the EU; this aims at avoiding tax avoidance but is highly controversial and is likely to create heated debates with EU’s international partners. A further idea looking rather strange is that an exchange of financial instruments is considered as two transactions (selling and buying), leading to a taxation in the Member State of residence of both the seller and the buyer (so, the effective rate per transaction – but not per party – is double). A party to the transaction residing in a third country will be deemed to be resident in the Member State of its EU counterparty. Finally, the Commission recognised the possibility of double taxation between FTT and non-FTT jurisdictions, but this could prove an incentive to join the FTT-area.

Those in favour of such a tax claim that the financial sector should pay a fair share of the collective tax burden, especially since it benefited from very costly rescue plans during the financial and economic crisis in 2008-2009. Moreover, banking institutions of some countries still continue to benefit from State aid because of their exposure to the debt crisis in the Eurozone. Furthermore, this debt crisis requires the Member States to find new resources. Since labour is already heavily taxed in most of them, they must turn to taxes on capital. Capital revenues are also seen as less “meritocratic” than labour revenues. Last but not least, taxing financial transactions would discourage speculation and therefore contribute to “moralising capitalism”.

On the other side, those opposing the introduction of the FTT fear a loss of competitiveness of Europe’s financial centres (this fear is particularly acute in the UK, preoccupied about safeguarding the City’s worldwide importance and influence), since investors would prefer to use their money somewhere else where it is less taxed[vii]. So, there would be less investment in the EU, which could lead to less growth and losses of jobs, in particular in the financial centres. But the Commission considers that the 11 participating Member States are economically too important to be abandoned by financial actors. Other arguments of opponents to the FTT can be mentioned, such as the fact that some speculation is necessary to ensure the liquidity of the markets, etc. All those arguments are subject to fierce economic debate not only between Member States, but also between economists.

Where are we now?

Following the request of the 11 interested Member States, the Commission accepted to resort to enhanced cooperation on 23 October 2012. The European Parliament then gave its agreement on 12 December 2012 and the Council on 22 January 2013. As already noted, the Commission has published a proposal of directive on the FTT on 14 February 2013.

Now, Member States have to discuss the proposal within the Council. All Member States will be involved in the discussion, but, in the end, only the participants in the enhanced cooperation will vote on the proposal. Moreover, the European Parliament will also be consulted. In addition, since the proposal intends also to cover transactions taking place abroad, provided one of the parties is resident in the EU, it is very likely that some international partners of the EU will express their views and try to influence the outcome through diplomatic means.

[i] Council Decision of 22 January 2013 authorising enhanced cooperation in the area of financial transaction tax (2013/52/EU), OJ L 22, 25.01.2013

[ii] COM/2013/71.

[iii] Consolidated version of the Treaty on the European Union (TEU), OJ C 326, 26.10.2012.

[iv] Consolidated version of the Treaty on the Functioning of the European Union (TFEU), OJ C 326, 26.10.2012.

[v] See e.g. paragraph 29 of Case C-446/03, Marks & Spencer [2005] ECR I-10837.

[vi] More information and official documents on the taxation of the financial sector are available on the Commission’s website. See in particular the document COM/2013/71 of 14 February 2013.