The House of Lords EU Committee have today written to Greg Clark MP, Financial Secretary to the Treasury to state that there is a case for a legal challenge against the proposal for a Financial Transaction Tax (FTT) to be adopted in 11 Member States. The Committee conclude that, despite Commission denials, UK authorities may be required to collect the FTT, and that revenue collected from London-based financial institutions could be used to reduce the EU budget contributions of contributing Member States. The proposal may fall foul of the legal requirement to respect the competences, rights and obligations of non-participating Member States.
The Committee make clear that they are “astonished by the paucity of thinking” by the European Commission on its FTT proposal. Yet the UK Government and financial sector have been equally guilty of complacency in underestimating the political will amongst many in the EU behind the proposal. The Committee conclude that the Government, European Commission and the City of London have all failed in their responsibility to assess the impact of a European Financial Transaction Tax (FTT) on non-participating Member States.
Commenting Lord Harrison, Chairman of the House of Lords EU Sub-Committee on Economic and Financial Affairs, said:
“We are highly alarmed that so little attention has been given to the potential impact of an FTT on non-participating Member States such as the UK. The failure to give the proposals proper scrutiny seems to have afflicted Government, the European Commission and the financial sector alike. Although the Commission denies it, it is our view that UK authorities will be under an obligation to collect the tax. The Commission has a duty to defend the interests of all 27 Member States, not just those who wish to participate, and the prospect of legal action against the use of the ‘Enhanced Cooperation Procedure’ now looms.
“But just as unforgiveable is the complacency shown both by Whitehall and the City. Some in London appear to hope that by closing their eyes to the proposal it will go away. Yet the recent introduction of FTTs in France and Italy shows that political momentum is growing. The Commission’s economic modelling has again been criticised, but a negative impact on economic growth is surely inevitable. The UK urgently needs to engage with EU partners and get to grips with what the FTT could mean not only for the City and financial services industry, but for the UK and the EU as a whole.”
The letter covers a number of aspects of the FTT proposals including:
- The proposal is being taken forward by 11 Member States under the “enhanced cooperation” procedure, whereby a proposal must “respect the competences, rights and obligations of those Member States which do not participate in it”. The Committee conclude that the proposal fails to meet this criteria, raising the possibility of a legal challenge at the European Court of Justice.
- The current proposals would mean that under the new issuance principle financial transactions between two states not participating in the FTT but trading shares that emanate from one that does (i.e. British and American traders buying/selling shares in Volkswagen) would be subject to an FTT levy. The Committee say this may not be compliant with international law. It may also provoke resentment in the US, threatening to undermine the US-EU trade talks.
- This raises further questions of what requirements will there be on UK tax authorities to collect FTT payments from qualifying transactions and how will the cost of this be met. The Committee disagree with the Commission’s claim that there would be no legal obligation on UK authorities to collect the tax.
- The Commission’s original analysis was that the FTT could result in the loss of 500,000 jobs in Europe and reduce growth by 1.75%. These predictions have been revised and the Commission now say there will be no job losses, but witnesses criticised the Commission’s Impact Assessment as relying on “back-of-the-envelope kind of calculations”.
- One of the Commission’s aspirations for FTT is to discourage high frequency ‘irresponsible trading’. However the Committee say there is no clarity that this will be the case or even if such discouragement would be desirable.
- The Committee dismiss the Commission’s assertion that the introduction of an FTT in Europe will lead to a similar global tax as an uphill battle that has just got even steeper. They point out that the USA is unlikely to introduce an FTT and this will lead to a commercial disadvantage for the European financial service industry that could lead to firms relocating outside of Europe.
- The Committee criticise the Treasury for failing to produce an Explanatory Memorandum on time to accompany the Commission’s proposals on FTT. The letter states that as the responsible Minister Greg Clark is “failing in his duty” to the House of Lords under the Scrutiny Reserve Resolution.
To read a copy of the letter, visit the Committee's webpage ( PDF 793 KB).