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House of Lords Committee Urges Legal Challenge To Financial Transaction Tax

By Amanda Banks,, London

02 April 2013

The House of Lords European Union Committee has warned that a Financial Transaction Tax within parts of the European Union will have "far-reaching adverse consequences for UK resident institutions," and it has urged the Treasury to take advice on a possible legal challenge at the European Court of Justice.

Eleven European Union countries have so far agreed to implement the tax. However, although the tax has been dismissed by UK Prime Minister David Cameron as "simply madness," a letter from committee chairman Lord Boswell to Greg Clark MP, financial secretary at HM Treasury, accuses the Government of "complacency" on the issue. The letter warns that UK financial institutions will have to pay the tax when dealing with countries that have the FTT; this is because of the issuance principle, which seeks to prevent avoidance by taxing financial instruments when traded, even if those conducting the transaction are outside the FTT zone.

According to the committee, this could leave the UK liable even for tax claimed against companies in foreign jurisdictions, particularly those in the USA. The letter gives the example of a financial transaction involving German shares between a US and a UK institution: "Under the issuance principle this would give rise to FTT upon both parties payable to the German tax authorities. Given that collection of this tax from the US financial institution may be difficult, the proposal would enable the German tax authorities to impose joint and several liability for both instances of the FTT upon the UK financial institution and recover the whole amount using the EU mutual assistance regime."

Lord Boswell also highlights lack of detail as to how the tax will be collected and lack of clarity as to how the FTT will affect subsidiaries outside the FTT zone. He goes on to express "alarm" at the degree of criticism that the European Commission's economic modelling has come under, and he questions the Commission's understanding of "irresponsible trading," which the FTT seeks to curb: "The impact of High Frequency Trading on financial markets remains contentious. The desirability of seeking to discourage such activity is a matter of considerable debate, and the potential impact of the FTT proposal on such activity is less certain still."

He also pours scorn on the notion that an EU FTT would contribute to the development of a global tax, noting opposition in the USA.

The committee advises Clark and the Treasury to take "urgent legal advice" as to whether the FTT proposal meets the criteria for enhanced cooperation, which is the mechanism that allows individual EU states to work more closely together while respecting the Union's wider legal framework. According to the EU Treaty, enhanced cooperation must not "undermine the internal market or economic, social and territorial cohesion. It shall not constitute a barrier to or discrimination in trade between Member States, nor shall it distort competition between them." It must also "respect the competences, rights and obligations of those Member States which do not participate in it."

Citing John Vella, a Senior Research Fellow at Oxford University Centre for Business Taxation, Lord Boswell suggests that distortion of competition will occur, and notes that the Commission has conceded that some double taxation will occur. The proposal, in the committee's judgment, therefore fails to meet the criteria for enhanced cooperation.

Lord Harrison, who chairs the EU Sub-Committee on Economic and Financial Affairs, was quoted as saying that: "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."

He added: "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 criticized, 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."

TAGS: court | tax | investment | European Commission | tobin tax | United Kingdom | trade | European Union (EU) | Europe

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