EUROPE – The European financial transaction tax (FTT) may infringe on the competencies of the EU member states that opted out of participating in the controversial tax and could even distort competition in those countries, according to a leaked report compiled by EU lawyers.

The Legal Service report on the proposed FTT, commissioned by the European Council and seen by IPE, reveals that article 4.f of the so-called 'Tobin tax' could breach some of the rules set under the EU treaty.

Article 4.f stipulates that any parties – even a party acting for its own account or for the account of another person, or acting in the name of a party to the transaction – would be "deemed to be established in the territory of a participating member state", meaning they would be required to pay an FTT.

In its report, the Legal Service concluded that article 4.f of the FTT proposal, as set by the European Commission, would "disrespect" the fiscal competences of non-participating member states set under the EU treaty, as there would be an "insufficient link" between the taxing member state and the non-resident person liable to pay the FTT.

The report, which dated 6 September, follows the Council's decision in January to authorise enhanced cooperation on the FTT, originally proposed by France and Germany and backed up by nine other member states – Belgium, Austria, Slovenia, Portugal, Greece, Italy, Spain, Estonia and Slovakia.

However, doubts were raised by a number of non-participating member states, including the UK, which launched a legal challenge against the FTT in April.

They claimed the FTT proposal could breach equal treatment, proportionality and the principles governing the internal market set in the EU treaty.

The Legal Service of the European Council was therefore asked by the Council to provide further research on the matter.

Reacting to the report, Sandy Bhogal, head of tax at law firm Mayer Brown, said that if the Council's legal opinion persuades the Commission to water down its EU-wide FTT proposal, national levies in France and Italy might possibly be beefed up.

"Other countries involved in the current EU-wide proposal could also decide to act unilaterally and introduce their own taxes," she said.

"If the current proposal is really watered down and changed substantially, it is possible the current draft will have to be shelved, and European regulators will have to start again, which could also act as an impetus for member states to introduce national FTTs."

Mark Boleat, policy chairman at the City of London Corporation – which previously published a report arguing that the FTT could raise the cost of UK Gilt issuance by £4bn (€4.7bn) in 2013 alone – said the tax was an "ill-conceived idea" that risked "significantly damaging economic prospects across Europe".

He added: "Not only would it adversely affect the cost of sovereign debt, but it would also make it more difficult for businesses across the Continent to access funding.

"In reality, the FTT is likely to have a negative effect on end-users such as pension funds, while generating less revenue than estimated due to the behavioural change that would result."

The National Association of Pension Funds (NAPF) echoed his sentiments.

Its chief executive, Joanne Segars, said the FTT would hurt savers not bankers, and would hike costs for many employers struggling with a weak economy while trying to provide a good pension.

"It would increase the cost of investments, which means lower pensions or higher contributions," she said.

"That is why the NAPF has long argued that the FTT is not the way to encourage long-term responsible investment."

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