CJEU: it's too early to tell about FTT
01 May 2014 Europe
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The Court of Justice of the EU (CJEU) has dismissed the UK’s legal challenge of the Financial Transaction Tax (FTT), ruling that it was premature.
The possible effects that the FTT will have on non-participating EU countries’ administrative costs cannot be examined until the tax has been finalised, according to the CJEU.
The UK challenged the implementation of the FTT following the European Commission’s and the EU Council’s decision to allow 11 EU countries, including Germany, France and Italy, to use ‘enhanced cooperation’ to push through the tax.
Enhanced cooperation is an extraordinary procedure that EU countries can use if union-wide agreement on a rule or law is impossible.
The FTT—a levy on financial trades—will adversely affect non-participating countries, driving up the cost of taxed trades, argued the UK.
Securities finance business will be particularly affected, according to UK professionals and associations.
One commentator has warned that the FTT could have a damaging effect on returns and prevent securities finance participants from making a profit.
Repo markets would be the hardest hit, said the commentator, with an estimated cost of €198 billion to Europe's largest banks. The short average duration of repo transactions make them particularly susceptible to the tax, he explained.
The International Securities Lending Association is also fearful. It has said that the tax could “close down” the securities lending market.
“At least 65 percent of the European securities lending market would disappear as a result of the FTT.”
It noted that more than €2 billion of revenue would be lost to long-term investors, while close to €500 billion of euro government bonds would be removed from the lending/collateral markets.
Dismissing the UK’s legal challenge, the CJEU said: “It is obvious that the question of the possible effects of the future FTT on the administrative costs of the non-participating member states cannot be examined for as long as the principles of taxation in respect of that tax have not been definitively established as part of the implementation of the enhanced cooperation authorised by the contested decision.”
The UK has promised to take further legal action. "The government is determined to continue to ensure that the interests of countries outside of the single currency, but inside the single market, are properly protected," said a UK Treasury spokesperson.
James Walsh of the National Association of Pension Funds (NAPF), commented: “The FTT is not the best way to reduce excessive risks or tackle bad behaviour in the markets. In addition, the cost of this tax would undoubtedly be passed on to the millions of private savers and pension scheme members in the UK by the financial institutions and banks that manage their investments.
“The government is right to challenge the tax’s legality as it is highly likely that it would affect UK pension schemes and their members. The CJEU is not saying the UK’s challenge is wrong, only that it is premature because the details of the tax are not year clear. By challenging the FTT’s legality now, the UK government has protected its right to make a more detailed challenge later, once the full proposal is available.”
The possible effects that the FTT will have on non-participating EU countries’ administrative costs cannot be examined until the tax has been finalised, according to the CJEU.
The UK challenged the implementation of the FTT following the European Commission’s and the EU Council’s decision to allow 11 EU countries, including Germany, France and Italy, to use ‘enhanced cooperation’ to push through the tax.
Enhanced cooperation is an extraordinary procedure that EU countries can use if union-wide agreement on a rule or law is impossible.
The FTT—a levy on financial trades—will adversely affect non-participating countries, driving up the cost of taxed trades, argued the UK.
Securities finance business will be particularly affected, according to UK professionals and associations.
One commentator has warned that the FTT could have a damaging effect on returns and prevent securities finance participants from making a profit.
Repo markets would be the hardest hit, said the commentator, with an estimated cost of €198 billion to Europe's largest banks. The short average duration of repo transactions make them particularly susceptible to the tax, he explained.
The International Securities Lending Association is also fearful. It has said that the tax could “close down” the securities lending market.
“At least 65 percent of the European securities lending market would disappear as a result of the FTT.”
It noted that more than €2 billion of revenue would be lost to long-term investors, while close to €500 billion of euro government bonds would be removed from the lending/collateral markets.
Dismissing the UK’s legal challenge, the CJEU said: “It is obvious that the question of the possible effects of the future FTT on the administrative costs of the non-participating member states cannot be examined for as long as the principles of taxation in respect of that tax have not been definitively established as part of the implementation of the enhanced cooperation authorised by the contested decision.”
The UK has promised to take further legal action. "The government is determined to continue to ensure that the interests of countries outside of the single currency, but inside the single market, are properly protected," said a UK Treasury spokesperson.
James Walsh of the National Association of Pension Funds (NAPF), commented: “The FTT is not the best way to reduce excessive risks or tackle bad behaviour in the markets. In addition, the cost of this tax would undoubtedly be passed on to the millions of private savers and pension scheme members in the UK by the financial institutions and banks that manage their investments.
“The government is right to challenge the tax’s legality as it is highly likely that it would affect UK pension schemes and their members. The CJEU is not saying the UK’s challenge is wrong, only that it is premature because the details of the tax are not year clear. By challenging the FTT’s legality now, the UK government has protected its right to make a more detailed challenge later, once the full proposal is available.”
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