European Court of Justice knocks back UK Treasury’s FTT challenge

The European Court of Justice has rejected a UK Treasury challenge to the European Union's planned financial transaction tax (FTT), indicating that the proposals are not yet detailed enough to judge their compliance with existing EU legislation.

"The rejection is no big surprise," says Mark Sheiham, a London-based tax partner at international law firm Simmons & Simmons. "The ruling essentially states that the Treasury's challenge to the FTT was premature. It didn't make a judgement on whether the FTT would comply with existing EU legislation, as the Court believes it is too early to tell."

Eleven member states have agreed to implement the FTT, which will be raised by taking a small percentage of the value of financial trades. The UK has protested that the FTT will cost jobs, and if it goes ahead, UK firms will be affected by it if they trade with counterparties from the participating countries. The Treasury will have the opportunity to challenge the proposals once they have been fully fleshed out by the 11 member states, which could take months.

At present, it is unclear how the FTT will affect the FX market. "The original proposal from February last year didn't include spot FX, but there have been rumours that the scope of the FTT might be widened to include FX. It is not yet clear whether this will come to pass, as there are probably splits within the 11-member group over this issue," says Sheiham.

According to research last year by the global FX division of the Global Financial Markets Association, transaction costs for FX swaps, forwards, options and non-deliverable forwards could increase by as much as 700% for European corporates and 4,700% for fund managers if these instruments are caught in the FTT's net.

In monetary terms, the research found that, with just a single dealer, a corporate based within the tax zone could see its annual FX transaction costs rise from $2.4 million to $20.4 million, while transaction costs for a pension fund manager could rise from $1.6 million to more than $75 million.

UK trade organisations are keeping up the pressure against the tax. "This decision about legal procedure doesn't change the fact that the financial transactions tax will damage growth, jobs and investment across Europe," says Katja Hall, chief policy director at the Confederation of British Industry. "It will have a far-reaching impact on non-participating member states, by including extra-territorial reach into financial services activity conducted in the UK. As the UK's largest single trading partner, a healthy European economy is in everyone's interests, so we urge that this damaging tax is re-considered."