U.K. Challenge to EU Transaction-Tax Bid May Have Come Too Soon

A European Union court ruling on the U.K.’s challenge to 11 nations’ negotiations to enact a tax on financial transactions may be only the first skirmish in a prolonged legal battle.

The U.K. lawsuit comes before France, Germany and nine other EU nations have finalized any plans for the tax, meaning any ruling from the European Court of Justice in Luxembourg is unlikely to provide definitive answers.

The Court of Justice, the 28-nation bloc’s highest court, will rule tomorrow on whether EU governments violated the bloc’s laws when they authorized 11 countries to hold talks on enacting a transactions tax, known as the FTT. The U.K. challenge focuses on concerns that the measure would hit London’s banking center in ways that contravene the EU’s treaties.

“It’s too early for the court to say anything on this, even though the U.K. arguments may have merit,” Pierre-Henri Conac, a professor of financial-markets law at the University of Luxembourg, said in an interview. ‘My guess is that the complaint by the U.K. will be rejected at this stage, simply because it’s unclear what the final form of the tax will be.’’

EU finance ministers allowed a coalition of countries a year ago to move forward on a common financial-transaction tax, based on a draft plan expected to produce as much as 34 billion euros ($47 billion) a year, including 11.8 billion euros in Germany. The 11 countries indicated support for signing up to the measure, which included taxing trades of stocks, bonds and derivatives. EU lawmakers have said the rule is needed to bolster financial firms’ tax contribution and rein in high-frequency trading.

Slow Progress

Since the negotiations among the 11 nations started, progress has been hampered by clashes between governments over which securities should be covered by the tax.

EU Tax Commissioner Algirdas Semeta said this month that a “substantial amount of work” is still needed on the measure.

The court will make its ruling tomorrow without having held a hearing on the case, or arranged for one of its top judges to give a preliminary assessment.

“The absence of a hearing and of an advocate general’s opinion in the case indicates that the ECJ is unlikely to make a substantive ruling at this stage,” Alexandria Carr, a financial-services lawyer with Mayer Brown in London, said in an interview.

The U.K. was effectively forced to make a challenge now because of legal uncertainty over when, procedurally, is the right time to lodge a complaint, Carr said.

Legally Contest

According to ECJ case law, a nation seeking to contest an EU measure must lodge its complaint at the first available opportunity. Given the few times a coalition of EU countries has pushed ahead with a measure without the rest of the bloc -- a process known as enhanced cooperation -- there is “little precedent” for knowing when is the right moment to make a challenge, Carr said.

“The U.K. has lost nothing by contesting the authorization decision,” she said.

“What it has done is preserve its right to take further legal steps if and when the FTT is agreed,” Carr said. “Its move may also have led nations taking part in the talks to reflect on how to take the FTT forward, and focus their minds on the risk of an approach that is too extraterritorial.”

Under EU laws, a coalition of nations can adopt a piece of legislation if it becomes clear that support is lacking to get a deal in the bloc as a whole. In those cases, the rule, once agreed on, would only apply in participating countries.

Enhanced Cooperation

The U.K. was among several nations that abstained in the vote in January 2013 authorizing enhanced cooperation on the FTT. It lodged a legal challenge with the ECJ a year ago.

“If the court sides with the U.K.’s claim, the 11 member states working on an enhanced-cooperation directive will go back to the drawing board and seek to devise an approach which is more likely to pass muster,” Howard M. Liebman, a tax partner at law firm Jones Day in Brussels, said in an interview. “If the U.K.’s claim is rejected, this is just a first skirmish, with the battle on substance still to come.”

The U.K.’s complaints against the decision authorizing the tax negotiations center on provisions in the European Commission’s blueprint that would lead to some transactions involving London-based financial firms and platforms being covered by the measures.

Under the Commission’s approach, the measure would apply to trades where at least one party to the transaction is established in a participating country.

Wide Scope

The rule would also apply in cases where the product being traded was issued in one of the nations where the tax applies.

This would mean that the tax could, for example, capture a trade in Greek government bonds that takes place in London between a U.S. hedge fund and a Chinese bank, according to a presentation on the Commission’s website.

Britain alleges that this “wide extraterritorial” scope contradicts guarantees given in the EU’s treaties.

“I am confident that the proposed FTT is fully in line with the EU treaties and international tax law,” Semeta said in an e-mailed statement. “The FTT is an unquestionably fair, technically sound and legally robust tax.”

The U.K. Treasury declined to comment.

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