The European Commission has adopted a proposal for a draft directive authorising 11 Member States to proceed with the introduction of a financial transaction tax (“FTT”).

The proposal follows an earlier proposal for a FTT to apply across the European Union as a whole. However, following intense discussions for nine months, Member States concluded that they would not be able to agree upon it unanimously. Therefore 11 Member States requested to proceed with the proposal through enhanced cooperation, a procedure that allows a limited number of Member States to proceed with a Commission proposal where unanimity on that proposal cannot be attained within a reasonable period by the EU as a whole.

The 11 Member States involved are: Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain (the “FTT Countries”). Ireland will not be one of the FTT Countries. This will be the first occasion when the “enhanced cooperation procedure” has been used in the area of taxation.

The proposed directive, which is based on the original 2011 proposal, envisages that:

• The scope of the FTT will be wide and will cover 
  • Instruments which are negotiable on the capital market 
  • Money-market instruments (with the exception of instruments of payment)
  • Units or shares in a collective investment undertaking (including UCITS and Alternative Investment Funds) 
  • Derivatives contracts
• The FTT will be charged, inter alia, on transactions where at least one party to the transaction is a financial institution and at least one party is resident in one of the FTT Countries and/or the issuer of the financial instrument subject to the transaction is established in one of the FTT Countries.
• The FTT will also apply to repurchase agreements, reverse repurchase agreements and securities lending and borrowing agreements.

The definition of financial institution is also wide, encompassing insurance and reinsurance companies, pension funds, most retail funds (including UCITS) private funds and SPVs.

The headline rate will be a harmonised minimum of 10 bps of the purchase price of financial instruments and a minimum of 1 bps of notional principle for derivatives. The effective rate will be higher.

The extra-territorial scope of the FTT will be wide, with the branches of FTT Country financial institutions being subject to the tax even where not located in an FTT Country. In addition, transactions cleared through a clearing system based in an FTT Country, such as Euroclear, may be subject to the FTT even where the parties and underlying issuer are not established in an FTT Country.

The French institute, Edhec-Risk has written an open letter to the European Commission warning that the FTT risks making the optimal management of long-term investments more expensive. This is the latest in a number of opinions originating from industry against the introduction of the FTT. The money market funds industry is particularly worried by the implications of the FTT, with France’s asset management association, AFG, suggesting the tax could be catastrophic for the industry because the holdings of MMFs are short-term and have a very high turnover.

The proposal requires all FTT Countries to adopt any laws necessary to implement the proposed directive by 1 January 2014, although this date appears optimistic.