The EU's Court of Justice only ruled against claim on its prematurity, not merits of argument
THE UK’S LEGAL CHALLENGE to the EU’s plans to introduce a financial transaction tax is “premature”, Europe’s highest court ruled, as details of the tax have not as yet been finalised.
The decision is a blow to the UK’s plans to steer clear of implementing the 0.01% levy, which is aimed at shares, bonds and derivatives across the whole EU. But legal experts suggest that the European court has left the door ajar for the UK to continue its fight.
The levy is intended to prevent speculative trading and prompt the financial sector to pay back some of what it received from governments during the financial crisis.
A working group of 11 member states, including France and Germany, have been responsible for negotiating the tax following the collapse of EU-wide talks in 2012 after strong disagreement from members such as the UK, Sweden, and Denmark, who fear the EU would lose competitiveness in the financial sector.
In particular, the UK harbours concerns over the levy on trading financial securities would add as much as £3.95bn to the cost of issuing UK government debt and could “seriously” increase the cost of capital for businesses and governments across the continent if it were in place today.
Another worry is the impact the tax would have on UK financial institutions despite the UK’s refusal to implement it.
The City could be hit if, for example, a British firm trades with branches of French or German banks based in the capital.
Of the 27 EU member states, the 11 going ahead with the FTT are Germany, France, Italy, Spain, Belgium, Austria, Portugal, Greece, Slovenia, Slovakia and Estonia.
Those countries had not yet decided how the tax will work, the court said, so the UK’s challenge was premature.
However, a memo leaked last year to think tank Open Europe raised a litany of questions over how the collection of revenues would work in practice, and warns the tax would introduce additional and unsustainable costs for participants in the bonds market.
That document included criticism of the European Commission’s impact assessment of the levy, noting it “is not fully clear on how the taxation on government bonds would interact with the cost of national debt”, querying whether an increase in the cost “could be counterbalanced by the revenues of the FTT”.
Not all doom and gloom for the UK
A key element of the ruling is that it did not comment on the merits of the UK’s argument, and only dismissed it on the grounds of its prematurity, leaving the door open to further challenges once greater detail on how the levy would function is agreed by the participating nations.
More interestingly, according to Gary Richards, partner at law firm Berwin Leighton Paisner, the judgment raises the possibility of the enhanced co-operation procedure being “hijacked” to undermine the principle of unanimity in decisions on tax. Participating EU member states will need to balance their desire for a wide-ranging tax against the risk that any extra-territorial scope could open the way for an annulment challenge.
The possibility of success, though, is very much dependent on the scope of the charge, and whether it becomes clearer that the UK’s fears are to be borne out upon the emergence of greater detail on how the levy will be implemented.
What is certain, though is the fight will go to another round and the Treasury has confirmed it plans to continue its legal challenge in order to “ensure that the interests of countries outside of the single currency, but inside the single market, are properly protected”.