By Jonathan Watkins.
The legal challenge facing the controversial
European Financial Transaction Tax may not herald the end of
efforts to implement it, a leading market commentator has
Europe’s highly-contested FTT suffered a major
setback this week after the EU’s top legal advisor
concluded it is discriminatory to non-participating
But despite the strong challenge to the tax, which includes
a 0.01% levy on derivative transactions, Christian Voigt,
business solutions architect at Fidessa says that the tax may
still be implemented.
"The legal opinion highlights some fundamental flaws in the
definition of the scope of the EU FTT," said Voigt.
"I think at the very least, the current EU FTT draft
requires considerable modifications.
"This is a key opportunity for the legislator to go back to
the drawing board, address the issues highlighted by the
opinion and come up with another proposal.
"If the legislator chooses to push ahead they could re-work
the current proposal and go forward with that."
Not legally binding
The conclusions from the EU Legal Council are not legally
binding but deal a heavy blow to the European
Commission’s proposal which has been much debated
in the financial markets.
The idea of taxing equities, derivatives and high frequency
trading was estimated by the commission to generate around
The 0.01% charge on derivatives transaction alone is
predicted to bring in around €20bn.
However, many industry experts believe the levy will reduce
liquidity in the market and have spoken out against the tax
from the outset.
The issue of who the tax would apply to in transactions where
one counterparty was a resident in a participating country and
the other wasn’t also spurred further arguments.
The legal council has now concluded that the tax is
"discriminatory and likely to lead to distortion of competition
to the detriment of non participating member states" for this
A watered-down version?
It also stated the FTT exceeds member states' jurisdiction
for taxation under the norms of international customary
"It’s a very strong legal opinion and even
though it’s not legally binding, I
can’t see how the legislator could ignore it,"
"The opinion includes criticism that has previously been
voiced by the industry, and confirms that the proposal is
flawed in its current state.
"In a way, this has brought sanity back into the EU FTT
discussion, because the legal service of the Council of the
European Union confirmed a lot of the industry concerns."
Germany voices support
Voigt added that a watered-down version of the tax is now
more likely to be considered by the European Commission.
EU tax commissioner Algirdas Semeta has been at the centre
of rolling out the FTT, commonly referred to as the Tobin Tax,
and was quick to defend it despite the legal challenge.
"FTT is legally sound and fully complies with EU Treaties and
international tax laws," Semeta wrote in a tweeted
What would Nobel Laureate James Tobin have
thought of his name being attached to one of the most
controversial tax proposals in modern times? While it
is true that he was the author of a transaction tax in
1972, his proposals were far removed from what is being
proposed in his name four decades on.
The "Tobin Tax" was originally conceived in the
post-Bretton Woods world of international currency
instability. His tax, which he again advocated in the
wake of the Asian financial crisis of the late 1990s,
was intended to solve the problem of short term
speculation in global currency markets.
Tobin identified that a fundamental challenge of
free floating currencies was that they fell prey to
speculation and short term flows of investment. To
dissuade such short-term speculation, Tobin proposed a
small tax on each conversion of one currency into
Such a tax would, in his famous phrase, "throw
sand in the wheels" of the machine of international
Today, his name is used by people who seek rather
to throw sand in the eyes of the speculators.
Tobin’s tax was designed to reduce
volatility in the currency markets and deter
speculation in times of market stress, not as a panacea
applied to tax all trades in almost any asset
Shortly before his death in 2002, Tobin bemoaned
the fact that anti-globalisation activists had
"hijacked my name" in their calls for a transaction tax
and what is being proposed today is greater in scope
and potential impact than anything that has gone
Semeta has championed the tax from the beginning, claiming
it will strengthen the market.
He has urged the eleven participating countries –
which include France, Italy and Germany – to push
forward with implementing the tax.
Legal concerns must be dispelled
Germany’s finance ministry also voiced its
continuing support for the FTT despite the latest setback.
"The German government advocates a
swift introduction of the FTT for good reasons. We want to make
the financial sector contribute adequately to the costs of the
financial crisis," the German finance ministry said in a
"Nothing has changed on that.
"The legal concerns must be
cleared up and dispelled as quickly as possible."
Despite those pioneering the tax adamant the levy will still
be put into place, the legal opinion will undoubtedly make it
harder to move forward with the FTT in its current form.
"The bottom line is that they have to re-work the scope of
the EU FTT – I would say the best thing is to
re-design the scope from scratch because of the fundamental
criticism," said Voigt
"If they go forward, I expect a more sensible and realistic