Financial Transaction Tax and Extraterritoriality

I’ve always maintained that business and taxpayers should oppose any attempt to introduce extra territorial provisions in tax – the reason being that it increases the likelihood of double taxation and its detrimental economic effect on growth. Its also “taxation without representation” and that is not a firm foundation for any international tax system which is accepted and sustainable. So I’m pleased with the news coming from Brussels on the Financial Transaction Tax. Now my views on this tax are clear (see my blog – Financial Transaction Tax – were business concerns correct?) and I along with Business Europe have opposed this extra territorial feature of the tax ab initio.

 

Now, the Council’s legal services have released a legal warning against the FTT with respect to the extraterritorial reach of  establishment principles determining which financial institutions fall within the scope of the tax.

 

The Council’s legal services opinion concludes that:

 

-taxing establishments outside the FTT jurisdiction “exceeds member states’ jurisdiction for taxation under the norms of international law as they are understood by the Union”’

 

– the definition of establishments falling within the scope of the tax “is not compatible with the EU treaties as it infringes with taxing competences of non-participating Member States”

 

– it is “discriminatory and likely to lead to distortion of competition to the detriment  of non-participating Member States”

 

The council’s legal services opinion opposes the DG Taxud’s one which continues to defend the legal basis of their proposal as sound and compliant with EU and international law.

 

Although only consultative, the Council’s legal services opinion represents an important blow for the Commission proposal, which, it appears, is already stalling on Member States dismissal in council’s discussions. The commission recognized recently that the initially planned entry into force early 2014 is impossible and could not occur before the middle of 2014, if agreement is found before the end of 2013 and there is a speedy transposition into national law by the participating Member States.

 

This legal warning increases the probability that the Commission’s proposal will be at least significantly watered down.

 

Now the significant points I take from this are ,firstly, that taxing establishments outside the FTT jurisdiction “exceeds member states’ jurisdiction for taxation under the norms of international law as they are understood by the Union”. This is a welcome endorsement that extra territoriality is outside the norms of international law, which is what we all understood to be the case. So for this proposal to go ahead we would need to change the norms of international law, with all the consequences that would have.

Secondly, the definition of establishments falling within the scope of the tax “is not compatible with the EU treaties as it infringes with taxing competences of non-participating Member States”. This is a very significant statement and if followed through indicates the limits of the ability to move through tax measures without unanimity.

 

It will of course be interesting to see how this plays out over time, but we may well be seeing the FTT as a step too far in European tax and the resurgence of the unanimity principle as the key foundation of tax rules at a European level.

 

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