EU: Financial Transaction Tax (EUC Report)

Lord Harrison Excerpts

Tuesday 17th December 2013 Grand Committee

Asked by

[Lord Harrison]

To ask Her Majesty’s Government what assessment they have made of the Report of the European Union Committee Financial Transaction Tax: Alive and Deadly (7th Report, HL Paper 86).

[Lord Harrison (Lab)]

My Lords, I am delighted to introduce the new EU Committee report, Financial Transaction Tax: Alive and Deadly. I thank fellow members of the Sub-Committee on Economic and Financial Affairs, which undertook this inquiry, for the contributions they will make today, and other distinguished Members of the House.

This is an update report on the Commission’s contentious proposals for a financial transaction tax, following on from our March 2012 report, Towards a Financial Transaction Tax?. That report found the Commission’s proposals seriously wanting, and likely to fail the five objectives that the Commission had set itself. We contended then that there was a significant threat of relocation of financial activity outside the EU as well as the City of London, were the FTT to go live. You would have imagined that we would have rejoiced when the proposals for such an EU-wide FTT later ran into the sand—far from it. Let me explain.

In June 2012, a breakaway group of 11 member states, led by France and Germany, announced their intention to proceed with an FTT under the enhanced co-operation procedure, whereby nine or more member states can take a proposal forward without binding those who do not wish to participate. The UK Government made clear, with my committee’s support, that they would not participate. However, we were deeply alarmed that the proposal could nevertheless have a serious detrimental impact on the UK. We grew even more agitated when the Council vote approving use of the enhanced co-operation procedure went ahead without a text having been published—a veritable case of buying a pig in a poke.

Three weeks later, on 14 February 2013, the Commission did indeed publish its detailed proposal, but the revised version included new and disturbing anti-avoidance provisions, including the significant issuance principle. When we took evidence from Commission official Manfred Bergmann in March 2013, he told us, to our open-mouthed astonishment, that there would be no legal obligation on UK authorities to collect the new tax. This contradicted our view that the United Kingdom could indeed be obliged to collect the tax on behalf of participating member states under the EU regime, which requires all member states to assist each other in the recovery of tax. In our view, the proposal failed to meet the key criterion for enhanced co-operation, which requires that any proposal must respect the competences, rights and obligations of all non-participating member states.

We urged the Government to launch a legal challenge against the proposal. The Government belatedly took our advice, and in April this year challenged the use of enhanced co-operation. In the mean time, we asked the Commission to provide urgent clarification of the feared legal obligation that the United Kingdom authorities would have to collect the tax. This, the Commission signally failed to do for a full six months.

Later, a leaked Council Legal Service opinion concluded that the deemed establishment principle, on which the proposal was based, did not comply with the treaty requirements for enhanced co-operation on several grounds: notably, that it would represent extraterritorial taxation; it could discriminate to the detriment of other parties caught by the deemed establishment principle; it failed to respect the competence of non-participating member states; it would distort competition; and, finally, it would inhibit the free movement of capital.

In light of these significant developments, we undertook this short update inquiry, taking evidence from Heinz Zourek, Director-General, Taxation and Customs Union, European Commission. Our findings are clear: in our view, the Commission has failed to demonstrate that it has taken full account of the interests of non-participating member states. The Commission confessed that it had brought forward a deliberately contentious proposal with the studied intention of challenging participating member states to excise those elements they found inimical—an unworthy and divisive tactic. Moreover, it undermines the Commission’s obligations to defend the interests of all member states and throws into doubt use of the enhanced co-operation tool in the future—a significant by-product of this study. In contrast, we found the Council Legal Service opinion highly persuasive. It demonstrates in concrete terms how the proposal would breach European Union law in respect of the integrity of the single market. Moreover, we jib at the Commission’s artificial distinction between imposing the financial transaction tax and the collection of the tax from member states.

We published our report last week but already events have moved on. Media reports emerged that the Commission had finally produced a legal reply to the Council Legal Service. In addition, the Financial Times last week reported a compromise proposal emerging from the Lithuanian presidency, seeking to limit the tax’s broad scope while still retaining the element of restraining the impact on high-frequency trading. However, we understand that the compromise did not address key issues of extraterritoriality or the dubious legality of the tax. What update can the Minister give us on these negotiations? Does he predict, as we do, that the political weight behind the FTT—often misunderstood in this country—means that a proposal will nevertheless emerge in some shape or form? What efforts is he making to ensure that the potential damaging effect of such a tax is limited not only for the United Kingdom and other non-participants but, indeed, for all European Union member states?

I should warn the Minister that we do not let the Government off scot-free either. While we welcomed their legal challenge, we are frustrated that it took so long for them to sit up and take notice of the repeated, and increasingly admonitory, warnings that we have spelt out in no fewer than 12 letters to his ministerial colleagues over the past 18 months. What update can he give us on the progress of the Government’s legal challenge? When does he expect the Court of Justice to reach a decision? What assurances can he give us that the Government are taking the proposal, and its potential implications for the City of London, the United Kingdom and, indeed, the entire European Union, seriously? Are the Government engaging positively in negotiations in Brussels as they unfold, especially with other non-participating member states?

The financial transaction tax is a real and present danger to the City of London, Europe’s premier global financial centre, and to all of us who derive pensions and savings from its teeming financial activities.

--- Later in debate ---

[Lord Newby]

My Lords, we will probably have to agree to disagree on this. As the previous Financial Secretary pointed out in the correspondence that the noble Lord, Lord Kerr, quoted, it was clear from discussions that took place in the lead-up to the ECOFIN meeting that a qualifying majority of member states was prepared to support the authorising decision. Moreover, abstention had no bearing on the prospects for our subsequent legal challenge. The noble Lord, Lord Kerr, talks about building alliances, an issue that arose when we last discussed this matter, but we have to accept, as the noble Lord, Lord Liddle, pointed out, the strength of the political will across much of the EU to introduce this tax. The UK standing up to say, “We are going to vote against it” would not have affected that. It is inconceivable that this would not have gone ahead at that meeting, whatever we had done.

[Lord Harrison]

Perhaps the Minister can be helpful. The committee has made that point time and again. Would it be useful if the Minister demonstrated the activity of the Government in Brussels in talking to other member states: what canvassing they did and with whom they spoke? We would like to see the ocular proof of the Government’s enthusiasm to block this tax.

[Lord Newby]

My Lords, I will not go through a blow-by-blow account of which member state we spoke to at which point. The view was taken, which I believe was the correct one, that at that stage this proposal was unblockable, because of the political will to which the noble Lord, Lord Liddle, referred. We may think that other member states are misguided. History may prove they are misguided. But there is a slight tendency in the UK to believe that we always know best. We may well know best in this case, but the French and the Germans think they know best, and it is a bold UK Government—or committee of your Lordships’ House—who are unambiguously sure that they know better than a large number of major EU member states.

--- Later in debate ---

[Lord Newby]

My Lords, I have 12 minutes, of which I have used 11, and I have not answered a single substantive question posed by noble Lords. It is just possible that I might do so if I am allowed to respond to some of the points that have been raised.

I was asked where matters stand in terms of discussions in the Council. A Lithuanian document was produced last week which I think has been rather mischaracterised as to its significance. It is a short document and I have it with me. It was discussed briefly at last Thursday’s working group, but many participants were reluctant to discuss it, taking the view that the technical discussions should not run ahead of and potentially prejudice the more substantive discussions, so consideration of it was limited. There has been no substantive breakthrough in the negotiations recently, largely because of the situation in Germany. As noble Lords will be aware, the German coalition deal has now been ratified and we expect more progress in the new year.

The noble Earl, Lord Caithness, asked about the timing of the resolution of the difference between the Council and the Commission legal opinions. The conflicting opinions of the Commission and Council legal services were discussed by the 12 December working group and it is now for the Council members and the 11 participating member states to weigh these as they begin to consider a compromise proposal. We are not aware of any challenge from Luxembourg.

On the timing of the legal challenge, we have exchanged written arguments with the Council. Several member states and other eligible parties have intervened. Written proceedings will come to a close in January, and it is then down to the court. But, as noble Lords will be aware, oral proceedings would ordinarily take place after written proceedings close.

On the argument that has repeatedly been made about our engaging positively with other member states, the UK has been closely engaged with these negotiations from the start. We have held numerous meetings with other member states about the FTT. UK officials are closely engaged in the Council working groups, of which there have been five, including submitting detailed written technical questions to the committee. It simply is not the case that we have not been and will not continue to be fully engaged.

I have gone over my time, for which I apologise. I thank the noble Lord, Lord Harrison, and members of the committee again for the report, and for generating what has been, as usual, an extremely stimulating debate.

[Lord Harrison]

I apologise; the noble Lord’s comments have provoked a number of interventions. Can he promise the Committee that he will write to us on those many questions which he was eager to answer, and give us full and ample replies to those which he was not able to reach?

[Lord Newby]

I would be delighted to do so.