European Union update: quiet before the storm?

January 10, 2013

If 2011 was a year of resolute action and concrete proposals designed to bind the European Union (EU) around a set of shared goals in the area of taxation, 2012 could perhaps be characterized as a year when the best laid plans have been clouded by whether the EU would indeed exist in its current shape and form. 

This article was first published in the Ernst & Young Global Tax Policy and Controversy Briefing, Issue 11, December 2012 (pdf, 4.26 MB)

Whether due to urgent and unplanned measures in individual countries, attempts at the center of the EU to create a platform of shared tax characteristics or the exhortations of leaders of the EU to pull together in a time of crisis, the status and direction of common tax policy is perhaps harder to discern than ever before. On the topic of Europe’s Financial Transactions Tax (FTT) though, recent events have shown that the FTT is now closer than ever to becoming a reality.

Frustration with the state of the union has not been lost on its leadership; at the Conclusions of the European Council of 28–29 June 2012, a communiqué stated: “Tax policy should contribute to fiscal consolidation and sustainable growth. Work and discussions should be carried forward on the Commission proposals on energy taxation, on the common consolidated corporate tax base and on the revision of the Savings Tax Directive.

As noted at the [Ecofin] Council on 22 June 2012, the proposal for a Financial Transaction Tax will not be adopted by the Council within a reasonable period. Several Member States therefore will launch a request for an enhanced cooperation in this area, with a view to its adoption by December 2012.

The Commission is pursuing work on concrete ways to improve the fight against tax fraud and tax evasion and will soon present an Action Plan including options to that end. Rapid agreement must be reached on the negotiating directives for savings taxation agreements with third countries. Member States participating in the Euro Plus Pact will continue their structured discussions on tax policy issues, notably to ensure the exchanges of best practices.”

Deciphering the message

In concrete terms, this means that two of the major tax proposals on the Council table — the Common Consolidate Corporate Tax Base (CCCTB) and the Energy tax proposal — will continue to be discussed at length in the Council working group. Given their inherent complexity, the CCCTB discussions will likely continue for some considerable time.

As for the energy tax proposal it appears that the ambitions of the EC proposal are being watered down, particularly because very few Member States appear to be in favor of splitting the tax base into two separate elements — one based on carbon emissions and the other on energy content.

Discussions are also getting underway in the Council on the EC’s recent and longawaited proposal on the VAT treatment of vouchers — an area that has evolved considerably, and where there are no clear existing rules.

Financial Transactions Tax

The EU long-disputed FTT moved a step closer to introduction on 9 October 2012, as 11 EU Member States requested its introduction via the EU’s seldom-used “enhanced cooperation” process. EU Taxation Commissioner Algirdas Šemeta said at the conclusion of the recent EU finance minister’s meeting in Luxembourg that the EC will make a proposal to the European Council for the enhanced cooperation procedure to be approved at the next meeting of EU finance ministers in November.

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 like the UK stamp duty. Effectively, the levy would be introduced on the purchase and sale of financial assets and all derivative transactions.

Introduction of the Directive in all 27 European countries (including the 17 Eurozone 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.

The days running up to the Luxembourg meeting saw a series of letters from individual Member States confirming their support, with a total of 11 Member States (exceeded the required nine) voicing their support. The 11 countries are Austria, Belgium, France, Estonia, Germany, Greece, Italy, Portugal, Slovenia, the Slovak Republic and Spain.

It should be noted that all Member States have a say in whether to authorize the enhanced cooperation process proposed by the EC, with a qualified majority of member country votes needed for that authorization to be granted. A number of Member States — importantly, with more than the 91 (of 345) votes required to constitute a ‘blocking minority’ under the EU’s qualified majority voting procedures — 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 authorization to proceed.

Member States not satisfied that the conditions required to allow proposals to proceed under enhanced cooperation may choose to vote against the enhanced cooperation on those grounds, and it may be necessary for the terms or scope of the proposed FTT to be amended before it gains approval, even at this procedural stage. A German EU diplomat close to the EU Finance Ministers’ consultations said: “We are hoping to achieve the enhanced cooperation by the end of this year.”

Although more than a year has elapsed without major progress since the EC’s directive proposal in September 2011, an implementation of the FTT may yet be possible in January 2014 as originally envisaged. “One year as a period to prepare for the implementation seems not to be too short,” said Austrian Finance Minister Maria Fekter at the meeting’s conclusion.

This news means that the FTT is one step closer to becoming a reality. Accordingly, political developments now require close monitoring by the business community, and companies should revisit economic and fiscal scenario planning related to the potential implementation of the tax.

The impact of an FTT, if introduced, can be expected to be felt beyond the financial services industry (as it could affect group treasury operations), as well as in countries outside of the Members States adopting the proposal — for example where a counterparty based outside one of the Member States enters into a transaction with a person/institution resident in one of the Member States.


Now that these recent events have unfolded, it is well worth spending some time setting the procedure for adopting a legislative measure by enhanced cooperation. The procedure involves a number of steps not only confined to those countries who will participate in the eventual measure.

First, those Member States wishing to establish an enhanced cooperation between themselves are required to make a request to the EC (as France and Germany have now done) specifying the scope and objectives of the enhanced cooperation proposed, and there must be at least nine Member States signing up to such a request.

The enhanced cooperation must fall within one of the areas covered by the European Treaties and must be used only as a “last resort” — i.e., it must be clear that the measure would not be adopted within a reasonable time by the EU as a whole.

It cannot include areas that fall under the exclusive competence of the EU. This would already, for example, rule out any FTT proposal intended to raise resources for the EU Budget.

The EC also has to be satisfied that a number of other conditions for enhanced cooperation laid down in the EU treaties are satisfied. These conditions are:

  • It must not undermine the internal market or economic, social and territorial cohesion.
  • It must not constitute a barrier to or discrimination in trade between Member States.
  • It must not distort competition between Member States.
  • It must respect the competences, rights and obligations of those Member States who do not participate in it.

If satisfied that the scope and objectives of the proposed enhanced cooperation meet those conditions, the second step is for the EC to make a proposal to the Council for the enhanced cooperation procedure to be approved.

The EU Commissioner for taxation has already indicated he will give favorable consideration to a request for enhanced cooperation relating to an FTT, so it can be assumed that, if requested by sufficient Member Countries, the EC will indeed make this proposal to the Council, which is likely to come to the ECOFIN Council at the very earliest for its meeting on 9 October 2012.

Third, all Member States have a say in whether or not to authorize the enhanced cooperation process proposed by the EC, with a qualified majority of member country votes needed for that authorization to be granted. A number of member countries — importantly, enough to constitute a blocking minority under the EU’s qualified majority voting procedures — have already indicated that they will be looking carefully at the scope and potential impact of the proposed enhanced cooperation FTT before giving it authorization to proceed.

Member countries not satisfied that the conditions set out above are met may choose to vote against the enhanced cooperation on those grounds, and it may be necessary for the terms or scope of the proposed FTT to be amended before it gains approval, even at this procedural stage.
A further potential hurdle for an enhanced cooperation process to proceed is the choice of the Treaty area — the “legal base” — under which the eventual FTT will be adopted.

The legal base for the EC’s 2011 FTT proposal was Article 113 of the Treaty on the Functioning of the European Union (TFEU), which covers harmonization of legislation concerning indirect taxes (such as the FTT has been categorized) to the extent that such harmonization is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.

It is, of course, arguable that an FTT adopted by less that the full 27 member countries cannot by definition be necessary for the functioning of the internal market or would avoid distortion of competition. An alternative suitable legal base in the European treaties is not obvious.

Non-participating countries have a say, too

Overall, the right of non-participating member countries to vote on whether, procedurally, an enhanced cooperation should go ahead gives them a certain degree of influence over the substance of any enhanced cooperation measure, even though they will not participate in it.

In the context of the FTT proposal, this could, for example, lead non-participating Member States to insist on the removal of the ”extraterritorial” elements of the EC’s 2011 FTT proposal, whereby financial institutions in non-EU countries would be deemed to be established in the EU, and subject to the Directive, as a result of transactions with financial institutions or other parties established in the EU in the ordinary sense of that test.

It could also lead to calls for the FTT to be adopted by enhanced cooperation to be confined to the least potentially mobile transactions — such as stamp duties on shares levied by reference to the registered office of the company — in order to reduce the scope for potential distortion of competition between Member States.

Additionally, there are likely concerns on the part of non-participating countries that an introduction via the enhanced cooperation route, when combined with national measures already in existence, would lead to double taxation, which could therefore have an impact on sovereign taxing rights.

For example, it is possible that the introduction of an FTT — in broadly the form proposed by the EC in 2011 — among, say, Eurozone countries and combined with UK stamp duty reserve tax could lead to effective double (or multiple) taxation on trading in UK equities. This too could influence the detail of the measure to which the Council gives its approval.

In reality it is highly unlikely that the demands of nonparticipating Member States will be sufficient to prevent some version of FTT going ahead by those wishing to participate, even though they may seek to restrict its scope or delay its introduction. It is also worth noting that Member States who are outvoted at the stage of approving an enhanced cooperation procedure may still continue to challenge the enhanced cooperation in proceedings before the European Court of Justice, as for example Spain and Italy have done in relation to the European patent enhanced cooperation.

The design of an FTT will also need to take into account the risk of legal challenge by disgruntled taxpayers. In this context, we note that, for example, the British Bankers’ Association (BBA) has already expressed doubts on whether imposing an FTT within a subset of EU Member States would be compatible with the EU treaty “fundamental freedoms” designed to maintain a single market.

The consent of the European Parliament is also required for the enhanced cooperation process to proceed. Although the European Parliament has strongly advocated a European FTT and has indicated a willingness to support enhanced cooperation, its consent could also depend on the scope of the proposed FTT envisaged by the enhanced cooperation countries.

On the assumption that the EC’s proposal wins Council approval — or does so subject to amendments in the scope and objectives of the proposed enhanced cooperation that have been agreed under the Council’s voting procedures — the fourth step will be for the EC to put forward a proposal for the enhanced cooperation measure itself.

This substantive FTT proposal — which, for the reasons outlined above, is likely to be narrower in scope than the EC’s 2011 FTT proposal — could then be subject to the EU’s normal legislative processes, with the key difference that only participating member countries would have the right to vote.

This means that a legislative proposal would be made to the ECOFIN Council — likely to be in November 2012 at the absolute earliest — then discussed in the Council working group and at one or more meetings of the ECOFIN Council itself, as well as in the European Parliament, before being ready for adoption.

These procedures take time, with the possibility of further revisions to the legislative proposal throughout the process, until a measure that satisfies all participating countries, the European Parliament and the EC is arrived at.

Implementation of any measure adopted through this process therefore looks highly unlikely any time before late 2013 or early 2014, rather than by the end of 2012. Clearly, the timescale of such an enhanced cooperation process will very much depend on the nature of whatever FTT model is proposed and the scope of a European FTT will be shaped by a combination of legal and political pressures.

On one hand, a European FTT in the form of the 2011 proposal is likely to be supported by the EC, the European Parliament and others who favor a sweeping and hard-hitting tax. On the other hand, a European FTT that is more closely modeled on, say, a UK stamp duty reserve tax or the French financial transaction tax that came into force on 1 August 2012 may attract the support of a wider group of Member States and, in all likelihood, be more robust from an EU law perspective.

At the time of writing, debate on the likely broad model for a European FTT, and on the precise tax base and exemptions of such a tax, is still ongoing. Even once these primary design issues are settled, there remain questions as to how any European FTT should take account of the different legal systems that govern the transfer of those securities potentially affected, as well as the practical and operational aspects, such as clearing and settlement, which vary between different Member States.

Tax fraud and evasion

In the midst of these discussions, the EC also recently published a communication on concrete ways to reinforce the fight against tax fraud and tax evasion. In itself, this communication contained little that was new or revolutionary, but it does come at a time when the G20 and OECD are also stepping up their fight against tax evasion.

The communication does foresee as a next step the publication before the end of 2012 of an action plan that will have three distinct goals:

  • To enhance administrative cooperation and support the development of the existing good governance policy within the EU
  • To establish a set of measures, procedures and tools for coordinated action against tax havens that is likely to include a mixture of defensive measures or sanctions against countries that practice unfair tax competition and incentives for those countries to cease such practices
  • To put forward proposals for tackling aggressive tax planning

Clearly this is an area within which much momentum is seen; indeed, witness the OECD and EU seemingly simultaneous reports on double non-taxation. This promises to be an interesting trend that, along with deciphering messages around further harmonization, promises to be a key area that readers are advised to add to their bedside reading list.

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