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European Commission sets out details of 11 state financial transaction tax

The European Commission has published the details of a financial transaction tax (FTT) it claims will raise between €30 billion and €35bn a year for the 11 states that have agreed to participate.18 Feb 2013

The proposal, which takes the form of a draft directive (39-page / 187KB PDF), follows last month's agreement by EU finance ministers http://www.out-law.com/en/articles/2013/january/eleven-member-states-to-go-ahead-with-financial-transaction-tax-after-eu-approval/ to allow participating states to implement the tax under the 'enhanced cooperation' procedure. This process allows a minimum of nine EU member states to proceed with a plan even if not all EU countries agree with it.

Eligible transactions will be subject to the tax where at least one party is based in a participating member state. The states in agreement are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.

"On the table is an unquestionably fair and technically sound tax, which will strengthen our Single Market and temper irresponsible trading," said Algirdas Šemeta, EU Tax Commissioner. "Eleven member states called for this proposal, so that they can proceed with the FTT through enhanced cooperation. I now call on those same member states to push ahead with ambition - to drive, decide and deliver on the world's first regional FTT."

The Commission dropped plans for an EU-wide FTT in June 2012 after a Council discussion revealed that there was insufficient support for the proposal. The enhanced cooperation agreement matches many of the Commission's original proposals, but adds an 'issuance principle'. This will mean that financial instruments issued within a participating member state will be taxed when traded, even if those trading them are established outside of the FTT zone. The proposal also includes a general and a specific anti-abuse clause.

The FTT will apply where financial instruments such as shares, bonds, securities and derivatives are traded between banks where at least one party to the transaction is established in a participating member state regardless of where the transaction itself takes place. Transactions will be taxed at 0.1% for shares and bonds, and 0.01% for derivatives.

The tax will not apply to the day-to-day financial activities of citizens and businesses, or to traditional investment banking activities. Activities of member states and other public bodies when managing public debt are now also excluded, as are refinancing and monetary policy actions by the European Central Bank, European Financial Stability Facility and European Stability Mechanism.

The UK has never supported an EU-specific FTT, stating that any tax would have to be applied "globally" to prevent financial traders rerouting their transactions to countries outside of the EU. In a highly critical report on the original proposals, published in March last year, the House of Lords denounced the tax as "flawed" and warned that its adoption by the UK would force banks to relocate from the UK's financial centre in the City of London.

However the tax as proposed will be likely to catch economies based outside the FTT zone if they trade in any financial instruments or with any party established in one of the 11 participating states. According to an FAQ published by the European Commission, firms "would only be able to avoid the FTT if they were prepared to relocate, abandon all their clients in the 11 member states and refrain from any interaction with financial institutions established in the participating member states".

Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, was unconcerned by the proposals, as she suggested they would likely undergo further changes before being finalised. Although only those member states participating in the agreement will be able to vote on the proposals, they must agree unanimously before they can be implemented. The proposal sets out a deadline of 30 September 20013 for participating states to publish new laws, which should take effect from 1 January 2014.

"We've seen this nightmare raise its head before many times, and so it's hard to get too excited - yet – by the European Commission's proposals," Walker said. "The plans are so outrageous that one has to wonder whether, in the best bazaar tradition, the Commission is asking for the sun, moon and stars so it can spring something else on us that we will fall over ourselves to accept instead. Take a deep breath and, again, watch this space."