European Plan for Transaction Tax Runs Into Legal Hurdle

LONDON - European Union legal advisers say in an opinion that a proposed tax on financial transactions would exceed national jurisdictions and is not compatible with E.U. treaties

That view puts pressure on the 11 European countries that have pushed for the tax - including Germany, France, Spain and Italy - to either change the proposal or scrap it.

The opinion, which was published in a paper internally by a legal group advising the European Commission, emerged on Tuesday. It concluded that the proposed tax “exceeds member states’ jurisdiction for taxation” and “is discriminatory and likely to lead to distortion of competition.”

In the aftermath of the financial crisis, some European leaders have seen a tax as a way to reduce excessive risk-taking in the financial industry by charging a levy on the trading of stocks, bonds and other financial products.

Almost certain to hail the legal finding are officials in Britain and the United States, which have opposed the tax proposal. Britain started legal action to try to block the plan. Prime Minister David Cameron has argued that a transaction tax would harm Britain’s competitiveness as a financial center and that of the European Union as a whole.

Earlier this year, the tax proposal failed to win unanimous approval from the 17 E.U. countries that use the euro.

The advice from the advisory group, the Legal Service of the Council of the European Union, might give ”the main supporters of the financial transaction tax a valuable political escape route to move away from this internationally unpopular tax proposal and either limit the scope of the financial transaction tax or scrap it all together,” said Ben Jones, a principal associate at the international law firm Eversheds.

But Emer Traynor, a spokeswoman for the European Commission, the administrative arm of the European Union, rejected the service’s findings. She said the opinion was only one of a range of consultations and ”certainly doesn’t imply any necessary slowdown in the work being done to progress the financial transaction tax.”

”We stand firm that the proposed financial transaction tax is legally sound and fully in line with the E.U. treaties and international tax law,” Ms. Traynor said.

The proposal would require financial institutions to pay a tax of at least one-tenth of 1 percent of the value of transactions with other institutions. Each year, the tax could raise up to 35 billion euros, or $46 billion, the commission estimates.

The Council Legal Service took issue with a clause in the plan calling for the tax to be applied to financial trades executed by banks based in the European countries that sign on to the law, even if the transaction took place elsewhere.

That could mean that British or U.S. institutions, for example, could still be liable to pay the tax. Mr. Cameron said in May that the tax plan would not work unless applied globally across all markets.

The Confederation of British Industry, a business lobby group, said on Tuesday that the legal advice showed it was ”time to draw a line under this flawed proposal.” The proposed tax ”would have damaging implications for growth, jobs and investment beyond the member states involved,” said Leo Ringer, the head of the lobby’s financial services unit.

James Kanter contributed reporting from Brussels.