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.