The legal advisor to EU finance ministers — the “Council legal service” — has just published its own views, which do not just mirror mine, they actually go further in their criticism! Their report has been published in full by the blog section of the FT. By its own admission, the report is narrowly focused: It was a response to a request to look into the issues of ex-territoriality, dis-respect of fiscal competences of non-participating Member States, and the tenuous link of a taxing state with a non-resident legal person. The “is not intended to cover other issues or other provisions of the proposal”. It is even more interesting then how explicit the report is.
To save you the effort of reading the whole thing, I will give a summary of the salient points.
(1) The FTT was to be negotiated and introduced under a very specific legal provision, that of enhanced cooperation, which requires — according to EU rules — that it “respects the competences, rights and obligations of those Member States that do not participate in it”, and further that “acts adopted in the framework of enhanced cooperation shall bind only participating Member States”.
This is an issue, in particular since the current FTT proposal expects that non-participating Member States will collect a tax which does not accrue to them and which they deliberately decided not to participate in. At issue is the rule that someone in a non-participating Member State would be subject to the tax if they transact with someone in a participating-Member State. Let’s translate this into something we can all understand: If a UK resident buys something from a German retailer, do they become German residents for the purpose of this ‘transaction’? That, precisely, is the idea here. I quote from the original, the FTT proposals: If you are in a non-participating Member State and transact with someone in a participating Member State, you “will also be deemed to be established in the participating member state and the transaction becomes taxable there”. If you buy from amazon.de, you are deemed to be established in Germany and they will collect a “transaction tax”. Quite rightly, and explicitly, the legal service says this is a duty by any other name, i.e. a fee for giving you access to the German market. This is expressly forbidden in the EU, where freedom of movement of capital and freedom to provide services within the EU rank amongst the highest founding principles.
(2) The report then considers whether the exercise of taxing powers over a non-resident, over which another State would have a “more relevant interest in regulating the taxpayer’s conduct”, can be justified on any over-riding grounds. It rejects them in turn: (a) it is clearly not justified in order to principally raise revenue, where another state has more relevant jurisdiction over the person, (b) it then considers whether the cost of the crisis could be a justification. Here things get really interesting. The legal service states that “a substantial part of the transactions” subject to the FTT “had no part in the crisis whatsoever and are not liable to contribute to a crisis in the future”, and even if they did this would be insufficient justification for extra-territoriality of tax laws. (c) The report states that the reduction of risky activities does not justify the extra-territoriality, since in any case many non-risky activities essential to the running of the real economy would be subject to the tax (an interesting point to note!). (d) Lastly, the report states that fraud or tax evasion would not justify the extra-territorial scope of the proposal either, since the generality of the scope would imply that any financial activity is per se seen as potentially fraudulent or as having the purpose of tax evasion.
(3) “Entities must be subject to the laws of the jurisdiction where they are located.” How is the Commission going to argue with that?
(4) The report notes that the provision is also discriminatory. It analyses the situation where participating member State A has jurisdiction over an institution with transacts with someone in a different State B. If B is a non-participating Member State, State A will always collect tax from the non-resident counter-party (notably at rates set by State A). If B is a participating Member State, State A will never collect any tax from the counter-party. My earlier blog-posts missed that point, but it is obviously important and absurd.
(5) Non-participating Member States cannot be forced to change their laws as a consequence of an enhanced cooperation agreement which they were not party to. Again, pretty hard to argue with, but that is exactly what the FTT proposal demands. The FTT cannot be applied outside the territory of the participating Member States. These Member States, being the only ones around the negotiating table, have provided double-tax relief clauses between each other, but expect to double-tax non-participating State entities, and they even expect these non-participating Member State to collect the tax for them. It is really quite remarkable. Very EU-Commision. As the report says “the proposed Directive would necessarily affect the legal and financial situation of non participating Member States to an extent that goes far beyond their duty no to impede the implementation”.
(6) “The tax would have an effect equivalent to that of a duty imposed in return of the possibility to enter into a transaction with an institution located in a participating Member State”, which is against free moment of capital or services, both fundamental principles of EU law.
Because of its narrow focus on the extra-territoriality of the current Commission proposals, this report may not be the final coffin in the FTT debate, and we will probably see a weaker proposal emerge in time. But its language is unmistakably hostile on a number of issues that were not central to the request the report was asked to address. And this is the interesting part of it. We see the report questioning whether the transactions being taxed will ever play part in a crisis, state categorically that they did not have part in the last crisis, emphasize that a lot of the real economy participants who are not risk-takers will be negatively effected, and that it is not likely to reduce, or even target, fraudulent or tax-evasive activities. And the language on the central point is very poignant: the proposal over-steps the mandate of an enhanced cooperation framework, introduced hidden duties, is anti-competitive, and discriminatory against non-participating Member States. The report could not have been worse for the Commission.