EU: Financial Transaction Tax (EUC Report)

Lord Kerr of Kinlochard Excerpts

Tuesday 17th December 2013 Grand Committee

[Lord Kerr of Kinlochard (CB)]

I would like to reassure the Minister that we support the Government’s present position. It was the abstention that surprised us, not the litigation. We were rather keen on the idea of litigation.

We have been disappointed by the disdain with which the Government have dismissed our concerns down the years. I was disappointed in 2012 when the Minister wrote to us, saying:

“We are sceptical whether other Member States will agree to a … sub EU-27 … FTT or that it would work. If they decide to go ahead with a EU17 FTT, it may not necessarily be bad for the UK because: UK may gain market share … and … the impact on the UK may be no different from that on other international financial centres outside the euro area such as New York or Hong Kong”.

Really? New York and Hong Kong are not subject to the mutual assistance directive; we are. New York and Hong Kong would not collect this tax, as the noble Lord, Lord Hamilton, pointed out. They would be laughing all the way to the bank. The true cost of the financial transaction tax—if it comes in—would be the transactions displaced, which would migrate offshore, out of the whole of the EU, including away from London. It is a pernicious proposal.

I was disappointed when the Government, in explaining why they abstained rather than opposed the idea of an FTT at 11, told us in Mr Clark’s letter this year that,

“the Government attaches great importance to the principle of tax sovereignty, and therefore believes other member states should be free to set their own tax policies … We also recognise that introduction of a FTT is of great importance to several of the participating member states. Voting against the authorising proposal, rather than abstaining, could have undermined these messages”.

I think that is completely absurd. I entirely agree with the doctrine of the principle of tax sovereignty, but that means that member states are entitled to impose whatever taxes they like in their own countries provided they do not discriminate against other member states and do not damage the interests of other member states. However, it does not mean that they are entitled to impose a tax that damages us because we have to collect it at no benefit to our Exchequer but at great damage to our markets. That is an absurd reading of tax sovereignty. It shows a defensive Treasury that is refusing to get out there, argue proactively and build alliances. After all, 17 member states are not going to implement this tax. Had we approached them and argued the EU interest, and argued that EU markets, including their markets as well as ours, would be damaged by this tax, I do not believe that it would have been impossible to block it. I think that the Government now agree, because they are litigating, that it is a highly undesirable measure.

I draw four short morals from this sad story. First, it is almost always a mistake to say, “Roll out the red carpet, let them do as they like, the business will come to London”. That was Boris Johnson’s position. As usual, he got completely the wrong end of the stick. Sadly, the Government seem to have held on to the wrong end of the stick for some considerable time.

Secondly, as the noble Lord, Lord Vallance, said, the enhanced co-operation procedure is a new procedure. Case law is being developed. It will take some time to construct sensible ground rules for ensuring that Articles 326 and 327 are respected. I suggest three rules: first, the substantive proposal must be on the table before the procedural decision is taken, as was suggested by the noble Lord, Lord Vallance; secondly, the Commission and the Council secretariat must ensure that any subsequent amendments do not introduce detriment to non-participants; and thirdly, the overall EU interest must be respected at all times by all the institutions, including the Commission, which must not allow itself to become the secretariat of a subset of member states.

Lastly, we know that the Treasury is short-staffed and short on EU expertise. It is all the more sensible, therefore, to listen to the expertise available in this House and stop dismissing our reports with delay and disdain. I know that the Minister will not do that.

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[Lord Newby (LD)]

My Lords, I am extremely grateful to the noble Lord, Lord Harrison, for introducing the report, and to all noble Lords who have spoken. I think that all bar a couple of members of the committee have participated in the debate or are here. I therefore feel that I am giving evidence to the committee rather than making a speech to the Grand Committee, which makes the challenge all the more formidable. As one would have expected from the committee, the document is thorough and well researched, and is bound, as previous reports on this subject have been, to help colour perceptions and debate in Brussels and across the EU, where sometimes the reports of your Lordships’ EU Committee are read more carefully than they are in the UK.

The committee’s report makes a number of points with which the Government strongly agree. First, the committee expresses strong misgivings about the legality of the FTT proposal. Obviously, the Government share those misgivings and that is why we have taken the case to the European Court of Justice. As the committee notes, of particular concern to the UK is the extraterritorial impact of the so-called residence principle, which, for example, would bring into scope of the tax a UK pension fund buying UK government bonds from the London branch of a bank headquartered in Frankfurt. This is, in our view, an infringement of the provisions of the treaty designed to protect the position of non-participating member states under enhanced co-operation, and that is at the heart of our challenge to the proposal.

That brings me on to the second point that your Lordships’ committee discussed and which has been raised this afternoon: the credibility of enhanced co-operation as a way of doing business at all. The committee makes the perfectly valid point that there is a real risk of harm to the credibility of enhanced co-operation as a tool in the future because of the way that it has been operated in this case. We agree that there has been a triple failure: in bringing forward this legislation in undue haste; in paying insufficient regard to the views of non-participating member states; and in failing to support the proposal with a sufficiently thorough impact analysis—a point tellingly made by the noble Lord, Lord Hamilton. We completely agree with the committee that, particularly if this tool is to be more frequently used, it must command the confidence of all member states. Indeed, this is the very point that the Government have been making to Council colleagues during these negotiations.

The conditions that govern the use of enhanced co-operation are set out in the treaty in quite high-level terms, which makes it important during these early uses of enhanced co-operation that the right precedents are set in order to give the kind of confidence that we believe all member states need if it is to be used more frequently. Like the committee, we do not believe that this has been a helpful precedent in that respect. The conditions set out by the noble Lords, Lord Vallance and Lord Kerr, about the future use of the procedure seem eminently sensible.

The third concern, rightly highlighted by the committee, is that it is highly unclear how the tax will be collected, and what collection obligations are implied for non-participating member states. What is clear, as the committee points out, is that the UK will be required to fulfil any obligations it incurs under the mutual assistance in recovery directive. For that reason, as the committee acknowledges in its report, we have included in our legal challenge the ground that an FTT would impose collection costs on non-participating member states that should properly, under the terms of the treaty, be fully borne by the participating member states.

However, there is a theme in the report on which I cannot agree with the committee: the suggestion that the Government have been in any way complacent in relation to the risks of an FTT. The Government made their concerns about an FTT clear from the outset. In November 2011 the Chancellor highlighted the serious problems with the Commission’s original proposal to other member states, and indeed UK-led opposition to what was on the table resulted in that proposal being dropped.

It was obvious then that the proposal had not gone away, and the Government were very soon considering, and indeed taking legal advice on, the implications for the UK of an FTT under enhanced co-operation. When Council authorisation for enhanced co-operation was sought at ECOFIN this January, we tabled a statement to the minutes of the meeting recording our serious reservations about the legality of the authorising decision. The report acknowledges the Government’s point that it would not have made a difference to a vote if we had voted against the decision, rather than abstained, but argues that we should have sought support for a blocking vote.

[Lord Kerr of Kinlochard]

It is certainly true that the report quotes the Government’s view, but I do not think that we shared the Government’s view or acknowledged it as being correct. The view of the committee was that it was a pity that the Government had not been out seeking allies against the tax.

[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.

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[Lord Newby]

As I said earlier, we will have to agree to disagree on that. I do not believe that the Government have lost credibility in the EU because of the stance they took. People believe that the Government understood the political realities.

[Lord Kerr of Kinlochard]

I am sorry to interrupt the Minister again, but from all I hear, I do not think that there was a campaign with a ministerial delegation and a City delegation visiting capitals other than the 11 arguing the damage to their markets and ours—the overall EU market—which would result from the FTT. If I am wrong about that and such a delegation did go out to Europe, I will withdraw my criticism.

I believe that Policy Network is right when, in its report this week to the City of London Corporation, it states that there is an urgent need to:

“Upgrade the UK’s presence and leadership in Brussels by building up close ties with like-minded member states. Moving from a reactive to a preventive and agenda-setting position seems particularly paramount in that respect”.

I hope that the Minister will at least agree with that.

[Lord Newby]

My Lords, I completely agree with it.

[Lord Newby]

I apologise if I said that. What I meant to say was that there was not a qualified majority against the proposal. There was not a sufficient weight to prevent the proposal going through. I think that that was borne out by what happened at the relevant Council meeting.

[Lord Kerr of Kinlochard]

My Lords—

[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.