Law and Rights

The UK?s Failed Challenge to the Financial Transaction Tax: Keep Calm and Wait

By Steve Peers

?In capitalist countries, the bank robs YOU?. Rightly or wrongly, this phrase sums up the reaction of many EU citizens (as well as many of those outside the EU) to the bank bailouts and austerity of the last few years. The reaction to these concerns has been a series of populist measures by the EU ? a restriction on short-selling (upheld by the CJEU), criminal penalties for market abuse, and a possible financial transactions tax (FTT).

As widely expected, the CJEU today ruled against the UK?s legal challenge to the plans of a group of EU Member States to impose an FTT. In the form proposed by the European Commission, the FTT could possibly do significant damage to the UK?s financial industry, based in the City of London. So at first sight, the failure of the UK?s legal challenge today looks like a significant setback to the City. However, in reality it is no such thing, since the UK will still be able to bring a separate legal challenge to the FTT, if and when it is finally adopted ? and such a challenge would have a much better chance of being successful.

Background

Far from being a ?one size fits all? template, for many years EU law has provided for a number of different possibilities for some Member States to go ahead and adopt EU measures without all Member States participating. This is known in EU jargon as ?differentiated integration?.

The best known of these possibilities are the rules on the EU?s single currency (along with some related rules on bailouts and economic governance) and on EU Justice and Home Affairs Law. But also there is a lesser known possibility for some Member States to go ahead without the others in any area of EU law, known as ?enhanced cooperation?.

This possibility was first introduced by the Treaty of Amsterdam (in force 1999), but it was subject to strict rules, such as a de facto veto for each Member State. To make it easier for these rules to be used, particularly in light of the planned large enlargement of the EU, they were amended by the Treaty of Nice (in force 2003). They were amended again by the Treaty of Lisbon (in force 2009), and they have been used in practice three times since that point.

The first use of the enhanced cooperation rules was to adopt a Regulation on the choice of law in divorce in 2010. This proved uncontroversial. Secondly, the EU agreed in 2011 to create a unitary patent for a large number of Member States. Spain and Italy could not agree to the details of this proposal, since they wanted equal status for their languages. They brought a legal challenge to the Council?s decision to authorise enhanced cooperation in this case, but the Court of Justice of the European Union (CJEU) dismissed this challenge in 2013.

The third use of the enhanced cooperation procedure was to authorise a group of Member States to adopt an FTT. As noted already, the UK?s challenge to the decision authorising the FTT was dismissed today.

So why is the UK?s failure today not really a significant setback? The reason is that enhanced cooperation is a two-step procedure. First of all, the EU Council authorises a group of Member States to go ahead in a particular area. These authorisation decisions do not go into any detail about the law concerned. Secondly, the EU institutions then negotiate the details of the legislation which will apply to the participating Member States. This is known as the measure ?implementing? enhanced cooperation.

When the enhanced cooperation procedure was used for the first time (as regards choice of law in divorce), the Council very quickly agreed on the measure implementing enhanced cooperation. However, on the second occasion when this procedure was used (the unitary patent), it took nearly two years for the EU to adopt the legislation implementing enhanced cooperation. This was due to a need to agree these implementing rules with the European Parliament, as well as very difficult talks between Member States on a separate treaty creating a Unified Patent Court, particularly because it was hard to agree (among other things) where that Court would be located.

Similarly, although the Commission proposed legislation to set up an FTT back in 2011, and tabled a revised version of this proposal in 2013, once the EU authorised enhanced cooperation as regards the FTT, the participating Member States clearly appear to have difficulties reaching agreement on this proposal (each of the participating Member States has a veto).

Certainly, the Commission proposal is objectionable from the UK?s point of view. It provides not only for taxing transactions which take place in the financial markets of the participating Member States (reasonably enough), but also for taxing transactions which take place in the financial markets of non-participating Member States ? as long as one of the parties to the transaction is located in a participating Member State. To this end, the proposal would deem a British bank to be a French bank (for instance) in certain circumstances.

There is a very good argument that this proposal violates the EU?s rules on free trade in the internal market, and interferes with the taxation powers which would normally belong to the UK and other participating Member States. The EU Treaties require any enhanced cooperation to be consistent with those rules. Indeed, it is widely known that the EU Council legal service believes that, for these reasons, the Commission?s proposal would be illegal ? if it were in fact adopted.

While the CJEU today rejected those arguments at this stage of the process, this was simply because the final shape of the FTT has not yet been decided. It is entirely possible that the participating Member States might not agree on an FTT at all, or that they might agree on an FTT which does not contain such elements.

Even if they do agree to adopt the Commission?s proposal, the UK will be able to challenge that Directive when the time comes. Similarly, some of Spain?s detailed arguments against the legality of the unitary patent have been raised in a second legal challenge (still pending) which that country has brought against the legality of the EU measures implementing enhanced cooperation in this field.

Conclusion

If the UK had been successful today, it would have ended any prospect of an FTT for the time being. Its failure keeps the prospect of an FTT alive. But because the Court of Justice rightly did not rule on the merits of the UK?s case against the Commission proposal ? simply because that proposal has not yet been adopted ? the UK has only lost a minor skirmish, not the war.

The mere fact of bringing this legal challenge has made it clear to the participating Member States that the UK will vigorously defend its legal position, and may therefore have contributed to their difficulties in agreeing to the Commission proposal. And the government?s legal action, although unsuccessful, may yet play some role in ensuring that an FTT, if one is finally agreed, does not have an extraterritorial scope.

Without extraterritorial features, an FTT would of course not raise as much money. Then again, the UK could also reduce its budget deficit if it could (for instance) collect a toll from drivers on German motorways, or tax all the cheese bought in France. The absurdity of these scenarios shows why a future British legal challenge to the final FTT, if such a challenge is necessary, would have a much greater chance of success.

Barnard & Peers: chapter 5, chapter 14

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