The Financial Transaction Tax proposal under the enhanced cooperation procedure: legal and practical considerations

Research Highlight


The FTT proposal under the enhanced cooperation procedure

This research examines the controversial proposal in February 2014 by the European Commission for a Council Directive to implement a financial transaction tax (FTT) through the enhanced cooperation procedure. This procedure allows a sub-group of Member States, subject to the fulfilment of some conditions, to introduce measures that only bind the participating Member States and has been pursued following the Commission’s inability to garner the necessary support of all Member States for its original proposal for an FTT of September 2011.

The research analyses the proposal and the accompanying impact assessment, focusing on the newly-added features of the proposed tax and its potential impact on both participating and non- participating Member States. It concludes, amongst other things, that there will be both positive and negative impacts on non-participating Member States, such as the UK, but that the evidence provided in support of the proposal is unsatisfactory in a number of respects.

The research also examines the proposal from the perspective of public international law. It discusses the controversial extraterritorial reach of the proposed tax as a result of the “contagion effect” (following which an entity established outside participating Member States is subject to the tax if its counterparty is established in a participating Member State) and the “issuance principle” (following which transactions between entities established outside participating Member States are subject to the tax if they involve instruments issued in participating Member States). It argues that doubts exist with respect to the compatibility of the “contagion effect” and the “issuance principle” with internationally-recognised legal principles.

The research also considers the legal requirements imposed by the EU Treaties on the use of the enhanced cooperation procedure. Whilst raising some concerns in relation to the proposal’s  compliance with these requirements, the research concludes that the outcomes of any potential political or judicial challenge are uncertain.

The Financial Transaction Tax proposal under the enhanced cooperation procedure: legal and practical considerations, Joachim Englisch, John Vella and Anzhela Yevgenyeva: British Tax Review, 2, pp.223-259



The EU Commission’s Proposal for a Financial Transaction Tax

The European Commission’s proposal for a Financial Transaction Tax (FTT) has been one of the most controversial political issues in the EU over the past year. The proposal has the full backing of the EU Parliament, and is the subject of vocal and widespread campaigns by interest groups, although EU Member States are divided on the issue.

The CBT issued a policy briefing on the proposal just after it was published in September 2011, which was extended into a longer article in the British Tax Review. Our work questions each of the proposal’s four objectives as set out by the European Commission. The first objective is to raise revenue from the financial sector to recover the costs of the financial crisis, to compensate for the “undertaxation” of the financial sector due to the VAT exemption for financial services, and to create a new revenue stream for the EU. All of these reasons are unconvincing; the link with the costs of the financial crisis is tenuous; the extent of under-taxation due to the VAT exemption is controversial, with mixed evidence, and there is no  apparent reason why the EU should be financed by a financial sector tax. In any case, if the aim is simply to raise more revenue, then other, more efficient, taxes would be preferable. 

The second objective is to create disincentives for transactions that do not enhance the efficiency of financial markets. The Commission’s target is short-term trading, particularly high- frequency trading (HFT). However, as the Commission itself has explained, the “existing evidence is inconclusive about the impact of HFT on market efficiency.” In any event, targeted regulation appears to be a better option to address such concerns.

The third objective is to avoid a fragmentation of the internal market given the increasing number of national financial taxes being introduced. But these new taxes are not FTTs, and so this objective is not well grounded. The final objective is to pave the way towards a global introduction of the tax. But there is little evidence that the unilateral introduction of the tax  in the EU will induce other countries to follow suit.

John Vella

British Tax Review, 6, pp. 607-621


Joachim Englisch, John Vella and Anzhela Yevgenyeva