There have been few material developments in the FTT negotiation process between participating Member States since our last newsletter of 12 January 2016. Having announced its intention to leave the enhanced co-operation (“ECP”) process following the ECOFIN meeting of 8 December 2015, Estonia formally withdrew in March 2016. There are ten Member States which continue to participate in the ECP process.
The group of ten participating Member States reiterated the agreed basis for the on-going discussions, focusing upon a tax which (i) is based initially on the issuer principle, (ii) has a narrow market making exemption, and (iii) applies to the widest possible range of derivatives without impacting the cost of sovereign borrowing.
Prior to this meeting, the FTT working group set out a number of proposals to help progress the FTT whilst also addressing the issues mentioned above. The working group proposes the following:
- Issuer principle – Introducing FTT on an issuer basis as an initial phase, with a temporary exemption applying with respect to the residence basis. A further option being discussed is for FTT only to apply to shares issued in the participating Member States in the first instance, by means of a temporary exemption for shares issued by businesses in other countries including other Member States.
This may alleviate any extra-territoriality concerns, but could be unpopular within the group if it were seen to disadvantage businesses established in members of the FTT zone vis-à-vis non-participating Member States. Participating Member States could of course consider imposing their own domestic FTT on shares issued by other Member States and traded in their countries, but this would not be part of the EU FTT project, at least in the first instance.
- Market maker exemption –.Certain member states had expressed concerns about the practicalities of applying a narrow market maker definition. The working group suggests using existing regulatory definitions to simply the process based on definitions set out in the Markets in Financial Instruments Directives (MiFID and MiFID2). The working group also suggests that certain market maker transactions could be subject to a lower rate of tax – specifically a rate which is 80% of the full rate of FTT (i.e. a discount of 20%).
- Derivatives – The working group also discussed a temporary exemption for any derivative (including options, futures and forwards as well as credit default swaps) which has a sovereign instrument as an underlying reference asset (defined broadly to include states as well as certain supranational organizations).
- Regular reviews – The exemptions should be reviewed by the Commission every 5 years.
- Further analysis be carried out with respect to the impact of FTT on the “real economy” and pension schemes.
These proposals do indicate that compromises are being made, and that discussions on the FTT continue, albeit slowly. However, there is clearly still some way to go for agreement to be reached. Other stumbling blocks remain, such as how revenue generated by the FTT would be shared among the participating Member States.
The FTT is due to be discussed at the next ECOFIN meeting on 17 June 2016. It is understood to be on the agenda as a ‘state of play’ update, rather than as a major announcement of a compromise agreeable to all participating Member States having been reached.
The outlook for the FTT remains uncertain. We will continue to keep you updated on all material developments.