EU financial transaction tax illegal, say lawyers

A Tobin tax is intended to affect all share, bond and currency transactions

Imposing a financial transaction tax (FTT) in 11 European Union member states would be illegal, according to the bloc's lawyers.

The controversial tax aims to discourage risk-taking by taxing transactions of shares, currencies and bonds.

The 14-page legal opinion concludes the move would exceed member states' tax powers.

It adds that the measure is also incompatible with the EU treaty.

The FTT, also known as the Robin Hood tax and Tobin tax, is set to be adopted by 11 EU states, but not by the UK.

But the legal document claims the transaction tax plan "exceeds member states' jurisdiction for taxation under the norms of international customary law", according to media reports.

The non-binding opinion adds that the plan "infringes upon the taxing competences of non-participating member states", making it incompatible with the EU treaty.

The fact that only 11 EU members are signed up would make the tax "discriminatory and likely to lead to distortion of competition to the detriment of non participating member states", the document from the EU Council Legal Service says.

BBC World Service economics correspondent Andrew Walker says the countries concerned can press ahead, as this is just a legal opinion, but it is a warning that they would risk losing if it were to end up in court.

"This legal opinion is a very serious setback for the 11 countries' plans," he said.

City fears

The 11 countries currently going ahead with the FTT are Germany, France, Italy, Spain, Belgium, Austria, Portugal, Greece, Slovenia, Slovakia and Estonia.

UK ministers fear it could be imposed on British firms trading with businesses based in one of those states.

In April, the UK government launched a legal challenge to the plans in the European Court of Justice.

The City of London could be hit by the tax if, for example, a British firm trades with branches of French or German banks based in the capital.

The British government would have to collect the tax, but would not be allowed to keep it.

Business lobby groups are concerned that British companies trading with the UK branches of French or German banks could be hit by the tax.

In response to the EU lawyers' opinion, the CBI's head of financial services and corporate governance, Leo Ringer, said: "This opinion recognises that the FTT would have damaging implications for growth, jobs and investment beyond the member states involved, so now is the time to draw a line under this flawed proposal.

"It also makes clear that moves towards further integration between a number of EU countries can't be taken forward if they impact on the rights of all member states, unless all states affected have signed up."

The Robin Hood Tax campaign group said the UK's legal move was about "defending one rather rich square mile".