April 24, 2014
There has been an important development brewing in the UK’s flagship case against the EU’s proposed Financial Transaction Tax (FTT). We’ve known for some time that the European Court of Justice (ECJ) will take a shortened proceeding and rule on the case on the 30 April – this has now become public, as European Voice reported this morning. A ruling hadn’t originally been expected until 2015. We expect the ECJ to either throw out the case or rule against the UK – which is problematic for numerous reasons.
The UK claims that the use of enhanced cooperation here is fundamentally against the EU treaties as it imposes costs on those outside the FTT-zone. If the ECJ rules against the UK, it could become a wide-ranging precedent with three key effects:
- Allowing for the broader use of enhanced cooperation (even with extraterritorial impacts) including for eurozone integration
- Making it more difficult for the UK to employ a veto over further EU integration it’s not part of
- Undermining trust in the ECJ as a fair, impartial arbiter and guardian of the single market
However, it’s important not to be too alarmist about this. While the ruling looks unlikely to go in the UK’s favour (but it still could) it seems more likely to be dismissed on grounds of the UK’s challenge being premature (given that the proposal is yet to be finalised) rather than being outright wrong. So the UK will have another shot at challenging the final decision.
Also, the FTT is likely to be substantially watered down so the actual effect might be far less damaging than the Commission proposal pursued under enhanced cooperation. As a key proponent of a watered down FTT, the UK is already to a large extent a winner. Finally, this is a different sub-set to the eurozone (with Ireland and the Netherlands outside).
Below is a Q&A on the issue – pardon the length of it.
What are the UK’s objections?
As a recap, the UK has called for the decision authorising the use of ‘enhanced cooperation’ for the FTT to be annulled. As such it is not directly challenging the measure itself. The key reasons for the UK’s challenge are (as published by the ECJ):
- The FTT is not compatible with Article 327 of EU Treaties which states that any member states not participating under enhanced cooperation must not feel any impact. The FTT will hit UK firms if there are any transactions with those inside the FTT zone.
- There is no basis in international tax law which justifies imposing taxes on a sovereign state which does not wish to be part of said tax regime. Adopting a law with extraterritorial effects does not fit with the code of international tax law.
- The tax will be distortionary and impact competition across the EU. Rather than improving the single market it could fragment it.
- The FTT is not compatible with Article 332 of the EU treaties which states that any expenditure from enhanced cooperation will come from those directly involved. Given that taxes will be raised from UK and other countries not involved, this has been breached. The UK would also likely be directly responsible for collecting and enforcing this tax due to rules on mutual assistance, producing a further burden.
What are the potential outcomes from the ruling?
- The ECJ rules in favour of the UK – seems very unlikely, but not impossible. In this case the Council would be forced to reconsider the FTT. It would need to adjust the details of the FTT to fit with the ECJ’s ruling and then get renewed support for enhanced cooperation.
- The ECJ rules against the UK and dismisses some or all of its claims – possible. This could amount to the ECJ ruling that the FTT does not have any extraterritorial effects nor that it cuts across the single market. This would not only set a worrying precedent for any future challenge against the specific nature of the FTT itself but also for the UK’s position in the EU more generally, weakening its ability to bloc future eurozone integration with a direct or indirect impact on the UK. Combine this with the growing use of intergovernmental agreements and using the single market legal base for eurozone integration and it’s clear the net effect is reduced UK leverage in Europe.
- The ECJ deems the challenge premature or unwarranted – likely. Given that the FTT is still a work in progress and the final proposal remains uncertain, the ECJ could throw the complaint out on technical grounds. This would not be too detrimental to the UK, although it would still be a blow as the UK was hoping to stop the FTT as soon as possible. It would also mean that, out of four key legal challenges on financial services at the ECJ (short selling, FTT, bankers bonus cap and ECB location policy) the UK is now at 0/2 – not exactly an encouraging score.
Does this mean the UK was wrong to launch its challenge?
- In the end, we still think it was the right thing for the UK to do. It seems clear to most that there are numerous negative side-effects from the FTT, many of which seem to break rules enshrined in the EU treaties. The broader point is that the UK is right to establish the boundaries of what the EU can do and what enhanced cooperation can be used for.
- The one caveat in this instance is that, given the large and growing concerns about the FTT, it has floundered and stalled on its own to a large extent, suggesting the legal challenge may not have been necessary. This would especially be true if it ends up going against the UK and setting the precedent described above.