Europe's Tobin Tax faces legal uncertainty

Efforts to impose a financial transaction tax across 11 European countries has been hit after Brussels' own legal experts claimed such a tax would be illegal in a leaked memo.

The memo, first published by the Financial Times, states such a tax “infringes upon the taxing competences of non-participating member states.” 

A spokesperson for the European Council declined comment, saying the body does not comment on legal opinions. 

The tax, commonly called the Tobin tax after economist James Tobin who first proposed the idea in the 1970s, aims to impose a 0.1 percent levy on most equity and debt transactions starting in early 2014.

The tax was due to be enforced in 11 countries through “enhanced cooperation” – a term describing nine or more EU member states deciding to move ahead with an initiative proposed by the Commission once it proves too difficult to reach unanimous agreement in all member states.

But because only 11 of the 28 EU members signed on to the controversial tax, it would be “discriminatory and likely to lead to distortion of competition to the detriment of non participating member states.”

The 11 countries participating are: France, Germany, Belgium, Austria, Slovenia, Portugal, Greece, Slovakia, Italy, Spain and Estonia.

The memo may strengthen the voice of critics who are challenging the legality of the tax due to its territorial overreach of power, as PE Manager previously reported. The tax would apply on transactions passing through both participating and non-participating EU jurisdictions. 

“They're not just taxing their own – they're taxing investors and financial institutions across the EU and beyond,” said Clifford Chance tax partner, Dan Neidle. “There is a serious question whether this kind of extra-territorial taxation is consistent with EU treaties.” 

However, a source close to the European Council said the legal opinion was requested by experts in the Council's working group as it examines issues related to the extraterritorial application of the tax rules. “The opinion therefore does not mean that the whole proposal is “illegal” and the working group will continue work on the issues raised by the opinion, in the same way that it is working on other issues.”

Private equity fund managers feared “the tax would… hit transactions by private equity fund managers when purchasing or selling shares, bonds or options in portfolio companies”, said Mark Stapleton, of law firm Dechert, when the tax was originally announced.