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By Joe Kirwin
June 13 — The lengthy, fitful efforts by some European Union member countries to establish a financial transactions tax faces an important vote June 16 when the 10 participating countries will be asked to decide whether the negotiations should continue.
Despite a wavering commitment by some countries and a preference by others to postpone a vote until after the June 23 U.K. referendum on EU membership, Austria will push for a decision.
“The FTT talks are still on,” Johannes Frischmann, spokesman for Austrian Finance Minister Hans-Joerg Schelling, told Bloomberg BNA in a June 13 e-mail. He added that Schelling, who is chairing the FTT negotiations, will convene a meeting of finance ministers of the 10 participating countries June 16 and “will push for a decision. From his point of view it is time to say ‘yes' or ‘no.' ”
Currently, 10 of the 28 EU member states are committed to establishing a collective FTT using a special legislative procedure known as “enhanced cooperation.” The procedure is designed to bypass legislative gridlock on issues such as taxation that normally require unanimous consent of all 28 EU member states.
The European Commission proposed the FTT in 2011, but after three years of unsuccessful negotiations, the enhanced cooperation procedure received the backing of 11 EU member countries (124 ITM, 6/25/12).
After Estonia dropped out of the FTT negotiations in December, the remaining 10 participating EU countries committed to finalize the terms of the levy by June 2016. However, technical talks in the past 10 months to resolve key outstanding issues, including the territorial scope of the levy and which transactions would be taxed, have been unsuccessful. According to EU officials, the most recent FTT negotiations took place June 10.
The territorial issue is particularly sensitive among non-participant EU member countries. Based on the pending proposal—initially put forward in 2011 and then revised in 2013—all shares, bonds and derivatives issued in a participant country would be taxed if they are traded in other EU member countries or in other parts of the world, including the U.S.
Some member states have proposed in past months to exempt shares issued in a participant EU country when they are traded in non-participant countries.
“It would remain to be decided on whether such an exemption should be temporary and what could be the modalities for its possible review or modification,” according to a confidential document summarizing the EU FTT state-of-play, a copy of which was obtained by Bloomberg BNA. “This exemption could cease to operate unless a decision by participating member states is taken to extend its duration.”
An FTT exemption on shares issued in a participant country and traded in a non-participant country is a particularly relevant issue for the U.K., which insists that any requirement that it collect the FTT on trades in U.K. exchanges would be a violation of EU single market laws. Concerned that the FTT negotiations could become an issue in the current U.K. referendum on EU membership, some participant countries, as well as the European Commission, have been reluctant to push hard for an agreement June 16.
“The thinking is that a final decision should not be taken until after the U.K. referendum,” said a European Commission official, who spoke to Bloomberg BNA on the condition of anonymity. “But at the same time, the technical work should continue with a goal of closing all issues by the end of June.”
Two other unresolved issues concern a possible exemption for “market-making” activities as well one for derivatives. Efforts in recent weeks to resolve differences related to exemptions for market-making activities have revolved around finding a precise definition.
“Many participating member states shared the view a workable solution could be the definition of market making based on the Markets in Financial Instruments Directive (MiFID) Art. 17 and 48,” according to the FTT state-of-play document . “As an additional aspect of the compromise, it could be also foreseen that participating member states, under a set of conditions, apply lower than the standard FTT rate to certain financial transactions carried out by market makers.
“The decision to apply the reduced rate would rest with the participating member states of ‘deemed establishment’ of the financial institution (market maker) concerned, and would be limited to the FTT due by the market maker on his part of the transaction only,” according to the document.
However, the same document stated that “unanimity” of the participating FTT countries on the market making exemption “could not be reached” because of the objections of one country, while non participating countries “raised concerns that such a definition could potentially be too restrictive.”
Key to the unresolved issue relating to derivatives concerns sovereign debt instruments.
“For a derivative contract to qualify for an exemption, the underlying ‘sovereign’ asset would have to be issued by a ‘sovereign entity’ that would also be listed in the directive,” the document said. Nonetheless, the document also said that “there still remains an agreement to be reached on whether there should be such a (possibly temporary) list of derivatives exempt from FTT.”
According to an EU diplomat participating in the FTT talks, “the problem is that a number of member states have certain classes of assets they want protected. This has been at the root of our problems in reaching a compromise agreement.”
The commission said an FTT imposed collectively in the 10 EU member countries at a rate of 0.1 percent on shares and bonds and 0.01 percent on derivatives would raise approximately $35 billion.
The 10 EU countries committed to a collective FTT are: Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain (243 ITM, 12/9/15).
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Text of the FTT state-of-play document is at http://src.bna.com/fQY.
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