of the participatory budget experiment in Porto Alegre and the state of Rio Grande do Sul, would have a decisive place in the democracy.

If human rights and practising democracy are not sufficiently respected, to the extent that the local people cannot express their choices, then, whenever possible, it is up to the SFSD to estimate the possibilities of redistribution of revenue case by case together with the representatives of the local populations. Although this topic is delicate, considering the numerous possible pit falls with respect to ethno-centrism, there are still means to deliver an assessment based on the reports of national and international human rights organisations when auditioning representatives of governments, auditioning trade union representatives, associations and local NGOs, and by sending evaluation missions there. The objective should not be try to distribute the resources allocated to a country at all costs but to verify whether in actual fact there is a way of ensuring that all or some of these resources can benefit the people concerned. There is a huge number of concrete situations. In a country ruled by an authoritarian government, i.e. dictatorial, for example, it can sometimes be possible to allocate financing to communities and local municipalities or to NGOs active in the region. If there are no useful means of allocating the resources to the people concerned, the resources have to be put into a special reserve fund that could be immediately used as soon as a minimum of democratic conditions have been established. Again, the revenue of the tax should not be diverted to foster corruption. If there is no minimal guarantee for spending the revenues properly, it would be better to refrain from distributing them. During a seminar on the CTT and the financing of development, organised by AT-TAC France during the second "World Social Forum" in Porto Alegre in February 2002, a Brazilian speaker underlined to what extent development aid could be destructive if it fosters the nepotistic practices of certain politicians, or even buying votes during elections.

This concept of redistribution of finances in placing democracy at its centre is probably the most utopian. However, it is the only concept that ensures that lessons are learnt from the past failures of traditional development aid. The content of social policies financed by international financial institutions is often defined without the consultation of the people concerned and is then imposed "from above". During the same seminar in Porto Alegre, a teacher coming from Northern Argentina explained how the World Bank imposed educational programmes designed for young Africans in that Argentinean region. Ecological priorities and concepts are also not the same in the countries of the North and South. The new sources of financing resulting from the global taxes must be taken as a chance to completely renew development politics and to break with these practices that lead to failure.

This necessity for democratic control in the elaboration of projects, as well as their finalisation and application, should also be applied to the institution itself, the SFSD that distributes the resources.

This actually implies that the SFSD should only accept representatives from governments that respect the UN Universal Charter of Human Rights, and the fundamental labour norms defined by the International Labour Organisation. The concrete respect for this rights can additionally be monitored with reports from international human rights organisations. Otherwise it is hard to imagine how dictatorships could respect the indispensable rules that ensure that the CTT finances are applied according to the democratic criteria we have described. As a last resort, the participation or non-participation of a country in the international institution would depend on the acceptance by the trade union representatives and NGOs who are independent of the country in question.

Despite the necessary rules we have proposed above, we do not pretend to present an institutional project that guarantees that there will be no deviation of funds from their intended use or that the danger of corruption is definitively avoided and that all financial pro-
jects will be useful and efficient. It is impossible to foresee a solution to all possible prob-
lems, especially those we cannot as yet anticipate. However, is this not usually the case
when we try to change things? Can we demand of the CCT that all the preconditions that
guarantee success are put in place, such as we would demand of any other proposal? The
experience with past mistakes in development aid will at least be useful for telling us what
not to do. On the other hand, the CCT will not come into existence unless we achieve a
political victory over neo-liberalism that enables an extension of democracy. This is why
the definition of local priorities, the contents of ecological, education, health and other
policies can be rethought and resolved in more favourable conditions than the ones we
have today.
STATISTICAL ANNEX OF CHAPTER 3

<table><caption>Table 3-9: CTT Annual Revenues at the World Level for Different Years and Tax Levels</caption><thead><tr><th colspan="9">CTT ANNUAL REVENUES AT THE WORLD LEVEL IN 1998 (BILLIONS OF DOLLARS)</th></tr><tr><th>ELASTICITY→</th><th colspan="3">-0.5</th><th colspan="3">-1</th><th colspan="3">-1.5</th></tr><tr><th></th><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th></tr><tr><th>TAX LEVEL↓</th><th>0.02%</th><th>0.05%</th><th>0.1%</th><th>0.02%</th><th>0.05%</th><th>0.1%</th><th>0.02%</th><th>0.05%</th><th>0.1%</th></tr></thead><tbody><tr><th>0.01%</th><td>21</td><td>25</td><td>27</td><td>15</td><td>21</td><td>25</td><td>11</td><td>18</td><td>23</td></tr><tr><th>0.02%</th><td>35</td><td>45</td><td>51</td><td>20</td><td>33</td><td>43</td><td>12</td><td>25</td><td>36</td></tr><tr><th>0.05%</th><td>61</td><td>87</td><td>106</td><td>25</td><td>50</td><td>75</td><td>10</td><td>29</td><td>53</td></tr><tr><th>0.10%</th><td>90</td><td>134</td><td>173</td><td>27</td><td>60</td><td>100</td><td>8</td><td>27</td><td>58</td></tr><tr><th>0.20%</th><td>131</td><td>200</td><td>268</td><td>29</td><td>67</td><td>120</td><td>6</td><td>22</td><td>54</td></tr></tbody></table><table><thead><tr><th colspan="9">CTT ANNUAL REVENUES AT THE WORLD LEVEL IN 2001 (BILLIONS OF DOLLARS)</th></tr><tr><th>ELASTICITY→</th><th colspan="3">-0.5</th><th colspan="3">-1</th><th colspan="3">-1.5</th></tr><tr><th></th><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th></tr><tr><th>TAX LEVEL↓</th><th>0.02%</th><th>0.05%</th><th>0.1%</th><th>0.02%</th><th>0.05%</th><th>0.1%</th><th>0.02%</th><th>0.05%</th><th>0.1%</th></tr></thead><tbody><tr><th>0.01%</th><td>17</td><td>20</td><td>22</td><td>12</td><td>17</td><td>20</td><td>8</td><td>14</td><td>18</td></tr><tr><th>0.02%</th><td>28</td><td>36</td><td>41</td><td>16</td><td>27</td><td>34</td><td>9</td><td>20</td><td>29</td></tr><tr><th>0.05%</th><td>49</td><td>69</td><td>85</td><td>20</td><td>40</td><td>60</td><td>8</td><td>23</td><td>42</td></tr><tr><th>0.10%</th><td>72</td><td>107</td><td>139</td><td>22</td><td>48</td><td>80</td><td>7</td><td>21</td><td>46</td></tr><tr><th>0.20%</th><td>105</td><td>160</td><td>215</td><td>23</td><td>53</td><td>96</td><td>5</td><td>18</td><td>43</td></tr></tbody></table><table><thead><tr><th colspan="9">CTT ANNUAL REVENUES AT THE WORLD LEVEL IN 2004 (BILLIONS OF DOLLARS)</th></tr><tr><th>ELASTICITY→</th><th colspan="3">-0.5</th><th colspan="3">-1</th><th colspan="3">-1.5</th></tr><tr><th></th><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th></tr><tr><th>TAX LEVEL↓</th><th>0.02%</th><th>0.05%</th><th>0.1%</th><th>0.02%</th><th>0.05%</th><th>0.1%</th><th>0.02%</th><th>0.05%</th><th>0.1%</th></tr></thead><tbody><tr><th>0.01%</th><td>27</td><td>32</td><td>34</td><td>19</td><td>27</td><td>31</td><td>13</td><td>23</td><td>29</td></tr><tr><th>0.02%</th><td>43</td><td>56</td><td>64</td><td>25</td><td>42</td><td>54</td><td>14</td><td>31</td><td>45</td></tr><tr><th>0.05%</th><td>77</td><td>109</td><td>133</td><td>31</td><td>63</td><td>94</td><td>13</td><td>36</td><td>66</td></tr><tr><th>0.10%</th><td>113</td><td>168</td><td>217</td><td>34</td><td>75</td><td>125</td><td>10</td><td>34</td><td>72</td></tr><tr><th>0.20%</th><td>164</td><td>251</td><td>336</td><td>36</td><td>84</td><td>150</td><td>8</td><td>28</td><td>67</td></tr></tbody></table><p>SOURCE: BIS FOREIGN EXCHANGE TRIENAL SURVEY, VARIOUS ISSUES. AUTHOR'S OWN CALCULATIONS</p>
<table><caption>Table 3-10: Estimates of the CTT Annual Revenues at Euro Area Level According to the Methodology of the French Ministry of Finance</caption><thead><tr><th colspan="10">CTT ANNUAL REVENUES AT THE EURO AREA LEVEL IN 1998 (BILLIONS OF DOLLARS)</th></tr><tr><th rowspan="2">ELASTICITY→</th><th colspan="3">-0.5</th><th colspan="3">-1</th><th colspan="3">-1.5</th></tr><tr><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th></tr></thead><tbody><tr><th>TAX LEVEL↓</th><td>0.02%</td><td>0.05%</td><td>0.1%</td><td>0.02%</td><td>0.05%</td><td>0.1%</td><td>0.02%</td><td>0.05%</td><td>0.1%</td></tr><tr><th>0.01%</th><td>9</td><td>11</td><td>12</td><td>7</td><td>9</td><td>11</td><td>5</td><td>8</td><td>10</td></tr><tr><th>0.02%</th><td>15</td><td>20</td><td>22</td><td>9</td><td>15</td><td>19</td><td>5</td><td>11</td><td>16</td></tr><tr><th>0.05%</th><td>27</td><td>38</td><td>46</td><td>11</td><td>22</td><td>33</td><td>4</td><td>13</td><td>23</td></tr><tr><th>0.10%</th><td>40</td><td>59</td><td>76</td><td>12</td><td>26</td><td>44</td><td>4</td><td>12</td><td>25</td></tr><tr><th>0.20%</th><td>57</td><td>88</td><td>117</td><td>13</td><td>29</td><td>53</td><td>3</td><td>10</td><td>23</td></tr></tbody><thead><tr><th colspan="10">CTT ANNUAL REVENUES AT THE EURO AREA LEVEL IN 2001 (BILLIONS OF DOLLARS)</th></tr><tr><th rowspan="2">ELASTICITY→</th><th colspan="3">-0.5</th><th colspan="3">-1</th><th colspan="3">-1.5</th></tr><tr><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th></tr></thead><tbody><tr><th>TAX LEVEL↓</th><td>0.02%</td><td>0.05%</td><td>0.1%</td><td>0.02%</td><td>0.05%</td><td>0.1%</td><td>0.02%</td><td>0.05%</td><td>0.1%</td></tr><tr><th>0.01%</th><td>5</td><td>7</td><td>7</td><td>4</td><td>6</td><td>6</td><td>3</td><td>5</td><td>6</td></tr><tr><th>0.02%</th><td>9</td><td>12</td><td>13</td><td>5</td><td>9</td><td>11</td><td>3</td><td>6</td><td>9</td></tr><tr><th>0.05%</th><td>16</td><td>22</td><td>27</td><td>6</td><td>13</td><td>19</td><td>3</td><td>7</td><td>14</td></tr><tr><th>0.10%</th><td>23</td><td>35</td><td>45</td><td>7</td><td>15</td><td>26</td><td>2</td><td>7</td><td>15</td></tr><tr><th>0.20%</th><td>34</td><td>52</td><td>69</td><td>7</td><td>17</td><td>31</td><td>2</td><td>6</td><td>14</td></tr></tbody><thead><tr><th colspan="10">CTT ANNUAL REVENUES AT THE EURO AREA LEVEL IN 2004 (BILLIONS OF DOLLARS)</th></tr><tr><th rowspan="2">ELASTICITY→</th><th colspan="3">-0.5</th><th colspan="3">-1</th><th colspan="3">-1.5</th></tr><tr><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th><th colspan="3">PRE-TAX TRANSACTION COST↓</th></tr></thead><tbody><tr><th>TAX LEVEL↓</th><td>0.02%</td><td>0.05%</td><td>0.1%</td><td>0.02%</td><td>0.05%</td><td>0.1%</td><td>0.02%</td><td>0.05%</td><td>0.1%</td></tr><tr><th>0.01%</th><td>8</td><td>10</td><td>11</td><td>6</td><td>8</td><td>10</td><td>4</td><td>7</td><td>9</td></tr><tr><th>0.02%</th><td>13</td><td>17</td><td>19</td><td>8</td><td>13</td><td>16</td><td>4</td><td>10</td><td>14</td></tr><tr><th>0.05%</th><td>24</td><td>33</td><td>41</td><td>10</td><td>19</td><td>29</td><td>4</td><td>11</td><td>20</td></tr><tr><th>0.10%</th><td>35</td><td>52</td><td>67</td><td>10</td><td>23</td><td>38</td><td>3</td><td>10</td><td>22</td></tr><tr><th>0.20%</th><td>50</td><td>77</td><td>103</td><td>11</td><td>26</td><td>46</td><td>2</td><td>9</td><td>21</td></tr></tbody><tfoot><tr><td colspan="10">SOURCE: BIS FOREIGN EXCHANGE TRIENNIAL SURVEY, VARIOUS ISSUES. AUTHOR'S OWN CALCULATIONS</td></tr></tfoot></table>
<caption>Table 3-11: Reduction of Market Volume According to the Tax Rate, the Elasticity and Pre-Tax Transaction Costs</caption>

<table><caption>TABLE A 3.3: REDUCTION OF MARKET VOLUMES ACCORDING TO THE TAX RATE,</caption><thead><tr><th>ELASTICITY</th><th colspan="2">-0.5</th><th colspan="2">-1</th><th colspan="2">-1.5</th></tr><tr><th>TAX RATE</th><th colspan="8">PRE-TAX TRANSACTION COST</th></tr><tr><th></th><th>0.02</th><th>0.05</th><th>0.1</th><th>0.02</th><th>0.05</th><th>0.1</th><th>0.02</th><th>0.05</th><th>0.1</th></tr></thead><tbody><tr><th>0.01%</th><td>29</td><td>15</td><td>9</td><td>50</td><td>29</td><td>17</td><td>65</td><td>40</td><td>24</td></tr><tr><th>0.02%</th><td>42</td><td>25</td><td>15</td><td>67</td><td>44</td><td>29</td><td>81</td><td>59</td><td>40</td></tr><tr><th>0.05%</th><td>59</td><td>42</td><td>29</td><td>83</td><td>67</td><td>50</td><td>93</td><td>81</td><td>65</td></tr><tr><th>0.1%</th><td>70</td><td>55</td><td>42</td><td>91</td><td>80</td><td>67</td><td>97</td><td>91</td><td>81</td></tr><tr><th>0.2%</th><td>78</td><td>67</td><td>55</td><td>95</td><td>89</td><td>80</td><td>99</td><td>96</td><td>91</td></tr></tbody><tfoot><tr><td colspan="10">Note: we have added the 0.02% tax rate and the 0.1% transaction cost. For simulations.</td></tr></tfoot></table>

The French report (2000) considers that the most plausible scenario is based on a neutral elasticity, -1, pre-tax transaction cost of 0.05% and a tax rate of 0.05%. It corresponds to a reduction of market volume of -67%. It means that after the introduction of the tax, the volume of the market would be at one third of its previous level. It is marked in blue in the table.

We have considered a 0.1% tax rate combined with a pre-tax transaction cost of also 0.1%, and a neutral elasticity of -1. This also leads to a reduction of -67% of the volume of the market. It is marked in green in the table.

In red, are represented combinations where the reduction of the market volume is closed or superior to 90%. These situations are undesirable and can be neglected.

The combination of a high tax rate, 0.2%, with low pre-tax transaction costs 0.02-0.05% and a low elasticity of -0.5 can exist in theory but are highly improbable. It is hard to imagine that traders would not be much more sensible to such an increase in transaction costs. These situations are marked in purple.
<caption>Table 3-12: Revenues Estimates According to the Methodology of the Ministry of Finance of Belgium and Finland</caption>

<table><caption>TABLE A 3.4. REVENUE ESTIMATES ACCORDING TO THE METHODOLOGY</caption><thead><tr><th>WORLD LEVEL IN 2004</th><th>TOTAL</th><th>NON-FINANCIAL SECTOR</th><th>OTHER FINANCIAL INSTITUTIONS</th><th>BANKING SECTOR</th></tr></thead><tbody><tr><td>ELASTICITY</td><td></td><td><strong>-0.5</strong></td><td><strong>-1</strong></td><td><strong>-1.5</strong></td></tr><tr><td>Transaction cost before tax in %</td><td></td><td>0.1</td><td>0.05</td><td>0.02</td></tr><tr><th>CTT Rate in %</th><th>Fiscal evasion in %</th><th>Endogeneous reduction of volume in %</th><th>Endogeneous reduction of volume in %</th><th>Endogeneous reduction of volume in %</th></tr><tr><td>0.01</td><td>15.1</td><td>4.7</td><td>16.7</td><td>45.6</td></tr><tr><td>0.02</td><td>15.2</td><td>8.7</td><td>28.6</td><td>64.6</td></tr><tr><td>0.03</td><td>15.3</td><td>12.3</td><td>37.5</td><td>74.7</td></tr><tr><td>0.04</td><td>15.4</td><td>15.5</td><td>44.4</td><td>80.8</td></tr><tr><td>0.05</td><td>15.5</td><td>18.4</td><td>50.0</td><td>84.7</td></tr><tr><td>0.06</td><td>15.6</td><td>20.9</td><td>54.5</td><td>87.5</td></tr><tr><td>0.07</td><td>15.7</td><td>23.3</td><td>58.3</td><td>89.5</td></tr><tr><td>0.08</td><td>15.8</td><td>25.5</td><td>61.5</td><td>91.1</td></tr><tr><td>0.09</td><td>15.9</td><td>27.5</td><td>64.3</td><td>92.2</td></tr><tr><td>0.10</td><td>16.0</td><td>29.3</td><td>66.7</td><td>93.2</td></tr><tr><td>0.15</td><td>16.5</td><td>36.8</td><td>75.0</td><td>96.0</td></tr><tr><td>0.20</td><td>17.0</td><td>42.3</td><td>80.0</td><td>97.3</td></tr><tr><td>0.25</td><td>17.5</td><td>46.5</td><td>83.3</td><td>98.0</td></tr><tr><td>0.50</td><td>20.0</td><td>59.2</td><td>90.9</td><td>99.2</td></tr><tr><td>0.75</td><td>22.5</td><td>65.7</td><td>93.8</td><td>99.6</td></tr><tr><td>1</td><td>25.0</td><td>69.8</td><td>95.2</td><td>99.7</td></tr></tbody></table>

This table presents the reduction of volume of the foreign exchange market at the world level. The values in red represent the combination of volume elasticity, pre-tax transaction costs and tax rate that lead to a reduction of market volume equal or superior to two thirds of the previous volume of the market.

A 0.1% tax rate is far above this limit for the banking sector (93.2%), just at the limit for the financial customers and would lead to a reduction of 29.3% of transactions ordered by non-financial customers.

To avoid the nearly disappearance of the market turnover of the banking sector, the solution is to fix the tax rate at 0.02% for banks only. For the customers, the tax rate remains at 0.1%.
<table><caption>Table 3-13: Hypotheses Concerning the Revenue Estimates According to the Methodology of the Ministry of Finance of Belgium and Finland for the Euro Zone</caption><thead><tr><th>EURO ZONE<br>LEVEL IN<br>2004</th><th>TOTAL</th><th>NON-<br>FINANCIAL<br>SECTOR</th><th>OTHER<br>FINANCIAL<br>INSTITUTIONS</th><th>BANKING<br>SECTOR</th></tr></thead><tbody><tr><td>ELASTICITY</td><td></td><td><strong>-0.55</strong></td><td><strong>-1.1</strong></td><td><strong>-1.75</strong></td></tr><tr><td>Transaction<br>cost before tax<br>in %</td><td></td><td>0.1</td><td>0.05</td><td>0.02</td></tr><tr><th>CTT Rate in %</th><th>Fiscal<br>evasion in %</th><th>Endogeneous<br>reduction of<br>volume in %</th><th>Endogeneous<br>reduction of<br>volume in %</th><th>Endogeneous<br>reduction of<br>volume in %</th></tr><tr><td>0.01</td><td>25.2</td><td>5.1</td><td>18.2</td><td>50.8</td></tr><tr><td>0.02</td><td>25.3</td><td>9.5</td><td>30.9</td><td>70.3</td></tr><tr><td>0.03</td><td>25.5</td><td>13.4</td><td>40.4</td><td>79.9</td></tr><tr><td>0.04</td><td>25.6</td><td>16.9</td><td>47.6</td><td>85.4</td></tr><tr><td>0.05</td><td>25.8</td><td>20.0</td><td>53.3</td><td>88.8</td></tr><tr><td>0.06</td><td>25.9</td><td>22.8</td><td>58.0</td><td>91.2</td></tr><tr><td>0.07</td><td>26.1</td><td>25.3</td><td>61.8</td><td>92.8</td></tr><tr><td>0.08</td><td>26.2</td><td>27.6</td><td>65.0</td><td>94.0</td></tr><tr><td>0.09</td><td>26.4</td><td>29.7</td><td>67.8</td><td>94.9</td></tr><tr><td>0.10</td><td>26.5</td><td>31.7</td><td>70.1</td><td>95.7</td></tr><tr><td>0.15</td><td>27.3</td><td>39.6</td><td>78.2</td><td>98.5</td></tr><tr><td>0.20</td><td>28.0</td><td>45.4</td><td>83.0</td><td>98.9</td></tr><tr><td>0.25</td><td>28.8</td><td>49.8</td><td>86.1</td><td>99.7</td></tr><tr><td>0.50</td><td>32.5</td><td>62.7</td><td>92.8</td><td>99.8</td></tr><tr><td>0.75</td><td>36.3</td><td>69.2</td><td>95.3</td><td>99.9</td></tr><tr><td>1</td><td>40.0</td><td>73.3</td><td>96.5</td><td>99.7</td></tr></tbody><tfoot><tr><td colspan="5">Source: Based on the methodology of the Ministry of Belgium and Finland (2001) with a higher fiscal evasion (25%) and different tax rates. B.Jetin's calculations.</td></tr></tfoot></table>
<table><caption>Table 3-14: Hypotheses Concerning the Level of Fiscal Evasion According to the geographical Coverage and the CTT Rate</caption><thead><tr><td>CTT Rate in %</td><td>EURO AREA</td><td>EU</td><td>EU+ SWITZERLAND+ NORWAY</td><td>WORLD LEVEL</td></tr></thead><tbody><tr><td>0.01</td><td>25.2</td><td>20.2</td><td>17.7</td><td>15.1</td></tr><tr><td>0.02</td><td>25.3</td><td>20.3</td><td>17.8</td><td>15.2</td></tr><tr><td>0.03</td><td>25.5</td><td>20.5</td><td>18.0</td><td>15.3</td></tr><tr><td>0.04</td><td>25.6</td><td>20.6</td><td>18.1</td><td>15.4</td></tr><tr><td>0.05</td><td>25.8</td><td>20.8</td><td>18.3</td><td>15.5</td></tr><tr><td>0.06</td><td>25.9</td><td>20.9</td><td>18.4</td><td>15.6</td></tr><tr><td>0.07</td><td>26.1</td><td>21.1</td><td>18.6</td><td>15.7</td></tr><tr><td>0.08</td><td>26.2</td><td>21.2</td><td>18.7</td><td>15.8</td></tr><tr><td>0.09</td><td>26.4</td><td>21.4</td><td>18.9</td><td>15.9</td></tr><tr><td>0.10</td><td>26.5</td><td>21.5</td><td>19.0</td><td>16.0</td></tr><tr><td>0.15</td><td>27.3</td><td>22.3</td><td>19.8</td><td>16.5</td></tr><tr><td>0.20</td><td>28.0</td><td>23.0</td><td>20.5</td><td>17.0</td></tr><tr><td>0.25</td><td>28.8</td><td>23.8</td><td>21.3</td><td>17.5</td></tr><tr><td>0.50</td><td>32.5</td><td>27.5</td><td>25.0</td><td>20.0</td></tr><tr><td>0.75</td><td>36.3</td><td>31.3</td><td>28.8</td><td>22.5</td></tr><tr><td>1</td><td>40.0</td><td>35.0</td><td>32.5</td><td>25.0</td></tr></tbody></table>

Note: Methodology of the Ministry of Finance of Belgium for the EU and world level. Own hypothesis and calculations concerning the euro area and the EU+Switzerland and Norway
# PART II

## LIEVEN A. DENYS*

## LEGAL ISSUES IN THE EU CONTEXT

<footnote>* Professor European and International Tax Law, School of Law, Free University of Brussels
(lieven.denys@vub.ac.be)</footnote>
# 4 IMPLEMENTATION OF THE CURRENCY TRANSACTION TAX IN THE EU LEGAL CONTEXT

This contribution discusses the compatibility of a Currency Transaction Tax (CTT)<fnref n="165" /> with the legal framework of the European Union (EU) and elaborates on the opportunities at the EU level to ensure a correct application of the tax and the prevention of fraud.

The starting point of this contribution is the address on *Capital Tax Systems and Globalisation* that the author gave to the European Parliament Intergroup on 27 June 2001. The address was published as "*An Opinion on Tobin-Spahn Tax on Financial Transactions and Art. 56 EC*" and annexed hereto (European Taxation, 2001, p. 430-435). It concludes that the CTT is not in principle incompatible with the legal framework of the EU. In detail the conclusions slightly reframed are:

(1) The Acceptability of a CTT must be examined at the level of European law, i.e. in view of the Treaty articles on taxation and the fundamental articles of the treaty that govern the Internal Market including the free movement of capital.

(2) The EC Treaty articles on taxation do not oppose a CTT and make it possible to prescribe the introduction of a harmonised CTT (at the national level) or to harmonise at the European level the CTTs introduced at a national level.

(3) The European secondary tax legislation must be observed by a national CTT (and, where necessary, can be adapted by unanimity).

(4) Upon the introduction of the CTT, the member states must respect other fundamental principles of (non-tax) European law.

(5) There is a concurrence of the objectives of the European Union/EMU and the CTT that aims at the financing of development policy and furtherance of monetary stability. The CTT is therefore not in principle incompatible with the objectives of the Treaty and the EMU.

(6) A crucial test for the Tobin Tax is its compatibility with the European non-discrimination principle that, inter alia, contains an almost complete prohibition of discrimination on grounds of nationality (Article 12 EC) and with the Internal Market's four fundamental principles of freedom of movement.

It cannot be concluded that the CTT would in principle be contrary to the EU non-discrimination principle because the tax is based upon a justifiable differentiation.

(7) Under the free movement of capital and related payments member states can introduce a CTT with a low tariff which thereby does not distort the movement of capital, or that is, under the Rule of Reason, justified in the light of its legitimate objectives that concur with the EC treaty objectives, and that does not unreasonably or disproportionately restrict the movement of capital.

(8) The CTT surcharge at a high tariff, however, the main aim of which is not budgetary but to combat harmful currency fluctuations, serves essentially a monetary policy, which within the scope of the EMU requires action at European level within the framework of the EMU (with a cooperation between EU and national authorities also at the international level). This high tariff surcharge is not contrary to the EC treaty if used as an instrument of monetary policy in the EU policy.

(9) Also, the free movement of goods, persons and services do not oppose under the Rule of Reason a CTT that, in the light of its objectives, does not unreasonably or disproportionately obstruct payments.

<footnote n="165">¹⁶⁵ CTT as formulated in Part II of the proposal for a treaty by H. Patomäki and L.A. Denys, *Draft Treaty on Global Currency Transaction Tax*, January 2002 and slightly revised in 2005. The draft is based on PATOMAKI, Heikhi (2001), *Democratising Globalisation, The Leverage of the Tobin Tax*, London and New York: Zed Books. It accommodates to a large extent the basic ideas of Paul Bernd Spahn (2002), who published a well-elaborated report, *On the Feasibility of a Tax on Foreign Exchange Transactions*, Report to the Federal Ministry for Economic Co-operation and Development, Bonn, www.uni-frankfurt.de. This Draft Treaty (Part II) was the technical source of inspiration for the Belgian Law on CTT of November 19th 2004, published in the Moniteur Belge of December 24th 2004.</footnote>
The EU Commission took a rather sceptical position on the compatibility of the CTT with the legal framework of the EU. At the request of the EU Council, the EU Commission published a report on "*Responses to the Challenges of Globalisation: a Study on the International Monetary and Financial System*" (14 February 2002).

The report does not really discuss the implementation of a “Tobin-Spahn Tax” from the legal or technical perspective. It only covers the CTT in a few pages. The report concludes that:

* The CTT may look appealing, but the feasibility is not demonstrated;

* A tax on transactions between the euro and currencies of other EU member states is likely to be found contrary to the Treaties;

* The compatibility with the EU's obligations within the World Trade Organisation (WTO) remains to be explored;

* The non-EU international cooperation has not reached a sufficient degree of integration, so that the feasibility of reaching an international agreement can be questioned;

* Extensive international coordination would need to be based on legally binding international agreements, including definitions of the tax base, the tax rate, the administration of the tax and an extensive coverage of countries;

* Collection of the tax at the national level requires an unprecedented degree of coordination among countries, such as a worldwide exchange of information.

The report of the EU Commission does not conclude that a CTT is not feasible in the legal context of the EU. It points to an intra-EU problem of taxation on exchange transactions between euro and other EU currencies, and the feasibility of a worldwide agreement and coordination for implementation. The report does not discuss the opinions already suggested in the literature, such as the options taken in the Draft CTT Treaty (see footnote 1), which to a large degree offers workable solutions for the geographical scope and coverage (taxable persons, taxable transactions, place of taxable transactions, chargeable events), the tax base, the tax rate, the tax liability and measures to ensure the application and to prevent fraud, drawing on the solutions found for the EU value-added tax (VAT), especially on international electronic trade and for the EU Saving Directive, especially with regard to the concept of paying-agents.

Moreover, on the occasion of their assessment of the Belgian Law on the CTT, the Commissioner for Taxation and the European Central Bank (cfr. hereafter sub 2.3.) have questioned, doubted and even to a certain extent negatively commented the CTT. In replies to EU parliamentary questions, the EU Commission has given further comments.

In its reports of 2005 in the framework of the debate on the EU Development Policy the EU Commission took a more neutral position but still repeated the differentiation / discrimination between the Euro and the other EU Member States currencies as the main legal obstacle. This is understandable as the financing of development with a low tariff CTT does not meet the same monetary criticism as the CTT in its dimension of a monetary surcharge.

The Commission Services prepared a Staff Working Paper in April and June 2005 as background for the debate on EU development policy in the framework of the assessment of the financing for the Millennium Development Goals (+5) in September 2005.

In this paper a more neutral position is taken vis à vis the CTT. In "New Sources of Financing for Development: A review of Options, SEC (2005) 467, Brussels, 5.4.2005", (building on the Commission Globalisation Report, the Landau Report and the Lula Report) the discrimination between EU Member States with different currencies for intra-EU
transactions compared to those within a country or within the Eurozone is listed as the main concern within the legal issue of the compatibility of the CTT with the free movement of capital. The paper however offers as a solution to have a tax on all financial transactions (p. 17).

In the legal assessment of the CTT the paper concludes (p. 30) that "the compatibility with the EC Treaty is not established yet. A CTT could restrict the free movement of capital and payments (Art. 56 TEC). The tax could also discriminate transactions involving countries with different currencies - including intra-EU transactions - compared to those within one country and within the euro zone.

The view of the European Central Bank, in an opinion relating to the Belgian tax model, was that the measure would not be compatible with the Treaty.

Furthermore, it needs to be checked whether such tax would be compatible with the GATS rules and other international obligations."

In the Communication from the Commission to the Council and the European Parliament "Accelerating progress towards attaining the Millennium Development Goals - Financing for Development and Aid Effectiveness" (Com (2005) 133 d.d. 12.04.2005) the Commission lists the range of proposals for international taxation contained in the Landau and Lula reports to be the most prominent proposals for new innovative finance mechanisms. The Commission quotes a.o. taxes on currency or financial transactions like the Tobin Tax (p. 12 - 13) inviting the Council "to agree to accelerate work on the most promising options for innovative additional sources of finance" and "to explore the scope for a European initiative".

From the annex to the Communication a summary of replies to a survey with Member States (January 2005) indicates that a Tobin Tax on currency transactions (among others) poses problems of political acceptability or economic efficiency (p. 28). The survey shows that with six Member States are involved in studies and analysis of a CTT (this tax scores the best compared to the IFF, the carbon tax, aviation tax, other international taxes and global lottery).

The EU comments do not take into account the growing number of instruments of cross border cooperation of tax, judicial and police authorities that may be applicable to the CTT.

It remained thus to be further examined - and that is the object of this contribution - whether the CTT is compatible with the changing legal framework of the EU and what instruments exist at the EU level to ensure a correct application of the tax.

The following chapter (4.1.1) deals with the change of the legal framework since 2001 up to the EU Convention (EUC 2004). It is the author's contention that the developments since 2001 do not basically affect the previous conclusions. In this section, the institutional framework relevant for an EU CTT will be clarified.

The second part of this chapter (4.1.2) intends to formulate further suggestions for implementation of a CTT in the EU on the basis of the development of the EU legal framework, taking into account the role of the European System of Central Banks.

In the third part of this chapter (4.1.3) comments are formulated on the Opinion of the European Central Bank and the European Commissioner for Taxation on the Belgian CTT Law approved by the end of 2004.

Chapter 4.2 focuses on the opportunities at the EU level to ensure a correct application of the tax and the prevention of fraud. This study concentrates on the EU instruments for cross-border cooperation and suggests how the existing instruments could be valued in the context of the CTT.
It becomes clear that the existing EU - Mutual Administrative Assistance in Tax Matters may, with a simple addition making reference to the CTT, be made applicable to organise the appropriate safe net for a coordinated tax administration of an EU-wide CTT.

The correct application of the CTT may be further guaranteed by the application of the existing EU money laundering legislation, the EU judicial cooperation in criminal matters and the EU administrative cooperation in criminal matters as well as the Prudential Supervision of Financial Institutions.

## 4.1 The implementation of a CTT in the EU Treaty Framework

Since 2000, the EU and EC Treaties have been amended<sup>166</sup> by the Treaty of Nice, which contains an important chapter on "Enhanced Cooperation"<sup>167</sup>. The Accession Treaties of 2003 have substantially enlarged the EU to ten new Member States. But as far as relevant for this contribution, the basic mechanisms have not been changed on this occasion. This study discusses the issues concerning an implementation of the CTT in the EU on the basis of the Treaty establishing the European Community (TEC or EC Treaty) with European institutions and EC Law, based on the Treaty Directives and Regulations, the Treaty on the European Union (TEU or EU Treaty) with an intergovernmental dimension and European Union Law, based on Conventions on Criminal Law (the "Freedom and Security" pillar), the EU cooperation of police authorities (coordinated by Europol), and on the cooperation of judicial authorities (coordinated by Eurojust). The Conventions relevant in this context are the Europol Convention (1995), the Convention on the Protection of the European Community's Financial Interests (1995), the Convention of Schengen (1985 and 1990), which is also relevant for police cooperation, the Judicial Assistance Convention (2000), and common positions, joint actions, framework decisions, and non-binding Decisions.

In the light of the objectives of the European Treaties, it is important to stress that the CTT's main objectives are to support international development policies and enhance international monetary stability. These objectives concur with the general objectives of the EC Treaty (art. 2, 3, 4 and 177). The CTT is therefore an instrument that would support internal and external policies of the EU (TEC Part III, Titles VII Economic and Monetary Policy, XIX Environment, XX Development Cooperation and XXI Economic, Financial and Technical Cooperation with third countries).

### 4.1.1 General objectives and principles of the EU Treaties

#### 4.1.1.1 Non-discrimination principle

The case law on the non-discrimination principle has further developed since 2001. In view of the CTT debate, to my knowledge no adversary developments are to be reported, so that I can refer to the earlier findings given in the annex. An excellent overview of the case law as it stands now is given by Advocate General Poiares Maduro in the opinion in the Marks and Spencer case (C-446/03) of April 7th 2005.

The CTT is not contrary to the non-discrimination principle. The CTT is based on justified distinctions or differentiations. CTTs not harmonised at the EU level may create disparity among Member States in the tax systems within the EU, where (and to the extent that) the fiscal sovereignty is not transferred to the EU level. Tax disparities are not prohib-

<footnote n="166"><sup>166</sup> This contribution will not focus on the further amendments that would result from the European Convention 2004 (EUC 2004) unless otherwise stated.</footnote>

<footnote n="167"><sup>167</sup> Art. 11 and 11a TEC juncto 43 to 45 TEU.</footnote>
ited by EU law. The Member States have indeed in principle the right to introduce new in-
direct taxation, until the EU enacts measures in that area.

Also, differences in currencies under the current Treaties are seen as acceptable
disparities: they co-exist within the EU.

4.1.1.2 Internal market principles

Four Fundamental Freedoms

The CTT does not contradict the basic freedoms of the internal market, the free
movement of people, services, goods and capital. The treaty articles on the four funda-
mental freedoms will not be changed in substance under in the EU Constitution 2004.

As to the principles of the internal market in general, the jurisprudence of the
European Court of Justice (ECJ) has developed in the same direction as summarized in
annex 1 (p. 434; see also above sub 2.1.1. the reference to the 2005 Opinion of the Ad-
vocate-General in the case of Marks and Spencer). Furthermore, it appears that the "rule
of reason" allows a balanced approach in valuing measures of general public interest; also
the concept of fiscal cohesion seems to be given a new development, at least in the opin-
ions of Advocates-General (e.g. A.G. Kokot in the Case C-319/02 Manninen and A. G.
Tizzano in Case C-315/02 Lenz).

We can add to the reasoning indicated in the summary in annex 1 that it is recog-
nized that there will not be a prohibited restriction when Member States do not restrict the
"access to the market", nor hinder the transactions that take place in that market; in our
opinion this will also be the case if the Member States do not regulate the use nor the ex-
change of the currencies, but merely organise one of the conditions of functioning of the
market at the national level (e.g. the taxation that conditions the functioning) in a neutral
way (i.e. as the CTT envisages, all currency exchange transactions are taxed, including
those where the domestic currency is used).

In the case law of the European Court, according to leading authors (M. Lehner, A.
Cordewener, EALTP conference 2005, publication in print) the market access test is sup-
plemented by a "rule of remoteness" which excludes minor hindrances from the realm of
the market freedoms. The question is then whether the CTT specifically places a burden
on transactions which fall within the scope of the market freedom and whether the CTT
has the effect of splitting up the internal market into several domestic markets by constitut-
ing a barrier to entry or to exit.

The organisation of the national taxation of market transactions in a neutral way through a CTT falls outside the scope of the EU Internal Market rules: the CTT, as envisaged, does indeed not affect the position of a person as such, nor the access to the market.

The CTT as envisaged is neutral, since it is not dependent on the position or resid-
ence of the market player nor does it influence his behaviour on the market; it does not
distort competition between persons nor between currency transactions, as they are all
treated equally.

A double taxation however may be an unacceptable restriction to the internal mar-
ket. Therefore, the CTT envisaged (and indeed the Belgian law) provides for a clause to
avoid double taxation by giving preference to the taxing rights of the country of the trans-
feror, rather than to the country of the transferee, or the country of which the currency is in-
volved. The CTT is also not an exit or entry tax as it does not take account of the origin of
the currencies nor its destination (e.g. domestic vs. foreign currency; foreign vs. another
foreign currency; foreign vs. domestic currency); CTT as envisaged is to be levied on any
currency exchange. The "exchange" of a currency within the same currency (e.g. coins for
notes or the reverse only within the same domestic currency or the same foreign currency)
is not to be considered a taxable exchange of currency; also the mere use of a currency
for payment of goods or services is not a (taxable) exchange in the envisaged CTTs.

Free movement of Capital

Although the treaty article on capital liberalisation is already “directly effective”, also
with respect to third countries (art. 57.1 TEC), the restrictions existing on 31 December
1993¹⁶⁸ in four areas (direct investment, establishment, provision of financial services, and
admission of securities to capital markets) may be continued. The ECJ ruled<fnref n="169" /> that cur-
rency transactions are not within the listed areas, so that this article is not relevant for the
CTT. However, the EU may legislate in those areas and shall endeavour to liberalise the
capital movement with third countries to the greatest extent possible (art.57.2 TEC).

Moreover, the EU Council may, on a proposal from the Commission, unanimously
decide to enact measures that constitute a step back in EU capital liberalisation with third
countries (art.57.2 in fine TEC). Even if the CTT was considered to be a step back in EU
capital liberalization towards third countries - quod non - this clause would allow the intro-
duction of a CTT anyway.

The two general EC law exceptions to the freedoms of movement also applicable to
the free movement of capital, i.e. the justified differentiations or the justified restrictions,
may allow the possible restrictive dimension of the CTT.

Moreover, Art. 58.1a TEC allows for distinguishing between taxpayers who are in
different situations with regard to the place of residence or the place where capital is inves-
ted. In some specific circumstances, this might apply to a CTT. It is however not clear
whether the self-imposed restriction for such legislation on intra-EU capital movements not
existing before 31 December 1992¹⁷⁰ reduces this possible differentiation c.q. justification.
If so this clause may e.g. not allow CTT restrictions on transactions with taxpayers of non-
euro Member States or on capital movements to and from these States.

Article 58.1b TEC allows measures to prevent infringement of Member States laws
in the field of taxation and the prudential supervision of financial institutions. It also allows
measures to gather administrative or statistical information and other measures justified on
grounds of public policy or public securities. These exceptions may well be appropriate not
only to introduce measures against CTT tax evasion and avoidance, but also to reinforce
the application of prudential supervision mechanisms to condition the compliance with the
CTT.

Art. 59 TEC allows exceptional monetary community measures with respect to third
countries for up to six months. The Council decides on these matters, after consultation
with the European Central Bank (ECB). Where it concerns a tax measure, a unanimous
vote will be required. This clause might be very important for the high surcharge of the
CTT to be permitted in times of excessive currency fluctuation. A European Directive or
Regulation may enable a simplified urgent procedure, allowing a decision for six months.
Non-Euro Member States can also take such measures on the basis of art. 119, 120 and
122(6) TEC.

The EU Commissioner for Taxation and the ECB are however of the opinion that this art-
icle is not appropriate for a CTT (cfr. infra sub 2.3).

<footnote n="168">¹⁶⁸ For Estonia and Hungary, December 31st 1999</footnote>

<footnote n="169">¹⁶⁹ ECJ Case C-163/94 Sanz de Lera</footnote>

<footnote n="170">¹⁷⁰ Declaration on art. 73 of the Maastricht version – art. 58 of the Amsterdam version.</footnote>
## 4.1.2 The institutional framework

### 4.1.2.1 EU competences in general in view of a CTT.

Within the fundamental principles of the institutional framework the EU cannot introduce a fully fledged "European tax", except with respect to the Common Customs Tariff Duties in the framework of the Customs Union (art. 23-27 TEC) and apart from agricultural levies and antidumping duties.

The competence or power of taxation is not conferred to the European Union. As the EU has no exclusive competence, the Member States are thus in principle free to introduce a CTT.

However, the EU has exclusive competence in the area of monetary policy for the Eurogroup, the group of Member States whose currency is the euro. This includes the competence to conclude international agreements. The monetary policy of the EU is conducted by the Eurosystem, constituted by the ECB and the national central banks of the Eurogroup. Together with all other national central banks in the EU they constitute the European System of Central Banks (ESCB), which is governed by the ECB (art. 107 TEC).

Non-euro Member States and their central banks however retain their powers in monetary matters (art.112 TEC). Nevertheless, the ECB must be consulted on all legal acts from the EU and all Member States in the monetary area (art. 105.4 TEC).

In areas of exclusive competence, only the EU may legislate. Member States can only act if so empowered, or for the implementation of EU acts. It is therefore necessary for Member States that introduce a CTT with a monetary surcharge to refer to the European level for that dimension of the CTT.

In areas where the EU has no exclusive competence conferred upon it, the subsidiary and proportionality principles apply (art. 5 TEC). In the light of the wording of art. 5 TEC, it is reasonable to assume that a CTT aimed at a regional or global coverage cannot be sufficiently achieved by the Member States at their level. For reasons of the scale and the effects of the proposed action, it could be better achieved at the European Union level. Thus, it would be appropriate for the EU to act in the matter of the CTT, but only to the extent necessary.

The internal market (art. 3.1c and 14.2 TEC), which includes the harmonisation of indirect taxes (Part III, Title VI, Chapter 2), is considered to be an area of shared competence. The Member States may exercise their competence, but only to the extent the EU has not exercised its competence or has ceased to exercise it.

Development cooperation and humanitarian aid are also considered to be an area of shared competence. Here the EU can take action and conduct a common policy, but that competence may not result in Member States being prevented from exercising their competence (art. 177-181 TEC). It can reasonably be concluded that the CTT enters into these competences of Member States. Therefore, the EU could harmonise legislation in this area, but it cannot prevent Member States from acting themselves.

Apart from the euro Member States, economic policies are "coordinated" by the Member States themselves, but within the broad guidelines adopted by the EU Council.

Even the most "European" tax that actually exists, the Common Customs Duties, which is an area of exclusive EU competence (art. 23 et. seq. TEC), is, though fully unified (there is a Common Customs Union), basically administered and collected at the level of the Member States on the basis of European Regulations. These are legislative acts, which are generally applicable, binding in their entirety and directly applicable in the Member States (art. 249 TEC).

As the EU has no tax administration, it is recommendable that a European CTT be administered by the national tax administrations of the Member States. The appropriate in-
strument to realise a coordination or harmonisation of the CTT in the EU is a Directive (art. 249 TEC). The VAT, which is the most elaborated, harmonised indirect tax in the EU, may be the appropriate model. It is organised at the EU level by the legal instruments of European Directives. These are legislative acts binding as to the result, but leaving the choice of forms and methods to national authorities (art. 249 TEC).

### 4.1.2.2 The EU Fiscal provisions

The EU has the competence to harmonise indirect taxation, provided that this is necessary for the internal market and to avoid distortion of competition. The EU can thus prescribe the introduction of a harmonised EU-CTT at the national level. The EU can also prescribe the harmonisation of the CTTs autonomously<fnref n="171" /> introduced by (some) Member States. For harmonising indirect taxation, unanimity at the Council is required (art. 93 TEC).

A limited group of Member States may however engage in an "enhanced cooperation", if it is established by the Council that the EU as a whole cannot attain the objectives of such cooperation within a reasonable time, and if at least eight Member States participate (art. 43-45 TEU). Unanimity in tax matters is then constituted just by the votes of all of the participating Member States. The acts bind only the participating Member States. The enhanced cooperation must not undermine the internal market or constitute a barrier to intra-community trade. It must not discriminate between Member States or distort competition between them.

As indicated above, the CTT does not principally violate these rules. Germany, France and other Member States are considering, together with the European Commission, to apply this new technique for the first time to harmonise corporate tax. This may serve as inspiration for the CTT.

The Member States can formulate a request to the EU Commission which may or may not submit a proposal to the Council that may act after obtaining the opinion c.q. the consent of the European Parliament. Each of these institutions can thus block such requests or proposals. As it relates to a fiscal matter, unanimity is required, while only participating members may vote. However, the Council of the Heads of State may unanimously decide to act by qualified majority. Hence, the CTT movement could encourage Member States to initiate the enhanced cooperation procedures for the establishment of an EU-CTT.

Apart from art. 93 TEC on the competence of the EU to harmonise indirect taxation, two other sets of fiscal provisions must be considered in the context of a CTT in the EU. These are art. 25-27 TEC on the customs union and art. 90 TEC on the fiscal non-discrimination of products.

It is established ECJ case law (e.g. Case C-358/93 Bordessa) that foreign currencies are not "goods" in the sense that they fall under the requirement of the free movement of goods. A CTT on "import and export" exchange of foreign currencies would therefore not fall under the prohibition of import and export duties or other measures with similar effects (art. 28-29 TEC). The CTT would also not be affected by the prohibition of internal taxation of "products of other Member States", or similar forbidden indirect tax measures to protect domestic products, as meant in art. 90. Moreover, these treaty rules apply only for products from within the EU.

It may be concluded that outside the scope of the EMU, the establishment and functioning of the internal market and the avoidance of distortion of competition, the EU has no right to impede on the sovereign rights of taxation of the Member States. However, by ex-

<footnote n="171">¹⁷¹ subject to the prescribed consultation procedures; e.g. art. 105.4 TEC provide for the consultation of the ECB for national legislative initiatives in areas of its competence</footnote>
ercising these sovereign rights, the Member States have to respect the internal market principles and the more general principle of equal treatment or prohibition of unjustified discrimination. Furthermore, the external EU freedom of free movement of capital is also to be respected in establishing taxation rules.

As already indicated, the secondary EU tax law, harmonising indirect taxation, especially the VAT and the taxes on the raising of capital, is particularly useful for the realisation of a European CTT. In the light of the VAT experience, it is advisable, in view of a coverage of the CTT in Europe as comprehensive and concise as possible, to establish a European Directive for the harmonisation of the CTT where the tax exists (Belgium, France) and for the introduction in other Member States. This Directive would provide a common set of substantive rules concerning the definition of taxable persons, taxable events, localization, tax base, tax rate, tax liability and the prevention of fraud. The fact that the draft version of the CTT, which this contribution refers to, borrows many concepts from the Sixth EU-VAT Directive, using a uniform set of legal concepts and a common case law based on jurisprudence of over 400 ECJ cases, may facilitate the introduction of a European CTT into the EU body of law.

As an example, it may be relevant for the CTT to refer to a 1997 milestone case decided by the ECJ in the matter of the First National Bank of Chicago in which the Court ruled:

> "On this question, the Court observes first of all that the currencies which are exchanged against other currencies in a foreign exchange transaction cannot be regarded as 'tangible property' within the meaning of Article 5 of the Sixth Directive, since money used as legal tender is involved. Foreign exchange transactions are thus supplies of services within the meaning of Article 6 of the Sixth Directive.

> From the mere fact that no fees or commission are charged by the Bank upon a specific foreign exchange transaction it does not follow that no consideration is given. Moreover, any technical difficulties which exist in determining the amount of consideration cannot by themselves justify the conclusion that no consideration exists.

> It must therefore be held that foreign exchange transactions, performed even without commission or direct fees, are supplies of services provided in return for consideration, that is to say supplies of services effected for consideration within the meaning of Article 2(1) of the Sixth Directive.

> The answer to be given to the first question must therefore be that transactions between parties for the purchase by one party of an agreed amount in one currency against the sale by it to the other party of an agreed amount in another currency, both such amounts being deliverable on the same value date, and in respect of which transactions the parties have agreed (whether orally, electronically or in writing) the currencies involved, the amounts of such currencies to be purchased and sold, which party will purchase which currency and the value date, constitute supplies of services effected for consideration within the meaning of Article 2(1) of the Sixth Directive."

This case demonstrates that an indirect taxation of currency transactions is not only very well compatible with EU law, but also technically feasible. It may be relevant to point to the fact that currency transactions by EU taxpayers with non-EU taxpayers are not exempted but zero-rated under the VAT. This implies that principally tax administrations could already control and investigate the taxable basis of the CTT turnover and transactions.

In the context of the implementation of the CTT at the EU level, two VAT techniques should be mentioned. Services performed on behalf of third parties fall under art. 6, § 4 of the Sixth EU-VAT Directive and are to be taxed as well. The VAT Directive also organises a reverse-payment system that transfers the duty to pay the tax to contracting parties established in the EU where the other party is established abroad. Both techniques are very
efficient to tax international transactions. These techniques are also proposed in the CTT draft and were adopted in the Belgian law.

The CTT is not prohibited as a transfer tax by the VAT-Directive that has an exclusivity clause in art. 33 of the 6th VAT Directive, nor by the EU Directive on the taxation of the raising of capital (TRC-Directive) art. 12 (cfr. Annex, footnote 6 and 7).

As the CTT does not provide for a credit mechanism for CTT paid "in amount" (input tax) and envisages the gross amount of currency transactions (not the value added by the traders), the CTT does not come under the prohibition of art. 33 Sixth EU VAT Directive. As to the compatibility with the TRC-Directive, a recent court case (Commission versus Belgium, d.d. 15 July 2004) is worthwhile mentioning:

> "It is sufficient to state that the prohibition on levying taxation other than capital duty and the other taxes and duties mentioned in Article 12 refers only to the capital transactions expressly listed, without it being necessary, in order to define them, to specify the identity of the person liable to the tax."

Currency exchange transactions have not been listed in the TRC Directive.

It is clear that where the TRC-Directive allows Member States to tax transfers of securities other than on the occasion of the capital transactions expressly listed, such as the formation of a company or the increase of its capital, and not prescribing the Member States to effectively tax such transfers, is not a violation of the EC Treaty in general, nor more specifically of the capital liberalisation, a currency transfer tax as such can also not be deemed to be such a violation either.

Moreover, both Directives do not exclude each other, nor do they exclude in principle other transfer taxes (see art. 12 TRC and art. 33 Sixth VAT Directive).

The examination of the relevant fiscal provisions in the TEC demonstrates that, at the actual stage of development of the administration of taxes in the EU, it is appropriate to conclude that the EU is not in a position to introduce an EU-CTT which is administered at the EU level. It should, like in other tax matters, leave this to the Member States. The EU could however establish the necessary measures for the harmonisation, the implementation and the coordination of the legislation of Member States. Through its support, coordination and supplementation of actions of the Member States, especially with respect to administrative cooperation, the EU can organise the linkage of national tax administrations as well as the linkage to the control and cooperation mechanisms organised at the EU level. A European Directive would be the appropriate means for the implementation of a harmonised EU-CTT, as this would allow national administrative organisation and control "in the field".

#### 4.1.2.3 The Economic and Monetary Union

As already mentioned (part 2.2.1.), the EU has the exclusive competence in the field of monetary policy in the euro-zone. The economic and monetary policy of the EU is dealt with in art. 4, 8 and Part III, Title VII, Chapters II-IV of the TEC. It implies a coordination of economic policies by the Member States and a single monetary policy and exchange rate policy, including a single currency in the Eurozone. Both policies lay down the principle of an open market economy with free competition within the broad guidelines of the EU (including a multilateral surveillance), favouring an efficient allocation of resources (economic policy, art. 98 TEC; monetary policy, art. 105 TEC).

The EU Council can establish measures necessary for the introduction of the euro as a single currency (art. 123.4 TEC). Since this implies the exchange of currencies involving the euro, the EU Council has the authority to impose conditions with respect to the payment system and can organise systems to control the use.
As briefly indicated in part 2.2.1., the ECB plays the most important role in the field of EU monetary policy. In consultation with the ECB, the Member States of the Eurogroup shall adopt common positions at international level (art. 111 TEC). This is managed within the Eurosystem, the network of the ECB and the national central banks of the Eurogroup. The Eurosystem is part of the ESCB, which is constituted by all central banks in the EU and governed by the ECB. The central banks operate independently from national or European political authorities (art. 108 TEC). The ECB establishes the guiding policies principles and is responsible for the currency exchange system of the euro vis-à-vis other currencies in the EU. The Eurosystem's basic task is to define and implement the EU monetary policy, to conduct the foreign-exchange operations, to manage the foreign reserves and to promote the smooth operation of payment systems.

As to the non-euro Member States, called "member states with derogation", several provisions do not apply (art. 122.3° TEC), such as the objectives and tasks of the ESCB. However, art. 105. 6° TEC does apply. This article allows the Council to confer upon the ECB specific tasks related to the prudential supervision on possible ECB policies.

Art.111.3° TEC empowers the EU authorities to conclude international monetary agreements with respect to systems of exchange rates, ensuring a single position does not apply to non Euro Member States.

The EU competence with respect to the non-euro Member States is thus rather limited. The TEC only prescribes at least one annual examination of the situation regarding the movement of capital and freedom of payments and the application of EU law by an Economic and Financial Committee, including the keeping under review of the monetary and financial situation of non-euro Member States. The Economic and Financial Committee is composed of Member States of the EU Commission and the ECB (art. 114.2 TEC).

The exchange rate policy of each non-euro Member State is however a "matter of common interest" (art. 124, 1° and 2° TEC).

The TEC provides moreover with appropriate procedures with respect to safeguard measures for non-euro Member States faced with monetary difficulties (art. 119 TEC) or a sudden crisis in the balance of payments (art. 120 TEC).

As the surcharge in the CTT is undoubtedly a "monetary" instrument to counteract undesirable currency fluctuations, especially detrimental to the weaker currencies and States, the role of the ECB as the holder of the monetary sovereignty of the Eurogroup is essential. The involvement of the ECB and the ESCB is not only necessary, it is also welcome, given the competences and the instruments it has at its disposal. The ECB could conclude the necessary agreements with the central banks in the Eurogroup to organise an appropriate support for the implementation and supervision of the application of the EU-CTT. The ECB could furthermore make appropriate recommendations to central banks in the other Member States to that effect. The Member States outside the Eurogroup have a large monetary sovereignty, but they are not outside the ESCB. Moreover, the ECB could conclude appropriate agreements with the private financial settlement institutions, such as the Target Agreement. The linkage with the Prudential Supervision of the financial sector could also be entrusted to the ECB. The EU Council may indeed confer to the ECB specific tasks relating to the prudential supervision of credit institutions and the stability of the financial system. This applies also to the non-euro Member States.

#### 4.1.2.4 The EU development cooperation

The EU Development Cooperation policy and that of Member States is complementary (art. 177 TEC). In those policies the EU implements, which are likely to affect developing countries, the EU authorities have to take the objectives of development cooperation into account (art. 178 TEC). The EU may conclude agreements with third countries
and international organisations helping to achieve the development objectives, such as the Millennium Development Goals of the UN (art. 177.3 and 181 TEC). The EU and the Member States may take joint actions (art. 180 TEC). The EU can carry out cooperation with third countries, including financial aid, in consistency with the development policy and complementary to the actions of Member States.

Both the draft CTT Treaty (art. 17 Global Common Goods) and the Belgian Law (art 5 § 1,3°) have the aim to contribute to the development cooperation and therefore a CTT, introduced at Member States level and/or harmonised at EU level, basically concurs with this EU objective.

### 4.1.2.5 Conclusion

From the institutional perspective it may be concluded that the EU has no exclusive competence in indirect taxation and that Member States are thus free to introduce a CTT. Since the EU has exclusive competence in the area of monetary policy for the Euro-Member States, a CTT with a monetary surcharge requires a European intervention. Moreover, a CTT with a global or regional coverage could be better achieved at the EU level.

The principles of the internal market, including the freedom of capital and development-cooperation are areas of shared competence between the EU and its Member States.

It may be concluded that outside the scope of the EMU, the establishment and functioning of the internal market and the avoidance of distortion of competition, the EU has no right to impede on the sovereign rights of taxation of the Member States. However, by exercising these sovereign rights, the Member States have to respect the internal market principles and the more general principle of equal treatment or prohibition of unjustified discrimination. Furthermore, the external EU freedom of free movement of capital is also to be respected in establishing taxation rules.

The examination of the relevant fiscal provisions in the TEC demonstrates that, at the actual stage of development of the administration of taxes in the EU, it is appropriate to conclude that the EU is not in a position to introduce an EU-CTT which is administered at the EU level. It should, like in other tax matters, leave this to the Member States. The EU could however establish the necessary measures for the harmonisation, the implementation and the coordination of the legislation of Member States. Through its support, coordination and supplementation of actions of the Member States, especially with respect to administrative cooperation, the EU can organise the linkage of national tax administrations as well as the linkage to the control and cooperation mechanisms organised at the EU level. A European Directive would be the appropriate means for the establishment of a harmonised EU-CTT, leaving to Member States the administrative organisation and effective control of the CTT "in the field".

EU tax provisions require unanimity but an enhanced cooperation among at least 8 Member States could be considered.

As the surcharge in the CTT is undoubtedly a "monetary" instrument to counteract undesirable currency fluctuations, especially detrimental to the weaker currencies and States, the role of the ECB as the holder of the monetary sovereignty of the Eurogroup is essential. The involvement of the ECB and the ESCB is not only necessary, it is also welcome, given the competences and the instruments it has at its disposal. The ECB could conclude the necessary agreements with the central banks in the Eurogroup to organise an appropriate support for the implementation and supervision of the application of the EU-CTT. The ECB could furthermore make appropriate recommendations to central banks in the other Member States to that effect. The Member States outside the Eurogroup have a large monetary sovereignty, but they are not outside the ESCB. Moreover, the ECB could conclude appropriate agreements with the private financial settlement institutions, such as
the Target Agreement. The linkage with the Prudential Supervision of the financial sector could also be entrusted to the ECB. The EU Council may indeed confer to the ECB specific tasks relating to the prudential supervision of credit institutions (and the stability of the financial system). This applies also to the non-euro Member States.

### 4.1.3 Legal Assessment of the European Central Bank of the Belgian CTT - law and Comments by the EU Commissioner for Taxation<fnref n="172" />

#### 4.1.3.1 Introductory note

Upon request of the Belgian Minister of Finance (see also TEC art 105.4), the European Central Bank delivered its opinion on the Belgian Currency Transactions Tax Law on November 4th 2004. The ECB did not accept the invitation of the Belgian Parliament to attend a hearing and discuss the opinion of the ECB on June 13th 2005.

To assess the Belgian law, it is useful to recall the division of competences in the EU in its relation to Belgium, a Member State of the Euro-zone, more specifically in the areas of

1. the monetary policy,

2. the tax policy and

3. the policy on development cooperation.

##### 1. Monetary Policy

The EU has exclusive competence in monetary matters in the Euro zone, to which Belgium belongs. This implies that Belgium acts if empowered by the EU or when implementing EU acts.

The monetary component of the Belgian Currency Transactions Tax (hereafter the CTT), the 80 % - surcharge, is undoubtedly within the exclusive EU - competence.

Therefore, the Belgian CTT law takes this EU competence explicitly into account as will be indicated hereafter.

##### 2. Tax policy

The tax sovereignty has not been transferred to the European Union, except concerning customs rights, antidumping and agricultural levies.

However, for all matters (of taxation) related to the internal market, there is a "shared" competence between the Member States and the EU.

More specifically for indirect taxes - a CTT is an indirect tax - the rules concerning the internal market provide explicitly for the EU competence in harmonisation of indirect taxes (which may possibly be levied autonomously by the Member States).

Since no EU initiative for harmonisation has been taken, Belgium is free to introduce a CTT. In using its sovereign fiscal competence Belgium must however respect two EU limitations:

a) A Member State may introduce a CTT but only, in as far and as long as the EU does not use its authority to introduce or harmonize a CTT (which, as stated, is not yet the case with regard to the CTT) ; Belgium is thus free to introduce a CTT.

<footnote n="172">¹⁷² Within the context of this contribution implementation of the CTT within the legal framework of the EU law and only the legal assessment will be commented upon (based on a commentary prepared by the author for the Belgian Parliament in November 2004) ; the ECB-opinion deals in its first part with an economic assessment which has been commented upon by Peter Wahl in a WEED-paper: comment on the "Opinion of the European Central Bank" for the hearing by the Belgian Parliament of June 13th 2005.</footnote>
b) A Member State may introduce a CTT only in observance of the fundamental EU treaty rules, more specifically the rules of the internal market, where in case the free movement of capital is most relevant (the freedom of movement of capital is moreover, also applicable to relations with non-EU Member States; cf. hereafter).

### 3. Development Cooperation Policy

In development cooperation a specific "shared" competence applies, i.e. the EU has the competence to establish a policy, but: specifically for development cooperation, this policy may not lead to Member States being prevented from the exercise of their own competence.

The EU can thus harmonize and establish its own development policy but cannot prevent a Member State from acting. This applies also to the introduction of a CTT to finance development cooperation.

The Belgian CTT aims at the financing of (EU) development cooperation (art. 5, § 1, 3° BCTT) and is thus within its competence (shared with the EU, but cannot be prevented by the EU).

#### 4.1.3.2 The opinion of the ECB and comments

##### 1. Exclusive EU competence in monetary issues

* The ECB opinion states in its pt. 13, 18 and 19:

13. The euro area's exchange rate policy is an exclusive Community competence. As the purpose of the tax envisaged by the draft law is to influence the euros exchange rate vis-à-vis another currency, in particular to smooth exchange-rate developments and reduce volatility, the draft law would provide a national government with the means to impinge on the Community's authority to define and conduct exchange-rate policy. On these grounds, the draft law should be deemed incompatible with the Treaty, as its application would interfere with the Community's exclusive competence in the field of exchange-rate policy.

18. The second paragraph of Article 8 of the draft law provides that the tax rate of maximum 80 % will be established 'by a decision'* adopted after deliberation in the [Belgian] Council of Ministers and respecting Article 59 of the EC Treaty and the secondary law derived from it. The draft law also provides that such a tax will only apply 'after the competent European authorities have given their agreement' (second paragraph of Article 13). Article 59 of the Treaty concerns safeguard measures with regard to third countries where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of Economic and Monetary Union. It provides for an exclusive Community competence, whereby the measures are taken by the Council on a proposal from the Commission and after consulting the ECB - and not by, or on, a proposal from a Member State. Therefore, the procedures defined by the draft law for the adoption and implementation of the tax rate of maximum 80% do not comply with Article 59 of the Treaty. Also, if and when the conditions for applying Article 59 of the Treaty are fulfilled, the Community is free to assess whether or not to use this provision, as well as to assess and take any safeguard measure(s) that it deems appropriate, without being subject to, or bound and restricted by, a Member State's legislation, procedures or measures.

19. The second paragraph of Article 13 of the draft law provides that the provision that a foreign exchange transaction is deemed to take place in Belgium if one of the involved currencies is the euro will only apply 'after the competent European authorities will have given their agreement.' The ECB refers on this issue to the preceding paragraph 18 on the compatibility of the draft law with Article 59 of the Treaty.

<footnote>(* It is understood that this will be a royal decree.)</footnote>
* The Belgian law fully respects the European exclusive monetary competence in the Euro zone.

1.1. It is not clear whether the ECB is of the opinion that the CTT at the low tariff is a monetary matter: as this is obviously not the case, one may presume that also the ECB is not of that opinion, though this requires clarification of point 19 of its opinion. The ECB may have misunderstood the meaning of the deemed localisation for tax purposes of a currency transaction. The Sixth EU VAT Directive and the implementing Member States VAT also determine where the place of a taxable currency exchange transaction is deemed to be localised, without this being a matter that needs to be assessed under art. 59 of the Treaty.

Indeed, by way of analogy, it can be stated that national VAT legislations, harmonised by the Sixth EU VAT directive, are, in principle, applicable to currency exchange transactions (art. 13, B, d, 4° and C, b, provides for an exemption and an option to tax). This VAT on currency exchange transactions is clearly not a matter of monetary policy and is certainly not violating the European law.

The European Court of Justice has already dealt with a VAT case on Exchange currency transactions (case: First National Bank of Chicago, C-172/96 d.d. July 14th 1998). The Court ruled "foreign exchange transactions are supplies of services within the meaning of art. 6 of the Sixth Directive". The European VAT Directive and the National VAT laws that implemented this provision are definitely not incompatible with European law in general, nor with the exclusive EU monetary competence, nor need the application of art. 59 EC Treaty procedures.

1.2. Article 8 juncto 13 of the Belgian CTT law does stipulate that Belgium will only apply the high CTT surcharge, upon the consent of the European authorities and within the boundaries of article 59 EC Treaty (turbulences) that provides for procedures to deviate from the freedom of capital with third countries in case of monetary turbulences.

The exclusive competence of the European Union does not prevent the Member States from putting the necessary machinery in place so as to be able to implement a European decision. As was indicated in the preparatory documents of the Belgian CTT law (see doc 51088/002, pg. 16), the law offers an instrument to the European Central Bank and the European Council of Ministers for the turbulences that occur during a limited period of time. Therefore, there is no conflict with the exclusive monetary competence because the EU authorities have to decide - and thus remain free to decide whether or not to allow the instrument to function. The Belgian CTT does not bind nor restrict the EU authorities. Without the supporting legislation of the Member States, the EU could under art. 59 EC Treaty not impose a CTT at the high rate.

In assuming that a Belgian Royal Decree will decide after deliberation in the Belgian Council of Ministers, the European Central Bank misread the Belgian law. As indicated in the Parliamentary documents (Doc. 51.088/001 pg 9, 15), the decision is to be taken by the European Council of Ministers.

The approved text of the law (art 13, 2d paragraph) clarifies that for the "monetary" surcharge (art. 8, 2d paragraph) and for the levy on transactions whereby the euro is involved (as localisation currency: art. 5 § 1,3° cfr. supra), the preliminary consent of the appropriate European authorities is required and that the application must respect art. 59 EC Treaty.

The Belgian law is thus only the "vehicle" in which the European monetary policy drives.
Furthermore, as the law determines (art. 13, 3° paragraph), the law enters in force only when all EMU Member States have introduced the tax or when a European Directive or Regulation prescribes the introduction or harmonisation of the tax.

A CTT law introduced in the whole EMU - implying unanimity - or based on EU sec-
ondary law, will therefore not be in violation of EU law.

When the EMU, as the ECB seems to state, includes all EU Member States and given
the unanimity rule in fiscal matters, and the preliminary consent of the appropriate
European authorities required by the Belgian law, there can be no violation of the
European constitutional division of competence.

The Belgian fiscal CTT law, as "enabling machinery" does also not violate the exclus-
ive monetary EU competence more than - so to speak - the sheer existence of the Bel-
gian National Bank (which acts as an agent of the ECB, its shareholder, and whose
governor, qualitate qua, is a member of the Executive Council of the ECB).

**Conclusion**

Belgian Tax Sovereignty, the shared competence for indirect tax harmonisation with the EU in combination with the exclusive monetary EU competence for the high CTT surcharge, and the fiscal unanimity rule means that Belgium is free to introduce a CTT at a low tariff (provided the internal market rules are respected, cf. hereafter) and that the high surcharge can only be applied after a European procedure of approval. The Belgian law does thus not conflict with the division of competences in the EU.

2. **Free Movement of Capital**

* The ECB opinion states in its pt. 14

14. Furthermore, under the ECB's analysis, the tax provided for in the draft law is incompatible with the free movement of capital and payments between Member States, and between Member States and third countries (Article 56 of the Treaty). This tax is indeed a measure imposed by a public authority which may or will, directly or indirectly, hinder the conclusion and/or execution of the capital or payment transfer involving foreign exchange on which the tax is imposed. Also, the tax will imply less favourable treatment of certain transactions in the currency of a non-euro area Member State or a third country compared to the same kind of transaction in euro only. It is underlined in this context that EMU's proper functioning depends on the fundamental freedom of capital movement and payments both within and beyond the boundaries of the EU. EMU is indeed based on completion of the internal market, of which the free movement of capital and payments is a centrepiece (Article 14(2) of the Treaty).

The ECB must certainly be aware that the freedom of movement of capital is not an abso-
lute freedom, as the EC Treaty itself provides for exceptions (cfr. pt. 15 of the ECB opin-
ion, hereafter sub 3) and as the European Court of Justice accepts exceptions on the
basis of the "rule of reason", i.e. justifications based on general interest.

2.1 Non discrimination: the CTT at the low rate.

a. The difference in treatment between the two financial markets (forex vs. domestic) is not based on discrimination but on a justified differentiation.

The different tax treatment of financial transactions (domestic vs. forex transactions) is justified by the fact that the transactions take place on <u>totally distinct capital markets</u> whereby the forex market, that has a fully distinct economic function for the market participants, has proper consequences and holds proper risks, namely currency exchange fluctuations, that do not exist in the purely domestic market. The ECB cannot be followed where it compares transactions in different currencies with the same kind
of transactions in euro only: such transactions are never comparable as the exchange
risks are not present in transactions in one currency only. The ECB may have con-
sidered the payment of goods and services in different currencies (cfr. hereafter sub
2.2. in fine).

It is this forex market that, precisely through the freedom of capital and the globalisa-
tion of the economy, enjoys special economic advantages and benefits that do not ap-
pear in the pure domestic market with money transactions within one and the same
currency. It is this entirely distinct proper international dimension of the taxable basis,
the taxable substance, i.e. the exchange of two different currencies that justifies the
distinction in the CTT which has as its main function (at the low rate) to finance devel-
opment cooperation (the transfer of globalisation benefits to those countries of the
South that are in the highest needs of these globalisation benefits). This appropriate-
ness is recognized at length in the UNO report of the Quadripartite (Action against
Hunger and Poverty, Report on Innovative Financing Techniques, Sept. 2004) and the
French Landau Report.

b. Moreover, under the low tariff, all exchange transactions are taxed, no matter which currencies are involved. Belgian taxpayers are not taxable if they use euros, pounds, dollars, etc.; Belgian taxpayers are taxable if they exchange dollars for yen, pounds for euros; none of the currencies are privileged.

c. Within the European Union several currencies exist: besides the Euro and the British, Danish and Swedish currencies there are now also the 10 currencies of the newly ad-mitted countries. The sheer existence of multiple currencies is not incompatible with the European Treaties, the EMU or the fundamental freedoms of the treaties. The European Treaties themselves, as it were, organise the multitude of currencies with value fluctuations. The existence of these differences as one of the criteria for a low rate taxation does thus not conflict with the European legal framework.

d. By means of analogy, national VAT legislations harmonised by the Sixth EU Directive, are not applicable to money transactions within one currency, they are only applicable on currency exchange transactions (cfr. supra 1.2 in fine). This, apparently, is not a violation of the freedom of capital. For the CTT, the same principle applies.

2.2. In as far as the ECB is of the opinion that the CTT does not so much constitute a dis-
crimination, but does constitute a restriction of free movement capital, the answer is that
the tax does not restrict the "access to the forex market", nor the transactions that take
place on that market, nor does the tax install a "national" market ; the tax functions solely
in a neutral way towards the forex market, i.e. all forex transactions are taxed, whether the
national currency or the Euro is involved or not. The CTT remains neutral toward the posi-
tion of the market participant (his place of residence or establishment); the tax does not
distort the competition between persons, nor the competition between forex transactions
that are all equally taxed. The CTT is also not an exit nor an entry tax; it does not take into
consideration origin, since it taxes all exchange transactions.

Furthermore, the Belgian law is neutral as it also prevents double taxation of CTTs in mul-
tiple tax jurisdictions (Art. 5 § 4).

Moreover, the CTT does not tax capital transfers nor payments (of goods, services, etc.) as the ECB seems to think (cfr. supra sub 2.1, a). Only exchanges of currencies (which may but need not be related to transfer of goods, services, capital and movement of persons) are within its scope.

Indeed, the CTT would, in its low tariff application (1 € per 10.000 €) to an exchange of currencies to pay for goods, services or capital, be too remote a restriction of intracom-
community movements of goods, services, including financial services, or capital to qualify under the ECJ-jurisprudence as a hindrance of the EU internal market.

Participants to the market of goods, services and capital are not discouraged from using the euro in their dealings with other market participants because of a CTT levy, as the CTT does not tax the use of currencies for the payment of goods, services and capital, but only the use of currencies for the exchange against other currencies, an operation which requires its own risk assessment, which is part of the market negotiations of the participants.

There is no sufficient direct link between a transfer tax on the exchange and the main transaction to cause a restriction as interpreted under the EU freedom.

From a policy perspective one may even conclude that the use of the Euro for intra-community trade will not be a result of a CTT but rather of the economic evolution of the Euro as the most convenient (reserve) currency for cross-border intra-community trade; that a CTT may have a very remote encouraging effect to that extent, concurs with the basic objective of the EMU to curb the instability of a multi-currency system and to promote the use of a single currency. The other EU currencies are transitional derogations preceding the third stage of the monetary Union.

Economic studies establish that the financial markets would, without difficulties, absorb the CTT in its low tariff application. Indeed the tax may contribute to tax disparities between different means of payment which is as such not more restrictive than other taxes such as the substantial differentiation of VAT rates depending on the "legal" localisation of the transactions, the withholding taxes on wages, revenue from capital, real estate levies, etc.

2.3. Finally, in as far as the low rate CTT would be a restriction; it is entirely justified by a non-market distorting levy to finance the development cooperation policy, an EU treaty objective and as such an appropriate justification (cf. infra).

2.4. Concerning **the monetary surcharge** (that may apply to transactions with one specific currency in turbulence), discrimination or a restriction of the freedom of capital is obvious (as monetary policy often aims at influencing exchange rates) but allowed under the exemption in the TEC for matters of "public policy" (cf. infra).

2.5. Concerning the capital movement toward third countries, European law allows moreover explicitly a step back decision at European level (art. 57 TEC).

### 3. Exceptions to the freedom of capital

* The ECB opinion states in pt. 15

Furthermore, the ECB considers that the exceptions laid down in Article 57(1), Article 60(2), Articles 119 and 120, and Article 297 of the Treaty, which allow Member States to restrict under specific circumstances the free movement of capital of payments, do not cover the measures envisaged by the draft law. Also, Article 58(1)(a) of the Treaty only justifies a tax measure that distinguishes between taxpayers on the basis of their place of residence or the place where their capital is invested. However, the draft law does not distinguish according to taxpayers, but according to transactions. Considering the narrow interpretation of 'public policy' and 'public security' in Article 58(1)(b) of the Treaty, as well as the exchange-rate policy nature of the tax envisaged by the draft law (paragraph 12), the ECB is of the opinion that such a tax may not be introduced on such grounds. Similarly, the ECB is of the opinion that such a tax cannot be justified and objectively required for mandatory reasons of general interest.

3.1. As monetary policy must obviously and effectively be qualified as a matter of 'public policy', the opinion of the ECB that the (high) CTT surcharge cannot fall under the ex-
ception to the freedom of capital provided for in art. 58, §1b of the treaty (i.e. measures justified on grounds of public policy) can obviously not be shared. The ECB does surely not think that the monetary policy measures by Central Banks of 13 Member States (other than in the Eurozone) and its own measures, can not, as a matter of public policy, restrict under specific circumstances free movement of capital. Monetary policy is in the financial sector public policy "par excellence".

3.2. Furthermore, with respect to the non-monetary low tariff CTT, as was also mentioned above (2.3), the financing of EU development cooperation policy being one of the goals of the European Union, as stated in the EC Treaty, is surely a "reason of general interest (rule of reason)" that taking the proportionality into consideration does justify a restriction to the free movement of capital globally (if there is a restriction at all). Every tax or levy does "impose" a taxable basis. Mobile taxable bases are not per se and absolutely tax exempt under the EU law.

3.3. The articles 57, as interpreted by ECJ Case Law, and 60 §2 EC Treaty, do not cover the hypothesis of the CTT and the reference to these articles by the ECB is therefore probably irrelevant.

The articles 119, 120 and 297 EC Treaty can be read in connection with article 59 (cfr. supra).

4. The EMU, a "State"?

* the ECB opinion states in its pt. 16

The draft law considers as a 'State' the "European Economic and Monetary Union or every other territory with a single currency' (second paragraph of Article 4). EMU includes all Member States and, thus, also the Member States that have not adopted the euro as their currency (these Member States are either in the second stage or in the third stage with a derogation). A reference to EMU for purposes of defining a currency area is therefore inappropriate. Also, considering EMU as a 'State' is inconsistent with the draft law's intention to impose the tax on, inter alia, transactions involving the exchange of euro for the currency of a non-euro area Member State (paragraph 3), since this implies that the euro and the currencies of the non-euro area Member States are currencies of the same 'State'.

The ECB states that the EMU includes all Member States, also those that did not adopt the Euro as the single currency; the ECB reproaches the Belgian CTT law to consider the EMU to be a "State".

The ECB demonstrates a wrong reading of the article 4 of the CTT law. It reads: "the European Economic and Monetary Union or any other territory with a unitary currency", is qualified as "a State for the application of art. 4". That article 4 describes the taxable event and more precisely the transactions "to trade currencies of a State for currencies of another State". The Euro is for that purpose qualified as a "currency of a state" (i.e. including the single currency of the European Economic and Monetary Union, into the scope of application).

The BCCT thus does not consider the EMU as a State nor as a currency area. The terminology is only used to define a currency as an element of a taxable event.

Other regions in the world have also adopted a single currency. Also these currencies are currencies for the CTT and the region a "State" for the application of the CTT. So the remarks of the ECB are not at all to the point.
## 5. Development Fund

* the ECB opinion states in pt. 17

According to Article 5§1 of the draft law, 'the proceeds of the tax (...) shall be paid in full into a fund, managed by the European Union and to be allocated for cooperation and development, to promoting social and ecological justice and to conserving and protecting international public property'. A legislator of an individual Member State adopting this provision would attribute the management of a fund established at national level to the EU. However, the creation of new Community tasks by national legislation does not appear to be compatible with the Community legal framework and order.

Based on existing precedents, a fund for the financing of EU Development Policy, partly financed by some of the Member States only and managed by the European Union, can definitely be created in conformity with European Law.

### 4.1.3.3 Comments of EU Commissioner for Taxation

Upon request of the Belgian Minister of Finance, the EU Commissioner for Taxation, Bolkestein, gave on Sept. 1st, 2004, the following opinion (summary):

"From a purely legal perspective, it goes without saying that, in principle, the introduction of a tax on cross-border exchange operations may render those less attractive to normal investors. Therefore, such a tax may constitute a restriction to free movement of capital and payments, in the meaning of Article 56 and following of the EC Treaty. In particular, the fact itself that such a tax would only apply to exchange operations, meaning that operations with EU Member States outside the Euro-zone as well as with all third countries would, in principle, be subject to a less favourable treatment than the one applying to EU Member States within the Euro-zone (see Article 4 of the draft law), would also deserve a more in-depth analysis in the light of Article 56 EC.

According to well-established ECJ case-law, once the presence of a restriction to one of the fundamental Treaty freedoms is established, one should carefully assess whether such a restriction is necessary, proportionate and justified having regard to an imperative, non-economic reason in the general interest.

"In this respect, I have taken note of the fact that, according to Article 5 of the draft law, "... le produit de la taxe est, après déduction d'un pourcentage de perception fixé par le Roi, intégralement verse à un fonds, géré par l'Union Européenne, qui sera affecté à la coopération et au développement, à la promotion de la justice sociale et écologique et à la préservation et la protection des biens publics internationaux."

"Whilst one may argue that those objectives broadly are "in the general interest", it is unclear to me what their exact scope is and, even more, why it is considered that a "Tobin tax" like the one designed in the draft law would be a necessary and proportionate tool to reach them."

The comments are apparently based on some assumptions that are not accurate since they are not based on the text of the Belgian CTT law.

1. The Commissioner comments upon "cross-border" exchange operations. This qualification is not accurate since all exchange operations are within the scope of the BCTT, and indeed all transactions in which two currencies are involved (also when the parties, the banks and the transactions are located wholly within Belgium and/or no borders are crossed; moreover cross-border transfers or other movements of currencies without exchanges into other currencies are not envisaged). As mentioned above, the currency exchange or foreign exchange markets are clearly distinguished from the national or domestic money or capital markets, where no currency exchange risks are run, and therefore no currency gains or losses made. As such, the exchange e.g. of Euros notes in Euro coins or Pound Sterling notes in Pound Sterling notes is not a currency exchange transaction.
This distinction between single currency transactions and dual currency transactions is also known in the EU-VAT law and, as mentioned above, is not per se a breach of the EU Freedom of Capital.

2) The Commissioner argues that since the tax would only apply to exchange operation with EU Member States outside the Eurozone as well as with all third countries and those operations would be subject to a less favourable tax treatment than the operations within the Eurozone, a more in depth analysis in the light of art. 56 (free movement of capital) would be deserved.

Again, the operations envisaged in the CTT are not taxable c.q. exempt according to whether they are effectuated within the Eurozone-territory or whether effectuated with other States (cfr. supra).

As mentioned above, under the EU-VAT law exchange transactions may be taxable and operations within one currency not, which does not imply that there is a breach of the EU freedom of capital.

Therefore, as the comment of the Commissioner is based on wrong assumptions, a further in-depth analysis may indeed clarify the views: the decisive criterion is the swap of currencies, not the territorial link of the parties, the banks or the operations to a Member State, a third country, or the Eurozone. An exchange of currencies (yen for dollars) between two Italian residents through an Italian bank is taxable, and not the payment in dollars by an Italian purchaser to an Italian vendor (e.g. for. goods imported from Hong Kong) whether the freedom of goods or services may be hindered through a taxation of the means of payment (like the VAT) is a matter to be judged under those relevant freedoms.

3) The EU commissioner acknowledges that the transfer of the CTT revenue to an EU development fund may meet the "rule of reason" justification for restrictions to the freedom of capital, as this funding of EU development cooperation may arguably be "in the general interest". However the commissioner questions whether the proportionality test is met.

Reference can be made to the many economic studies (e.g. Jetin, in this publication, Spahn, Kapoor, etc.) and the listing of CTT-type taxes as one of the most prominent examples with most promising global revenues of New Financing Techniques for Development mentioned in the Quadripartite UN initiative (New York, September 2004), the Landau Report (France, Summer 2004), the UN University Papers (e.g. the Report of Atkinson c.s.) and the EU Commission working documents of 2005.

Indeed, the international currency exchanges market is the most important World market, financially speaking, and one of the most direct exponents of globalisation of the world economy.

Clearly the EU Commissioner takes a far less negative stand on the BCTT than the ECB; he uses terminology like: "may constitute a restriction, deserves a more in-depth analysis in the light of art. 56 EC, it is unclear what the exact scope is, why it would be necessary and proportionate tool, etc." He concludes by offering to enter into discussions if appropriate.

4) In the closing remarks (not quoted above) the EU commissioner states it to be unclear how a unilateral allocation of revenue to an EU development fund can be made, and to be puzzled by an entry into force of a national legislation depending
on a Eurozone-wide introduction or an EU legislative initiative. On both accounts
one can refer to existing comparable precedents.

## 4.2 Further Implementation of a CTT in the EU Legal Framework: EU enforcement

This chapter examines the instruments which could play a valuable role in the enforcement of the CTT. It shows possible measures to ensure the correct application of the tax and the prevention of fraud.<fnref n="173" />

Like the VAT and the Security Transfer Taxes, the CTT is to be a self-assessment system, incorporated into the regular administrative and bookkeeping financial operations of the taxpayers, mainly international financial institutions, financial intermediaries and multinational groups of enterprises. Apart from the direct participants in the foreign exchange markets, who would be subject to a reporting and compliance system (the multinational corporation), the major part of the tax will be levied indirectly by the financial intermediaries who secure the settlement of the transactions, by the financial institutions who centralise and execute the currency trading at “wholesale” level, by the currency dealers and others. The draft CTT and the Belgian law provide for a model that can be used as an inspiration.

The finance industry would thus be in charge of collecting the tax. Therefore, fiscal supervision as well as a system of administrative fines of a substantial financial importance would be crucial to have the adequate pro-active effect. This chapter does not elaborate on these compliance issues, which are a rather executive matter that each member state could fit into its current administration of taxation. The compliance of the control could be entrusted to the tax authorities of the member state of residence and subsequently to the Member States of the transferor, of the transferee, of the intermediary or – for non-EU residents – of the member state chosen for registration for CTT. The VAT registration of non-EU businesses in electronic commerce could serve as a model for the latter hypothesis (EC VAT Directive 2002/38 amending the sixth VAT and EC Regulation 792/2002 amending VAT Regulation 792/2002; J.O. L 128 of May 15, 2002).

This chapter deals with some important developments at the European level that may facilitate the international supervision, control and enforcement of the CTT in the EU. Part 4.2.1 discusses the European administrative cooperation in tax matters, which provides for a substantial support mechanism for cross-border tax administration and enforcement. This mechanism could be extended to the EU-CTT. Part 4.2.2 looks at the EMU and the EMS, which permit a governance of monetary policy at EU level, including a policy of prudential supervision of the financial sector that would allow a monitoring of the CTT. Part 4.2.3 focuses on the EU system of preventing and combating money laundering. Since 2000 the system has developed into a system for the protection of the international financial system. It may serve the cause of the CTT. Finally, the judicial and administrative cooperation in criminal matters is subject of part 4.2.4. This cooperation has reached a high level on the European agenda since 2000 and may contribute to the enforcement of an EU-CTT.

### 4.2.1 European administrative cooperation in tax matters

The administrative cooperation in tax matters within the EU envisages the possibility for tax authorities to control, assess and recover taxes across the borders. Two basic sets of instruments are to be considered in this context. The first one refers to the cooperation

<footnote n="173">¹⁷³ See also draft CTT (2002) art. 15 and Belgian Law art. 12</footnote>
in the control and assessment of tax claims. The second set of instruments is concerning
the cooperation in the recovery of taxes due.

The cooperation in the control and assessment of tax claims is mainly organised by
two instruments. The EU Directive on Mutual Assistance in Taxation (77/799/EEC of 17
December 1977, as amended lastly by Directive 2003/93 EC of 7 October 2003), provides
for an exchange of information to assist in a correct assessment of taxes on income and
capital, excise duties, and insurance premiums. Transfer taxes are not covered by this Dir-
ective. The Directive allows the exchange of information between tax authorities of the EU,
irrespective of the residence or nationality of the taxpayer. The information can also be ex-
changed for the assessment of other taxes i.e. those covered by Directive 76/308/EEC on
the recovery of tax claims (art. 2 : cfr. hereinafter Recovery Directive). The exchange may
take place on request, automatically or spontaneously, and it may take place as joint in-
spections. The CTT however does not enter into this Directive's scope either. It is thus re-
commendable to extend the scope of the Recovery Directive in order to cover the CTT.

The other instrument that is relevant for the cooperation in the control and assess-
ment of tax claims is the Council Regulation 1798/2003 of 7 October 2003. It regulates co-
operation regarding the VAT and provides with a common system of exchange of informa-
tion, including the Electronic Data Exchange, a network to ensure transmission between
competent authorities in the area of customs and taxation by electronic means (art. 2, 19).
This Regulation does not cover other indirect taxes than those on goods and services. But
as currency transactions are a service listed in the Sixth VAT Directive (Art 13, B, d.3), the
common system covers the possibility to exchange adequate information, even if these
services are VAT exempt or zero-rated. The information may however not be used for oth-
er purposes, thus also not for the cooperation in the control and assessment of a EU-CTT.
It is therefore advisable to extend the scope of this Regulation. It provides for information
and inquiries on request, the presence of tax inspectors in other Member States, simultan-
eous controls, automatic and structured exchange, data storage (5 years) and exchange of
information (electronic direct access) on intra-community transactions. This information
may also be used for the assessment of other taxes i.e. those covered by the Directive
76/308/EEC on the recovery of tax claims (art. 41, 1). As already mentioned, the CTT does
not fall into the scope of this Recovery Directive. The information may however also be
used by the receiving state for other purposes if such use is allowed in the providing State
(art. 41, 3). Both the Directive and the Regulation on Administrative Cooperation in taxa-
tion allow the information to be used for taxation covered by the Recovery Directive (cfr.
hereafter), but the VAT-Regulation seems to have an even broader useful coverage.

As mentioned above, the recovery of tax claims in the EU is organised by the Dir-
ective 76/308/EEC, as last amended by Directive 2001/44/EEC, which entered into effect
on 30 June 2003. This Directive allows the recovery of taxes throughout the EU, as if they
were domestic tax claims. It has a broad field of application (import and export duties,
VAT, excise duties, tax on income and capital, insurance premiums, interest, fines and
costs). The Recovery Directive allows taking precautionary measures to guarantee the re-
covery. However, transfer taxes such as the CTT are not covered. It is highly recommend-
able to extend the scope of this Directive to cover the CTT. As indicated above, this would
bring the CTT into the scope of the EU Directive on the Mutual Assistance in Taxation (i.e.
tax-assessment and control) as well into the scope of the VAT Regulation.

Another type of European instrument concerning administrative cooperation in tax
matters has been elaborated by the Council of Europe in Strasbourg and by the Organisa-
tion for Economic Cooperation and Development (OECD). The "Convention on Mutual Ad-
ministrative Assistance in Tax Matters" dates from 25 January 1988, and entered into force
on 1 April 1995. It has the broadest coverage in taxation. An exchange of information and
a recovery of tax claims are possible for almost all taxes and some security contributions. Transfer taxes are not explicitly included, but the scope allows the optional application to "other taxes". However, states can reduce its impact through reservations and options. A reference to this instrument has been included in art. 15§2 of the draft Treaty for a CTT (cfr. footnote 1).

In the framework of a coercive action program towards tax havens and offshore financial centres, resulting from the "Harmful Tax Competition" reports (2003), the OECD and the EU within the framework of its Saving Directive Initiative put high pressure on those countries to accept a model agreement on the exchange of information on request. The efforts have been successful in relation to European Tax Havens in the framework of the EU Saving Directive where more than 250 agreements have been concluded by June 2005. This model also does not explicitly cover transfer taxes and would thus not be of use for a CTT without modification. But it mentions the possibility to include indirect taxes (Multilateral Model art. 2). It also contains a far-reaching clause to curb bank secrecy and professional secrecy of trustees, foundations, etc. (art. 5 (4)).

Although not directly relevant for the application of the CTT, another instrument that may serve as an inspiration is the Convention of 18 December 1997 on the Cooperation in Matters of Customs Duties. This Convention regulates a far-reaching administrative and judicial cooperation, as EU Regulation 515/97 of 13 March 1997 also does.

## Conclusion

The EU Administrative Cooperation in tax matters offers substantial instruments for cross-border tax assessments, controls and recovery within the EU. It would be a valuable help in the control, implementation and enforcement of the CTT. The scope of the instruments will however have to be enlarged to cover the CTT. This requires unanimity at the level of the EU, possibly limited to countries that engage into an enhanced cooperation.

### 4.2.2 Monitoring through the European System of Central Banks

The Monetary Union dimension of the EU is essential for the surcharge in the CTT system. Moreover, the Monetary Union embodies the "financial public interest" in the EU and realises a substantial part of the free movement of capital. The balance of power within the Monetary Union is technically and politically a delicate area.

As already outlined in part 2.2.3., the ECB is the most important actor in the area of monetary policy in the EU. It establishes the guiding policy principles and is responsible for the currency exchange system of the euro vis-à-vis other EU currencies. The euro bank notes are the only notes that have the status of legal lender within the euro-zone and can only be issued by the ECB or with its license. The ECB governs the Eurosystem, the network of national central banks of the Eurogroup, whose basic task is the definition and implementation of a common monetary policy in the EU.

The Eurosystem contributes to the conduct of policies of the authorities relating to the prudential supervision of the financial sector and the stability of the financial system (art. 105.5 TEC). The Council can unanimously confer specific tasks concerning policies of prudential supervisions of the financial sector to the ECB (art. 105, 6 TEC). Under the guidance of the ECB, the Eurosystem conducts foreign exchange operations, manages the foreign reserves and promotes the smooth operation of payment systems. If the application of the monetary surcharge of the CTT system is comparable to the interventions within the scope of the Eurosystem, the ECB can clearly use this policy instrument as a foreign exchange operation.

As mentioned above, the ECB and the national central banks are fully independent of the political authorities in the EU. Art. 108 TEC states:
> "When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute of the European System of Central Banks, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks."

The primary objective of the ECB is price stability or freedom of inflation. Its independence is a function thereof. The secondary objectives of the ECB, if not prejudicial for the price stability, align with the objectives of the EU. But the financial resources of the ECB do not form part of the EU budget (art. 28, 30 and 32 of the Statute; compare financial assistance ACP-EEC Rome Convention). An example of its strong independence is the recent court decision in favour of the ECB, challenging the right of the EU to impose the control mechanisms of the European Anti-Fraud Office (Office Européen de Lutte Anti-Fraude, OLAF) on the bank.

The ECB can establish legal acts that form secondary community law with normative effects. It is not only the regulator at community level, but also at ESCB level. It can confer rights and impose obligations on economic agents and even address decisions with binding effect to them, even individually, in particular in the field of monetary policy and payment systems. Moreover, other community organs are under the duty to adopt "complementary" legislation in several different instances, for example with regard to the limits and conditions of sanctions to be imposed on businesses by the ECB.

For the surcharge system of the CTT, one of the instances where ECB and Council should share their legislative powers is of particular importance. That is to "define the scope" of other operational methods of monetary control not yet foreseen in the statute of the ECB, if a 2/3 majority of its Governing Council sees fit to use such other methods and "if they impose obligations on third parties" (art. 20 juncto 42 of the ECB Statute). In these cases the Council is not entitled to regulate the ECB, but is obliged to specify and concretise the powers given to the ECB by EU Treaty Law without discretion. The ECB is the primary regulator and the Council legislates complementarily, but only on recommendation of, or on consultation with the ECB. The Council may even renounce its right and rely on the ECB by passing its complementary competence to the bank (art. 34.1 of the ECB Statute). The EC institutions cannot legislate in the field of competences of the ECB. Art. 108 TEC does not allow circumvention of the prohibition to give instructions to the ECB through legislative measures.

Member States with derogation, i.e. Member States outside the Eurogroup, still have their own monetary policy and currencies. They can participate in the currency exchange mechanism that links their currency to the euro. Such mechanisms (i.e. EMS-2) are elaborated in an agreement of September 1st 1998 (O.J. C345/6) between the ECB and the national central banks. It provides for a standard fluctuation margin of 15 % vis-à-vis the euro. For Denmark and the UK separate protocols have been concluded. While Denmark makes use of the EMS-2 mechanism, the UK has kept more of its monetary competences. Although it goes beyond the limits of this study, it would be worthwhile to elaborate on the integration of a CTT implementation mechanism within the EMS-2.
As a result of the "differentiated" integration of the Member States that participate in the monetary union (the "ins") and the Member States with derogation (the "pre-ins", including all new Member States, and the "outs", including Denmark and the UK), the ECB can only have recourse to the twelve central banks of the Eurogroup for the implementation of the monetary policy decisions taken by its Governing Council. As explained above, this net-
work of central banks is called Eurosystem. It is the operational part of the ESCB, the
"euro part". Participating central banks function as ECB agents.

The "outs" are national central banks that hold the monetary sovereignty of their states. The "out" position of Denmark and the UK was justified by historical circumstances and was not to be repeated by the new Member States, which all belong to the category of the "pre-ins". The latter group of countries are participating in the monetary union with derogation (cf. Treaty of Accession, Conditions art. 4). These "pre-ins" are not part of the Eurozone yet, but the power of the ECB over their national central banks is somewhat stronger than over the central banks of the "outs". However, both groups of countries participate in the General Council of the ESCB and consider their exchange rate policy as a "matter of common (EU) interest". They also pursue their monetary policy with the primary objective of price stability, as the ECB does. Article 2 of the statute applies to "pre-ins" and "outs" as well. As part of the ESCB they observe the principle of "System Integrity". They have to cooperate with the ECB and the other central banks to achieve an efficient conduct of monetary policy throughout the EU. A number of agreements have been concluded between the ECB and the non-participating central banks, e.g. the ERM-2 Agreement (September 1st 1998, O.J. C 345/6). Non-participating central banks also have to adhere to the Target system, the real time gross settlement system, allowing an EU-wide settlement of payments among central banks.

Art. 23-5 of the Statute of the ECB allows both the ECB and the national central banks to establish relations with central banks, financial institutions and international organisations. This includes the conduct of foreign exchange operations and all types of banking transactions. With respect to concluding external agreements under Public International Law with international institutions, it is relevant to note that neither the ESCB nor the Eurosystem has legal personality. The ECB acts at the international level when the tasks of ESCB are involved. However, Member States may still conclude international agreements without prejudice to the EU competence concerning the monetary union, to whom the monetary sovereignty was transferred. There is thus room for Member States for independent external action, e.g. to support foreign CTTs, provided that the monetary competence of the ECB at the European level is respected.

The national central banks may act under international law, if their national law permits. However, the national central banks, integrated into the ESCB, are subordinated to the Governing Council of the ECB. The statute of the ESCB confers legal personality to the ECB; the TEC confers specific tasks to the ECB, which requires legal contacts with other subjects of law, and art. 23 of the Statute gives the ECB specific external competences, such as to establish relations with central banks and financial institutions, to conduct banking transactions with other countries and with international organisations, and to act at the international level when the tasks of the ESCB are involved (art. 6, 1 and 2 Statute). The ECB can thus act independently at the international level. In this position the ECB could conclude the mentioned agreement on an exchange rate mechanism with the central banks outside the Eurozone (ERM-2 Agreement 1998, O.J. C 345/6).

Art. 111.3 TEC stipulates that the EU Council can act with respect to agreements on the euro with third states and monetary and exchange rate systems with states or international institutions. Although the external competence in the field of monetary policy is held by the ECB, the Council decides on positions to be taken on issues of particular relevance to the EMU (art. 111.4 TEC). Art. 111.3 TEC provides that the Council is competent for external agreements concerning monetary policies or exchange rate systems, when such agreements are needed and neither the Member States nor the ECB are competent. This may be the case if the external agreement has to be binding for the community institutions, the ECB, and the Member States, e.g. an agreement on an exchange rate system for the
euro in relation to non-EU currencies. An international agreement to conduct multilateral surveillance may also enter into that category. If the EU Council enters into a formal agreement on an exchange rate system, the ECB has to implement the obligations stemming from such an agreement (i.e. decide about the modalities, not about the substance). More room to manoeuvre for the ECB could be available under agreements concerning monetary or foreign exchange regime matters concluded by the EU Council.

The ECB is competent to conduct foreign exchange operations. This includes the concluding of private law agreements with financial institutions and public international law agreements with third countries, their central banks and international organisations. When there are no binding agreements with non-EU countries or currency zones, the ECB can act autonomously and the Council can issue non-binding "general orientations". The ECB is also responsible for the exchange rate system of the euro with regard to non-euro Member States currencies, the EU Council only being competent for agreements with third countries. Being accountable for the EU monetary policy, including the non-participants that are full EU members, the ECB contributes to the abrogation of derogations or exemptions inside the Union.

The ECB cannot impose its policy on the central banks of the non-participating Member States unilaterally. It must therefore conclude agreements with those central banks. This was the case with the ERM-2 agreement (1998, O.J. C 345/6). The Council, however, established a procedure for decisions on central rates and the standard fluctuations band (i.e. involving the ECB, national central banks, the ministers of the Member States, the EU Commission and the Economic and Financial Committee).

The ECB is competent to enter into international agreements on payment systems (art. 110 TEC and art. 22 of the Statute). It can make Regulations to that effect. The ECB and the national central banks can provide payment facilities, and the ECB can rely on the facilities of the national central banks. In 1998, the ECB and all central banks in the EU concluded an agreement on real-time gross settlement systems, the Target Agreement, which operates under the control and supervision of the ECB, while technical implementation lies with the national central banks.

The ECB can also contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system (art. 105, 5° TEC clarified by art. 25 of the Statute of the ESCB). Prudential supervision is not an exclusive EU competence. The ECB has only an advisory capacity and may exceptionally also participate in international agreements, like in the case of the Basle Committee on Banking Supervision. However, the Council can confer specific tasks in the field of prudential supervision upon the ECB (unanimously under art. 105, 6° TEC). At the level of the Member States, the function of supervision is often held by the national central banks or, like in France and Finland, by a dependent body.

## Conclusion

As the politically independent ECB plays the central role in the EU monetary policy and controls the use of the euro, it is essential to recognise its potential role and regulatory and supervisory impact for an EU-CTT with a monetary driven surcharge system. The implementation of the CTT in the EU requires the full cooperation of the ECB. Considering that the monetary policy has become an exclusive EU competency for the Eurogroup and a "Matter of Common Interest" for other Member States, where it is subject to a common surveillance system of the Economic and Financial Committee (art. 114 TEC) and to the intervention of the EU in crisis situations (art. 119 TEC), the ESCB, governed by the ECB, has been well established and could play a vital role in the CTT system.
In view of the delicate balance of power in the TEC and the Statute of the ESCB, the ECB and the EU Council should cooperate to include the CTT surcharge into the scope of the operational methods of monetary control. This would require an approval of the governing council of the ECB with a 2/3 majority. Especially taking the necessary protective measures with regard to the CTT for non-euro Member States and third countries would require the cooperation of the EU Council. With respect to third countries, one may conclude that the ECB could settle appropriate agreements with foreign authorities, if this fits together with the EU objectives and the primary goal of price stability, but would need the involvement of the EU Council where its competence is exceeded. In the context of the CTT it may be appropriate that the ECB be entrusted by the EU Council with the task to install the CTT registry as a condition for the license to operate in the financial sector, i.e. to execute and settle currency exchange transactions.

### 4.2.3 From anti-money laundering to EU protection of the financial system

The EU Directives on money laundering from 1991, 2001¹⁷⁴ and 2005 (a regulation replacing the first and second Directive, hereafter "ML Directive") aim at setting a high standard in protecting the financial sector and other vulnerable activities from the harmful effects of the proceeds of crime. The ML Directive recalls that the General Agreement on Trade in Services (GATS) allows "measures to protect public moral" and "for prudential reasons, including for ensuring the stability and integrity of the financial system". The Directives also recall that "there has been a trend towards a much wider definition of money laundering based on a broader range of predicate or underlying offences, as reflected for example in the 2003 revision of the 40 Recommendations of the Financial Action Task Force".

The ML Directives have effectively given the force of European law to those of the 40 Recommendations of the Financial Action Task Force (FATF), which are de facto world standards for anti-money laundering that deal with the financial sector and independent professionals involved in the sector. Amongst others, the Directives cover the obligations on the identification of customers, record keeping, preventive reporting of suspicious transactions to competent authorities, as well as rules on criminalizing of money laundering, on seizures and confiscation, and on international cooperation. A rather small threshold of 15.000 euro is set for the combined transactions.

The Directives have a broad coverage of the financial sector. This includes credit institutions, financial institutions (including currency exchange offices and money transmission remittance offices) including insurance companies, investment firms, and collective investment undertakings. The Directives also cover the branches of such institutions, whose head offices are outside the EU, as well as the independent professions active in the financial sector, such as auditors, accountants, notaries and lawyers.

The Directive prescribes that the obligation to identify also applies to persons on whose behalf the identified customer is acting, unless the customer or the intermediary is a financial institution from a member state or from a country with equivalent requirements. Apart from the financial institutions and other intermediaries and professionals in the financial sector, the Directive prescribes that the supervisory bodies of the financial institutions and those empowered to oversee the stock, foreign exchange and financial derivatives markets shall inform the ML authorities if they discover facts that could constitute evid-

<footnote n="174">¹⁷⁴ Directive 2001/97/EC of 4 December 2001 (O.J. L 344 of 28 December 2001, p. 76), amending Directive 1991/308/EC of 10 June 1991 (O.J. L. 166 of 28 June 1991, p. 77), hereinafter the ML Directives (the latter to be transposed in internal law by 15 June 2003); the regulation has been approved by Council on June 7th 2005.</footnote>
ence. The prudential authorities of the financial sector are thus involved in the system to fight ML, including serious tax offences.

The illicit activity of money laundering is also broadly defined. Relevant in the context of the CTT is that “the conversion or transfer” of funds, knowing their illicit origin or this origin being concealed, or “the acquisition, possession or use” of such funds, is considered to be an illicit activity. The illicit knowledge “may be inferred from objective factual circumstances”.

In the context of a global (or regional) CTT, the wording of the Directives is important, as it stipulates that illicit activities “shall be regarded as such, even where the activities which generated the funds to be laundered were carried out in the territory of another member state or in that of a third country.” Moreover, the definition of “organised crimes”, one of the underlying offences of the ML Directives, covers all kinds of activities, wherever the activity takes place. If the non-compliance with the CTT was considered to be a “serious” underlying offence, the ML Directives would apply to European based financial institutions or the European based branches of non-EU based financial institutions that know or should know, on the basis of “objective factual circumstances”, that the currencies converted, transferred, acquired, possessed or used originate from currency transactions where the CTT was evaded. In the view of the diligence prescribed by the ML Directives for financial institutions (for example adequate procedures of internal control and communication), the negligence in gathering information from other (offshore) branches and subsidiaries of European based financial institutions, from other (offshore) affiliated subsidiaries or branches of non-EU based financial institutions dealing with their EU branches or subsidiaries, or from foreign branches or affiliates of their clients, would likely be sufficient factual circumstances from which illicit knowledge may be inferred.

The ML Directive has thus a very broad international scope that may allow it to monitor and curb tax fraud in international currency transactions.

The Directive defines as an underlying “criminal activity [...] any kind of criminal involvement in the commission of a serious crime”. Serious crimes are, amongst others, not only “the activities of criminal organisations”,<fnref n="175" /> but also “fraud, at least serious, of the EU’s financial interest”<fnref n="176" /> and offences which are punishable by a maximum sentence of more than a year or of at least 6 months.

It is recommendable to define the breach of the CTT legislation as a serious crime so as to enter the scope of the ML Directives. The notion of “serious crime” may also be relevant for the applicability of the EU Conventions on administrative and judicial cooperation in criminal matters to the CTT, a question that will be dealt with in the next part of this study (3.4.).

If like the Belgian CTT law does, the revenue from the CTT was to be transferred into EU funds for development cooperation, humanitarian aid and environment policy, or the funding of such EU policies administered by the EU Commission,<fnref n="177" /> the “financial interests” of the EU would be at stake. The financing of the European Development Fund is done by the Member States, but the Fund is managed by the EU Commission (Internal Agreement, OJ 2000, L 317/555). Therefore, it is covered by the instruments for the protection of the communities’ financial interests (cf. Explanatory Report on the Convention on the protection of the European Communities’ financial interests, approved by the Council on 26 May 1997; OJ C 191, 23 June 1997, p. 1, sub III, 1.1). The second Protocol of the

<footnote n="175">¹⁷⁵ defined in Joint Action 98/733/JHA (O.J. C. 351 of 29 December 1998, p.1)</footnote>

<footnote n="176">¹⁷⁶ as defined in art. 1(1) and art. 2 of the Convention on the protection of the European Communities’ financial interests (O.J. C. 316 of 27 November 1995, p. 48). The Convention on the protection of the European Communities Financial Interest of 1995, and the first (1996) and the second (1997) Protocol.</footnote>

<footnote n="177">¹⁷⁷ the decision-making process to allow such funding of EU policies is not studied in the context of this contribution</footnote>
Convention on the protection of the EC's financial interests (OJ C 221, 19 July 1997) aims at preventing the refusal of mutual assistance, solely because the offences are considered to be tax or customs duty offences (art. 6 of the Protocol). As a result, when the revenue goes into such EU funds, a CTT would fall into the scope of the instruments for the protection of the Communities' financial interests, including the investigative authority of the OLAF. The CTT would thereby also fall under the protection of the ML Directive.

Other related EU initiatives demonstrate the increased development of financial supervision and international cooperation being fuelled by the debates on organised crime and on financing terrorism. Many of these initiatives might become relevant for the supervision of the compliance with the CTT legislation. Examples are:

- The 1997 Action Plan to combat organised crime (OJ L 251, 15 August 1997, p. 1).

- The 1998 Joint Action Plan on ML and the seizure of instrumentalities and proceeds from crime (O.J. No 32, December 1998, p. 331/1).

- The 1998 Action Plan on security and justice (calling for judicial cooperation in criminal matters regarding ML and organised crime and Europol exchange of information on ML) (O.J. 23 January 1999; C 19/1) leading to the Protocol on ML regardless of offences of origin (O.J. 13 December 2000, C 358/1), to the Europol Convention of 1995.

- The Protocol (fight against financial crime, information on bank accounts and bank transactions) of 16 October 2001 (O.J. 21 November 2001, C 326/1) to the Convention on Mutual assistance in Criminal matters of 29 May 2000 (O.J. 12 July 2000, C 197/1).

- The cooperation between the Financial Intelligence Units (17 October 2000, O.J. 24 October 2000, L 271/4) (i.e. competent authorities to receive the suspicious transactions reports from the financial sector).

- The negotiation with the USA on the basis of art. 38 of the Treaty of the European Union, on mutual legal assistance (extending the EU 2001 Protocol on bank accounts and bank transactions to the 2000 Convention) and on extradition.

It is important to note in this context that the 1959 European Convention on assistance in legal matters (art. 2, a) and the 1990 ML Convention (art. 18, 1, d), both from the Council of Europe, Strasbourg did allow refusal of cooperation regarding fiscal offences in the requesting state. The first Protocol of 17 March 1978 to the 1959 European Convention art.1.1 however eliminates that right of refusal. Furthermore, it is particularly relevant that the EU Protocol on bank information does not allow refusal of mutual assistance on the grounds that it concerns only "fiscal" offences (art. 8 of the Protocol), nor that the requested State does not impose the same kind of tax.

The authoritative brain trust, from which many of the international instruments quoted originate, is the aforementioned "Financial Action Task Force". The FATF has been created by the G7, joined by the EU and eight other states, in 1989. A year later, another nine States joined the FATF. In the context of the implementation of the CCT, the FATF Recommendations are important.

The FATF Recommendations 35-40 also elaborate on the international judicial and administrative cooperation. The 40 recommendations and interpretative notes have been reviewed in 1996 and in 2003, including the elimination of the refusal for tax offences. Eight separate recommendations have been made as a result of the US-driven debate on financing of terrorism (October 2001). The FATF Recommendations on financing terrorism call for a compulsory licensing or registering of all entities that provide a service for the transmission of money, including through an informal money transfer system or network (Rec. 6). The recommendations also call for measures to impose on financial institutions: the obligation to include accurate information on the originators of funds transferred; for this information to remain with the transfers all the way through the payment chains; and, where such full information is lacking, to conduct enhanced scrutinizing and monitoring of fund transfers for suspicious activity (Rec. 7).
The UN and the Council of Europe also include instruments to combat money laundering, which are relevant in the context of the CTT. The Council of Europe agreed upon a Convention on money laundering on 8 November 1990 in Strasbourg. It was, technically, largely inspired by the UN-Vienna Convention of 20 December 1988. But the latter only deals with the laundering of drug money, whereas the Strasbourg Convention concerns the criminalizing of laundering funds from any illicit origin, although states have the right to be selective. Both, the Vienna Convention (art. 5 § 1 and 3) and the Strasbourg Convention (art. 4 § 1) stipulate that each state should see to it that judges or competent authorities can seize banking files, with no right of refusal on the basis of bank secrecy.

As to the criminalizing of the financial activity, the Strasbourg Convention introduces the rule that the underlying illicit origin does not need to fall within the scope of the national jurisdiction. This rule facilitates the criminalizing of transnational activities. The Strasbourg Convention also states that the knowledge of the illicit origin can be evidenced by inferring from "objective factual circumstances". This means that everybody who knows or should have known, in view of the circumstances, about the illicit origin of funds can be held accountable. However, art. 18 of the Strasbourg Convention allows the right of refusal of international cooperation where the underlying illicit origin is a tax offence. No right of refusal can be based on the law on bank secrecy, like in the Vienna Convention, but the requested state may require an approval by a judge or a juridical authority.

### Conclusion

As mentioned above, the EU has established a more far-reaching international instrument to combat money laundering: the Directive 91/308/EEG of June 1991, amended by the 2001 and the 2005 Directive (replacing the former). The Vienna Convention was again of substantial inspiration, but the EU Directives went effectively much further than drug-related crimes. They also ban the refusal of cooperation on the basis of illicit origin from the tax offences, and on the basis of bank secrecy laws. The UN and Council of Europe Conventions may however be an adequate foundation from which, in the light of the FATF recommendations, adequate international repression of EU-CTT fraud could be organised.

The three instruments, the UN-Vienna Convention (art. 5 § 3), the Strasbourg Convention, and the EU Directives opt for a criminal law repression of financial offences and organise an intensive police and international justice cooperation to that effect. On the other hand, the EU Directives elaborate a preventive or pro-active approach by implicating the financial sector in the pro-active reporting of suspicious transactions.

### 4.2.4 Judicial and administrative cooperation in criminal matters

The conventions on cooperation in criminal matters imply that judicial authorities can pursue financial investigations, gather evidence and take precautionary measures in a repressive context. It is to be distinguished from administrative cooperation in tax matters, which envisages the possibility for tax authorities to control, assess and recover taxes across the borders. The anti-money laundering cooperation has both a repressive and a pro-active dimension; the pro-active part is in many countries handled by a Financial Intelligence Unit.

The TEU proclaims operational cooperation between Member States in the prevention and detection of criminal offences (art. 29 et seq. TEU). Administrative cooperation is to be ensured (art. III-61d and 66 TEC), as well as judicial cooperation in criminal matters (art. 31 TEU) and police cooperation (art. 30 TEU). The enhanced cooperation among a limited number of Member States is possible (e.g. art. 40 et seq. TEU), and in the area of particu-
larly serious crimes with a cross-border dimension, including organised crimes, money laundering and suspicious financial transactions, is envisaged.

The TEU determines Europol's tasks (art. 30.1 TEU) as well as Eurojust's tasks (art. 31.2 TEU), focusing on the cooperation in relation to serious crimes. The TEC stipulates explicitly that the EU and Member States should counter fraud and illegal activities affecting the EU's financial interests and organise close and regular cooperation (art. 280 TEC).

An EU Treaty of 29 May 2000 organises the mutual assistance in criminal matters. It envisages serious and organised crimes. The 16 October 2001 Protocol focuses on information on bank accounts and bank transactions. The EU Action Plan to combat "organised crime" of 28 July 1997 recommended (Rec. 29) to legislate on organised crime with respect to tax fraud. Money laundering is also considered to be a serious crime (art. III – 172 EUC). The Schengen Agreements (19 June 1990) already provide for legal assistance in criminal matters, including on excises, VAT and custom duties. In the 1959 (Strasbourg) Convention on Assistance in Criminal Matters, fiscal offences may be grounds for refusal to cooperate (art. 2a), but a Protocol of 17 March 1978 has lifted this exception. However, reservations are still permissible, as well as the condition of dual criminal liability. The EU Convention on Assistance in Criminal matters (2000) supplements the 1959 Strasbourg Convention. Part of the Schengen Agreement is incorporated. Some of the restrictions, including fiscal exclusion were lifted in art. 8 of the Protocol of 16 October 2001 (O.J. C 326 of 21 November 2001).

The judicial cooperation in the EU has a rather repressive character. It pertains the gathering of evidence, seizures, rogatory letters, hearing of persons (witnesses, experts etc.) as a part of criminal procedures. Eurojust, an EU body created by the Treaty of Nice, is a support organisation and coordinator of Member States investigating and prosecuting authorities on the basis of national and Europol investigations. Moreover, a European Judicial Network was created by the EU Joint Action of 29 June 1998 (J.O. 7 July 1998 L 191). It is a network of national contact magistrates.

The police cooperation in the EU, as envisaged by the Schengen Agreement, implies more than repressive action. It also covers pro-active investigations and operational cooperation, like the exchange of information, the right of pursuit, observations, etc. It does not include coercive actions. An online accessible police database has been built up: the Schengen Information System (SIS). The customs authorities have also created their common database (Convention of 26 July 1995, J. O.C. 27 November 1995, 316/34). The police cooperation in the EU is in large parts organised by Europol (art.30 TEU), an EU body created by the Europol Convention of 26 July 1995. Europol is a support organisation and coordinator of Member States police authorities in preventing and combating serious crime.

The EU police and judicial machinery and networks to fight serious offences and illegal activities affecting the EU financial interests offer solid instruments to counteract fraud. It is to be recommended to consider CTT fraud to be a serious crime, which can be sentenced by more than one year imprisonment, and an offence against the EU's financial interests, especially if the revenue from CTT is to be managed through a European fund for development cooperation, including environmental objectives. Through this the implementation of the CTT at the EU level would be reinforced by a well established international cooperation that could fight CTT evasion.

## 4.3 Conclusion

From the institutional perspective it may be concluded that the EU has no exclusive competence in indirect taxation and that Member States are thus free to introduce a CTT.
Since the EU has exclusive competence in the area of monetary policy for the Euro Member States, a CTT with a monetary surcharge requires European intervention. Moreover, a CTT with a global or regional coverage could be better achieved at the EU level.

The functioning of the internal market, including the freedom of capital but also the harmonisation of indirect taxes, and development cooperation are areas of shared competence between the EU and its Member States.

The Member States may exercise their competence, but only to the extent the EU has not exercised its competence or has ceased to exercise it.

It may be concluded that outside the scope of the Economic and Monetary Union, the establishment and functioning of the internal market and the avoidance of distortion of competition, the EU has no right to impede on the sovereign rights of taxation of the Member States. However, by exercising these sovereign rights, the Member States have to respect the internal market principles and the more general principle of equal treatment or prohibition of unjustified discrimination. Furthermore, the external EU freedom of free movement of capital is also to be respected in establishing taxation rules.

Although the development cooperation is also considered to be an area of shared competence, the EU can take action and conduct a common policy, but that competence may not result in Member States being prevented from exercising their competence. It can reasonably be concluded that the CTT enters into these competences of Member States. Therefore, the EU could harmonise legislation in this area, but it cannot prevent Member States from acting themselves.

EU Tax provisions require unanimity, but an "enhanced cooperation" among at least 8 Member States could be considered.

The appropriate instrument to realise a coordination or harmonisation of the CTT in the EU is a Directive. This is a legislative act binding as to the result, but leaving the choice of forms and methods to national authorities. The VAT, which is the most elaborated, harmonised indirect tax in the EU, may be the appropriate model.

The secondary EU tax law harmonising indirect taxation, especially the VAT and the taxes on the raising of capital, is particularly useful for the realisation of a European CTT. In the light of the VAT experience, it is advisable, in view of a coverage of the CTT in Europe as comprehensive and concise as possible, to establish a European Directive for the harmonisation of the CTT where the tax exists (Belgium, France) and for the introduction in other Member States. This Directive would provide a common set of substantive rules concerning the definition of taxable persons, taxable events, localization, tax base, tax rate, tax liability and the prevention of fraud. The fact that the draft version of the CTT, which this contribution refers to, borrows many concepts from the Sixth EU-VAT Directive, using a uniform set of legal concepts and a common case law based on jurisprudence of over 400 ECJ cases, may facilitate the introduction of a European CTT into the EU body of law.

The principles of the internal market, including the freedom of capital and development cooperation are areas of shared competence between the EU and its Member States.

The examination of the relevant fiscal provisions in the TEC demonstrates that, at the actual stage of development of the administration of taxes in the EU, it is appropriate to conclude that the EU is not in a position to introduce an EU CTT which is administered at the EU level. It should, like in other tax matters, leave this to the Member States. The EU could however establish the necessary measures for the harmonisation, the implementation and the coordination of the legislation of Member States. Through its support, coordination and supplementation of actions of the Member States, especially with respect to administrative cooperation, the EU can organise the linkage of national tax administrations as
well as the linkage to the control and cooperation mechanisms organised at the EU level. A European Directive would be the appropriate mean for the implementation of a harmonised EU CTT, as this would allow national administrative organisation and control "in the field".

The EU Administrative Cooperation in tax matters offers substantial instruments for cross-border tax assessments, controls and recovery within the EU. It would be a valuable help in the control, implementation and enforcement of the CTT. The scope of the instruments will however have to be enlarged to cover the CTT. This requires unanimity at the level of the EU, possibly limited to countries that engage in enhanced cooperation.

As the surcharge in the CTT is undoubtedly a "monetary" instrument to counteract undesirable currency fluctuations, especially detrimental to the weaker currencies and States, the role of the ECB as the holder of the monetary sovereignty of the Eurogroup is essential. The involvement of the ECB and the ESCB is not only necessary, it is also welcome, given the competences and the instruments it has at its disposal. The ECB could conclude the necessary agreements with the central banks in the Eurogroup to organise an appropriate support for the implementation and supervision of the application of the EU-CTT. The ECB could furthermore make appropriate recommendations to central banks in the other Member States to that effect. The Member States outside the Eurogroup have a large monetary sovereignty, but they are not outside the ESCB. Moreover, the ECB could conclude appropriate agreements with the private financial settlement institutions, such as the Target Agreement. The linkage with the Prudential Supervision of the financial sector could also be entrusted to the ECB. The EU Council may indeed confer on the ECB specific tasks relating to the prudential supervision of credit institutions and the stability of the financial system. This applies also to the non-euro Member States.

As the politically independent ECB plays the central role in the EU monetary policy and controls the use of the euro, it is essential to recognise its potential role and the regulatory and supervisory impact for an EU CTT with a monetary-driven surcharge system. The implementation of the CTT in the EU requires the full cooperation of the ECB. Considered that the monetary policy has become an exclusive EU competency for the Eurogroup and a "Matter of Common Interest" for other Member States, where it is subject to a common surveillance system of the Economic and Financial Committee (art. 114 TEC) and to the intervention of the EU in crisis situations (art. 119 TEC), the ESCB, governed by the ECB, has been well established and could play a vital role in the CTT system.

In view of the delicate balance of power in the TEC and the Statute of the ESCB, the ECB and the EU Council should cooperate to include the CTT surcharge into the scope of the operational methods of monetary control. This would require an approval of the governing council of the ECB with a 2/3 majority. Especially taking the necessary protective measures with regard to the CTT for non-euro Member States and third countries would require the cooperation of the EU Council. With respect to third countries, one may conclude that the ECB could settle appropriate agreements with foreign authorities, if this fits together with the EU objectives and the primary goal of price stability, but would need the involvement of the EU Council where its competence is exceeded. In the context of the CTT it may be appropriate that the ECB be entrusted by the EU Council with the task to install the CTT registry as a condition for the license to operate in the financial sector, i.e. to execute and settle currency exchange transactions.

The EU has established a more far-reaching international instrument to combat money laundering: the Directive 91/308/EEG of June 1991, amended by the 2001 and the 2005 Regulation (replacing the former Directives). The UN-Vienna Convention was again of substantial inspiration, but the EU Directives went effectively much further than drug-re-
lated crimes. They also ban the refusal of cooperation on the basis of illicit origin from the tax offences, and on the basis of bank secrecy laws.

If the non-compliance with the CTT was considered to be a "serious" underlying of-
fence, the EU Money Laundering Directives would apply to European based financial insti-
tutions or the European based branches of non-EU based financial institutions that know
or should know, on the basis of "objective factual circumstances", that the currencies con-
verted, transferred, acquired, possessed or used originate from currency transactions
where the CTT was evaded. In the view of the diligence prescribed by the ML Directives
for financial institutions, (for example adequate procedures of internal control and commu-
nication), the negligence in gathering information from other (offshore) branches and sub-
sidiaries of European based financial institutions, from other (offshore) affiliated subsidiar-
ies or branches of non-EU based financial institutions dealing with their EU branches or
subsidiaries, or from foreign branches or affiliates of their clients, would likely be sufficient
factual circumstances from which illicit knowledge may be inferred.

The Money Laundering Directives have thus a very broad international scope that
may allow it to monitor and curb tax fraud in international currency transactions. In the con-
text of a global (or regional) CTT, the wording of the Directives is important, as it stipulates
that illicit activities "shall be regarded as such, even where the activities which generated
the funds to be laundered were carried out in the territory of another member state or in
that of a third country." Moreover, the definition of "organised crimes", one of the underly-
ing offences of the ML Directives, covers all kinds of activities, wherever the activity takes
place.

The Directive defines as an underlying “criminal activity [...] any kind of criminal in-
volvement in the commission of a serious crime”. Serious crimes are, amongst others, not
only “the activities of criminal organisations”, but also “fraud, at least serious, of the EU’s
financial interest” and offences which are punishable by a maximum sentence of more
than a year or of at least 6 months. It is recommendable to define the breach of the CTT
legislation as a serious crime so as to enter the scope of the ML Directives.

The notion of “serious crime” may also be relevant for the applicability of the EU Conventions on administrative and judicial cooperation in criminal matters to the CTT. The EU police and judicial cooperation to fight serious offences and illegal activities affecting the EU financial interests offer solid instruments to counteract fraud. It is to be recommended to consider CTT fraud to be a serious crime, which can be sentenced by more than one year imprisonment, and an offence against the EU’s financial interests, especially if the revenue from CTT is to be managed through a European fund for development co-operation, including environmental objectives. Through this, the implementation of the CTT at the EU level would be reinforced by a well established international cooperation that could fight CTT evasion.

The UN and Council of Europe Conventions may moreover be an adequate founda-
tion from which, in the light of the FATF recommendations, adequate international repres-
sion of EU CTT fraud could be organised.

The three instruments, the UN-Vienna Convention (art. 5 § 3), the Strasbourg Con-
vention, and the EU Directives opt for a criminal law repression of financial offences and
organise an intensive police and international justice cooperation to that effect. On the oth-
er hand, the EU Directives elaborate a preventive or pro-active approach by implicating the
financial sector in the pro-active reporting of suspicious transactions.
**Annex of Chapter 4 : Tobin-Spahn Tax on Financial Transactions and Article 56 EC : An Opinion, Prof. Mr. L.A. Denys, in : European Taxation, Nov. 2001, p. 430 et seq., International Bureau of Fiscal Documentation.**

**EUROPEAN UNION**
**Tobin-Spahn Tax on Financial Transactions and Article 56 EC: An Opinion**
**Prof. Mr. L.A. Denys***

**THE QUESTION AND THE COMMISSION'S ANSWER**

Mr. Jonas Sjöstedt MEP put the following Question to the European Parliament (February 2001):

Article 56 of the EC Treaty reads:

1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.

2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.

Can the Commission say whether a tax on financial transactions, the so-called Tobin Tax, is compatible with Article 56 of the EC Treaty?

The answer of the Commission reads:

> that a tax of general application as originally conceived by Prof. Tobin ("Tobin Tax"), if introduced by a Member State, is likely to be contrary to Article 56, together with Articles 12, 39, 43, 49 and the corresponding articles of the EEA Agreement;

> that such a tax, if introduced at Community level, is also unlikely to be possible under Article 57(2) of the EC Treaty, since that Article provides for restrictive measures only in a limited number of areas.

**I. COMMENTARY ON THE ANSWER OF THE EU COMMISSION**

*Does the EU Commission consider the Tobin Tax1 to simply be contrary to the EC Treaty?***

A careful reading of the EU Commission's answer does not allow a conclusion to that effect. On the contrary! In the first part of the answer the Commission gives its opinion that "the original Tobin Tax would likely be contrary to Article 56 together with Articles 12, 39, 43, 49"*** and the corresponding articles of the EEA Agreement". From this statement we learn that:

I. (a) by the addition of "likely" the Commission indicates that it has at the very least its doubts, without, however, giving the Tobin Tax the benefit of the doubt;

II. (b) the Commission refers to three of the four EU freedoms of movement and not to the free movement of goods (Article 23 et seq. EC). In this respect it is also not immediately clear whether the Commission feels that the probable incompatibility

<footnote>*Professor of European Tax Law at the Law School of the Free University of Brussels; Advocaat, Brussels (Idenys@vub.ac.be). This article is a translation of an opinion given to the Belgian parliamentary working group on "Tobin Tax" and an address given to the European Parliament Intergroup "Capital Tax, Fiscal Systems and Globalisation" at the European Parliament on 27 June 2001.</footnote>

<footnote>**"The debate on the Tobin Tax is taking place mainly among fiscal economists. A concrete proposal that is suitable for a comprehensive (tax) legal review on the basis of (European) tax law is not available. The considerations here are accordingly limited to the review on the basis of the European fundamental treaty principles concerning a levy that can be conceived of as a transfer tax on the exchange of currencies in international financial transactions."**</footnote>

<footnote>"These fundamental treaty provisions concern the free movement of capital and payments (Art. 56) together with the non-discrimination principle (Art. 12), the free movement of persons (Art. 39), to which the freedom of establishment (Art. 43) also belongs and the freedom to provide services (Art. 49).</footnote>
with the freedom of movement of persons and services is only meant in their relationship with the freedom of movement of capital and payments;

III. (c) the EU Commission expressly only refers to the "tax of a general application as originally conceived by Prof. Tobin". The EU Commission therefore does not give its opinion on a refined version (for example, the two-tier structure as proposed by Prof. Spahn and the international financial transaction "payment" tax, etc.); and

IV. (d) the Commission only gives its opinion of a tax "if introduced by a Member State". The Commission accordingly does not take a position on an introduction by several or all EU Member States (for example, of the euro zone and the others), whether or not upon a European initiative (see, however, below), and whether or not limited to the application with reference to non-EU currencies.

In the second part of its answer the Commission does, however, state that it is of the opinion that the original Tobin Tax, "if introduced at community level, is also unlikely to be possible under Article 57(2)" of the EC Treaty". This reflection of the Commission is probably influenced by a judgment** of the European Court of Justice, according to which the export of currencies could not be considered to be one of the capital transactions enumerated in Article 57(2) EC. As such, the Commission, however, fails to clarify its view. The Commission thus does not really give its opinion on a harmonized Tobin Tax to be introduced by EU Directive or Regulation in all Member States by virtue of Article 93 (harmonization of indirect taxation) possibly in conjunction with Article 59 (safeguard measures with regard to the movement of capital to and from third (non-EU) countries in exceptional circumstances that threaten to cause serious difficulties for the monetary union for a period not exceeding six months).

The Commission has its doubts, and does not feel that it is its immediate responsibility to establish clarity.

## II. ACCEPTABILITY OF A TOBIN TAX AT THE LEVEL OF EUROPEAN LAW

In the considerations below, which contain a few clarifications for the benefit of a reader not trained in European tax law, reasons are found for resuming the Tobin Tax discussion in the European forum. The acceptability of a Tobin Tax must be examined at the level of European law in view of:

- the articles on taxation; and

- the fundamental articles of the treaty that govern the Internal Market and the free movement of capital.

*Does the European Union or one or more Member States have the competence to introduce a Tobin Tax?*

There is only one explicit European treaty article on taxation that is relevant for the review of a Tobin Tax (which is an indirect tax).***

Article 93 EC Treaty provides:

> The Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament and the Economic and Social Committee,

<footnote>*Art. 57(2) EC allows the EU Council to take measures in the field of the movement of capital with third countries insofar as they concern direct investment, establishment, financial services and admittance of stocks to the capital markets.</footnote>

<footnote>**ECJ, 14 December 1995, Cases C-163, 164 and 250/94, Sanz de Lera et al.</footnote>

<footnote>***Customs, agricultural and anti-dumping levies excluded. According to case law, financial transactions (particularly foreign currency transactions) are not transactions in "goods" upon which an import duty can be levied. Moreover, import levies are unified at the EU level. The question thus arises as to the compatibility of Tobin Taxes on the payment of goods with the prohibition of disguised import and export taxes (an issue not discussed in this opinion).</footnote>
adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market within the time-limit laid down in Article 14.

This must be read together with the "principle of subsidiarity" of Article 5 EC:

In areas that do not fall within its exclusive competence, the Community shall take action, in accordance with the principle of subsidiarity, only if and insofar as the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale or effects of the proposed action, be better achieved by the Community.

The European Union itself can thus not (without adapting the treaty) introduce an EU Tobin Tax (i.e. a European tax). The European Union can prescribe by means of a *harmonization measure* that the Member States must introduce a national (in that case EU- harmonized) Tobin Tax. The European Union can also harmonize a Tobin Tax introduced autonomously by (some) Member States.

As the European Union has already harmonized some indirect taxes, the Member States must respect these rules when conceiving a new Tobin Tax. For instance, as such, the taxes on the raising of capital were partially harmonized. In the TRC Directive of 1969, Articles 10, 11 and 12 are relevant for a Tobin initiative.<fnref n="4" />

Also, VAT is to a large extent harmonized. In the Sixth VAT Directive, Article 33 may, for example, be relevant for a Tobin Tax proposal.<fnref n="5" />

Commission proposals have also been made with respect to the harmonization of indirect taxation on stock transactions that were, however, not passed by the EU legislator (the Council) despite positive recommendations by the EU parliament and ECOSOC.

If a Tobin Tax were to be (partially) contrary to a harmonization tax directive then a Member State could only introduce the tax after the EU legislator has amended the directive (which requires unanimity in the Council).

<footnote n="4">⁴Art. 10 of the TRC Directive:</footnote>

<footnote>Other than capital duty, the Member States may not levy any other taxes, in whatever form, in respect of the transactions of capital companies, associations or legal persons in respect of:</footnote>

<footnote>The transactions as intended in article 4; (in particular the contribution and raising of capital)</footnote>

<footnote>The contribution, loans or output, realised within the context of the transactions as intended in article 4 [...]</footnote>

<footnote>Art. 11 of the TRC Directive:</footnote>

<footnote>The Member States shall not levy taxes, in whatever form, in respect of: the drafting, the issue and the quotation of securities on a stock exchange, the issue or trading of securities, bonds or other similar securities, as well as certificates of these objects, irrespective of the issuing party; loans, including interest, as taken up against the issuance of bonds or any other tradable securities, irrespective of issuer, and all associated formalities, as well as the drafting, issue and the quotation of stocks on a stock exchange, the issue or trading in these securities or other tradable securities.</footnote>

<footnote>Art. 12 of the TRC Directive:</footnote>

<footnote n="1">1. In deviation to that determined in articles 10 and 11, the Member States may levy: duties of any kind on the transfer of securities transfer duties, [...], according to the transfer of immovable property on its property or assets; transfer duties on assets [...], in so far as the transfer of these assets is for consideration other than shares in the company [...] [...] taxes over the added value.</footnote>

<footnote n="2">2. The rights as intended in article, sub b), c) [...] are the same, irrespective of whether the statutory seat of the capital company, association or legal person is located in the territory of the Member State who levies the tax. These duties may be no higher than any other taxes as levied in the Member State in respect of other similar transactions.</footnote>

<footnote n="5">⁵Art. 33 of the Sixth VAT Directive: Without prejudice to other Community provisions, the provisions in this Directive shall not prevent a Member State from maintaining or introducing taxes on insurance contracts, taxes on betting and gambling, excise duties, stamp duties and, more generally, any taxes, duties or charges which cannot be characterised as turnover taxes.</footnote>
The Member States have, in general and therefore also with respect to the Tobin Tax, retained their sovereign tax competence. Each Member State can thus "in principle" introduce a Tobin Tax itself. "In principle" implies, however, under European law – and this is very far-reaching – that a Member State must respect the fundamental European treaty principles (see below) because of the primacy of European law and the loyalty principle of Article 10 EC.

The same applies with respect to secondary European law (for example, legislation already harmonized). In so far as a Tobin Tax would be incompatible with the existing directives (for example, the VAT), a Member State could not introduce a Tobin Tax on its own; the mediation of the EU legislator is then required (i.e. unanimity of the Council).

### III. ACCEPTABILITY OF THE TOBIN TAX IN VIEW OF FUNDAMENTAL EUROPEAN TREATY ARTICLES OF A NON-TAX NATURE

*Is the Tobin Tax incompatible with the principles of the European Union and the EMU and the freedom of movement in the Internal Market, which is based upon the non-discrimination principle, the freedom of movement of capital, payments, goods, services and persons?*

1. The Tobin Tax in general supports in both its main objectives *two fundamental aims of the European Union: development policy and monetary stability*.

The main objectives of the Tobin Tax, namely financing the (sustainable) development of developing countries and promoting currency stability (combating harmful currency speculations) fit in completely with the EC Treaty aims of a policy of development cooperation and promotion and the Economic and Monetary Union (EMU) (as listed in Articles 2 and 3 EC). Development cooperation is oriented to promoting the sustainable development of developing countries, and more particularly the poorest, to the integration of the developing countries into the world economy, and to the fight against poverty there

(Article 177 EC Treaty).* Monetary objectives (EMU) have as a main goal maintaining price stability (Article 4.2) (by means of a single currency and an exchange rate policy), sound government finances and monetary conditions (Article 4(3) EC).**

Article 59 EC*** grants the Council the power to interfere in the movement of capital with third countries if the proper operation of the Economic and Monetary Union so demands it, by means of safeguard measures for no longer than six months. In the case of a sudden crisis in the balance of payments, EU Member States outside the Euro zone can also take safeguard measures in accordance with the procedure of Articles 119, 120 and 122(6) EC in consultation with the European Union. Monetary safeguard measures may also be justified on the basis of (public policy) Article 58(1)(b) EC.

From a legal-technical point of view, there is no reason why the high tariff in the Spahn two-tier structure could not be such a safeguard measure (if necessary, subject to unanimity, given that it is also a fiscal decision). From the structure of the Treaty and the cited treaty articles it can be deduced that the Economic and Monetary Union rules and the

<footnote>*The Treaty of Nice (December 2000) reinforces this by laying down that the EC take measures of economic and financial cooperation with third parties that are coherent with the development policy of the EC (Art. 181 A).</footnote>

<footnote>**See also Art. 105 and further Art. 99(4) (economic policy), Art. 111 et seq. (policy on non-Community currencies is a matter for the Council).</footnote>

<footnote>***Art. 59 EC:</footnote>

<footnote>Where, in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union, the Council, acting by a qualified majority on a proposal from the Commission and after consulting the ECB, may take safeguard measures with regard to third countries for a period not exceeding six months if such measures are strictly necessary.</footnote>
powers of the Council with respect to currencies of third countries take precedence over
the free movement of capital. Therefore, (and as the Commission probably also assumes,)
the Tobin Tax is not per se and in principle incompatible with the EC Treaty and the EMU,
which aim at a (common) development policy and monetary stability.

2. A crucial test for the Tobin Tax is the *European nondiscrimination principle*, that, inter alia, contains an almost complete prohibition of discrimination on grounds of nationality or similar criteria (Article 12 EC and in the four fundamental freedom of movement articles).
One of the first questions* is whether the Tobin Tax on foreign currency transactions violates the general non-dis-crimination principle, in other words whether it implies an illegal discrimination, or is rather based on a justified differentiation.

Under the non-discrimination principle equal situations must be treated equally, and different situations require different treatment. Therefore, in the first instance, the comparability ((1) comparability test) of the situations is analysed. Subsequently it is verified whether the (distinction in) treatment is reasonable ((3) justification test), and proportional to the objective ((4) proportionality test), in as far as the objective is legitimate ((2) legitimacy test). If the Tobin Tax passes these tests, there is no illegal discrimination, but a justifiable differentiation.

In practice, the question amounts to whether taxing transactions in foreign currencies without taxing transactions in the domestic currency is an illegal discrimination.

(1) Comparability test

Are financial transactions in foreign currencies comparable with those in domestic currencies?**

It is clear that there is an essential economic difference between the two kinds of
transactions, and that precisely that difference is taken into consideration for the Tobin
Tax. The two types of financial transactions (domestic vs. foreign exchange financial
transactions or payments) take place on entirely different and distinct capital markets. The
exchange of foreign currencies has its own clear underlying economic function for the
market players with appropriate economic consequences and risks, which make it possible
to determine that these transactions have completely different characteristics to those of
the domestic financial transactions (which may appear from an extensive economic
analysis, but in the context of the fiscal discussion, the value fluctuations are essential,
with the inherent risk dimension, the possibility of speculation and the corresponding need
to cover the risks that are lacking in the case of financial transactions in one currency all of
which are certainly relevant characteristics).

Unlike domestic financial transactions, there are two currencies involved in foreign exchange financial transactions, and there is always a conversion, an exchange to another currency. Notably these characteristics are envisaged in the Tobin Tax, defined as a tax on international exchange transactions in currencies that fluctuate in value and that are also object of a genuine distinctive risk-bearing trade with supply and demand, which in turn affects the value fluctuation and so the stability of the currency. That is not the case for financial transactions in one (domestic) currency. The international transaction belongs to the international capital market and dealings because it implies the conversion of two currencies, and on the occasion of this conversion the Tobin "transfer" tax is levied.

It should also be noted with respect to the difference between the euro and the other EU currencies that the option has been included in the EC Treaty for Member States to

<footnote>*This question is also relevant not only within the European Internal Market, but also in relation to third countries, because the free movement of capital also extends to third countries and a prohibited restriction is also understood to mean an arbitrary discrimination.</footnote>

<footnote>**For the sake of simplicity, it may be assumed that in the euro zone both the euro and the EU currencies with irrevocable fixed rates of exchange are domestic currencies.</footnote>
maintain the actual different situation of their currencies, which implies that taking this actual difference as the guiding principle of taxation is not in itself against the fundamental rules of European law.

(2) Legitimacy of the objectives

In the assessment of the legitimacy of the objectives of the Tobin Tax it can be stated, as it is above, that they concur with the EC Treaty objectives: promoting currency stability and financing international development cooperation.

(3) Justification of difference in treatment

In the light of these objectives it appears justified to distinguish international financial currency transactions in particular as material and relevant bases and taxable events, rather than transactions on the domestic money market. These transactions dovetail very well with the advantages and the risks of the global economy, and it is therefore appropriate to relate the contribution to sustainable development of notably poor countries, whose economies are especially vulnerable as a consequence of the “globalization” of the world economy, to the bases of international financial transactions.

There is a comparable precedent for such a difference in treatment in the EU recognition of the justified distinction between residents and non-residents for income tax, taking into consideration the ability-to-pay principle and source principle.

Moreover, Article 58(1)(a) EC concerning movement of capital (in principle only with respect to third countries) considers explicitly that a distinction made in function of the place of residence or the place where the capital is invested may be justified in tax legislation.

(4) Proportionality

The question of proportionality, i.e. whether the Tobin Tax is not disproportional (overkill), is answered by using the necessity criterion: is the tax necessary or is there a less “restrictive” alternative tax that guarantees the realization of the objective?

Given the very low tariff in the Spahn variation (and thus the minimum impact on transactions) and the large returns as a consequence of the large scale on which the tax is introduced, the Tobin Tax appears very efficient, and an alternative with a similar effect that is less burdensome for the market players is difficult to conceive. The high-tariff version (intends overkill) is part of the monetary policy, and is therefore of a different order, where the non-dis-crimination principle, given the exceptional situation of excessively harmful currency fluctuations is per hypothesis not at stake.

(5) Per se forbidden discrimination based on nationality or similar criteria

In Article 12 EC (to which the Commission also refers in its answer) nationality is regarded as an absolute, per se illegal distinguishing criterion.

Tobin Tax proposals have been put forward that can be completely neutral with respect to the nationality criterion or de facto similar criteria, such as the residence or place of establishment of the market players, the origin or destination of the goods, services or capital as well as to the nationality of the currency, as only the conversion of one currency into the other is subject to taxation. Moreover, as indicated above, a tax distinction according to the place where the capital is invested* (within or outside the European Union) is explicitly allowed under Article 58 EC (in relation to third** countries).

<footnote>*In some circumstances the purchase of a foreign currency may be considered to be a capital investment.</footnote>

<footnote>**This is relevant for a tax on the conversion of euro and other EC currencies not justified as a monetary measure.</footnote>
Based on the considerations above, it cannot be concluded that a Tobin Tax would in principle be contrary to the EC non-discrimination principle because the tax is based upon a justifiable differentiation between domestic financial transactions and foreign exchange transactions.

## IV. ACCEPTABILITY UNDER THE FUNDAMENTAL PRINCIPLES OF THE INTERNAL MARKET

One of the fundamental objectives of the EC Treaty is the Internal Market, characterized as a space without internal borders in which the free movement of goods, persons, services and capital is guaranteed (Article 14 EC).

### Does the EU free movement of capital oppose the Tobin Tax?

In the current state of Community law,\* all restrictions on financial transactions\*\* are, in principle, prohibited by virtue of Article 56 EC.

Appropriate restrictions, however, are still possible for capital movement by virtue of explicit treaty articles: Article 58(1)(a) allows, as already mentioned, tax laws distinguishing according to the place of residence or investment; Article 58(1)(b) EC allows restrictions to prevent infringements of tax and the prudential supervision of financial institutions, measures of administrative and statistical information, and restrictions for reasons of public policy (monetary measures are recognized as public policy); Article 57(2) EC allows EU

Council restrictions for capital transactions with respect to third countries in four\*\* spheres, and Article 59 EC allows exceptional monetary community measures in the area of free movement of capital (see above and note 10).

Although a tax on foreign currency transactions can be considered to be a restriction in principle on the movement of capital, since it increases the cost of international capital allocation, it is not necessarily prohibited for that reason. If a restriction is not a per se illegal nationality discrimination, a tax may, however, have a deterring effect and create (or may create potentially) an effective burden to the free movement of capital.

Assessed in terms of both intention and effects, the Tobin Tax with its low tax rate (in the Spahn proposal) is, according to its supporters, in line with the market, meaning it does not actually nor potentially deter the market players; most commentators agree that the tax will not increase the cost of capital (or of moving of capital) significantly. As such, the tax may not amount to a restriction.

The principle of the free movement of capital is furthermore not absolute:\*\*\* it serves the objective of a free Internal Market,\*\*\*\* but this objective must be balanced against the objective of tax measures.

<footnote>\*For a comprehensive study of this area of EC law, see Mohamed Sideek, *European Community law on the Free Movement of Capital* and the EMU* (Deventer: Kluwer Law International, 1999).</footnote>

<footnote>\*\*Foreign currency transactions that are payments which are inextricably linked with the movement of goods, persons or services are not assessed under capital liberalization, but rather under the relevant free movement rules (see below).</footnote>

<footnote>\*\*\*Not including investments in foreign currencies as such (see note \* on the second page of this annex).</footnote>

<footnote>\*\*\*\*The European Court of Justice (e.g. Case 203/80, Casati) recognized public policy as a permissible restriction to capital movements, reasoning that "complete freedom of movement of capital may undermine the economic policy of one of the member states or create an imbalance in its balance of payments"; see also Case 148/91, Veronica) recognizing the restriction of freedom of capital for cultural policy and Case C-275/92, Schindler) for social policy (promotion of lotteries); see also (freedom of persons) Case 41/74, Van Duyn, restriction of "socially harmful" conduct.</footnote>

<footnote>\*\*\*\*\*For that matter, it may be noted that in the relation with third countries in general "the principle of the internal market" cannot be used as an interpretation guideline to specify the freedom of capital (apart from the effect in or for the EU Internal Market).</footnote>
As fiscal competence remains with the EU Member States, it is clear that the national tax measures that serve a budgetary objective may be at odds with the EC rules that serve the Internal Market as objective and that the Member States are obliged to respect loyally (Article 5 EC). Tax measures that are diverted from their budgetary objective to obstruct free movement in the Internal Market will therefore be unacceptable.

If the objective of a tax measure, however, were not to obstruct free movement but the measure results in the restriction of free movement then there must be an assessment of whether this is justified:

- under the grounds of justification explicitly allowed under the treaty (see above), as well as

- under the "Rule of Reason" (a corrective rule with its origin in ECJ case law).

Under the Rule of Reason a restrictive levy may be acceptable if it:

(1) is justified by compelling reasons of public interest;

(2) is suitable for guaranteeing the realization of the objective;

(3) does not go further than necessary to achieve the objective;

(4) is applied without discrimination to all market players; and

(5) is not incompatible with specific EC law.

The tests in this matter are very similar to the differentiation tests mentioned above.

Under the Rule of Reason, the Tobin Tax, if restrictive, must be justified and objectively required for the safeguarding of compelling reasons in the public interest; to assess this the introduced tax should not be disproportional to the intended objective, and the aim of the tax measure and the free movement norm are balanced against each other.

As stated above, the low tariff proposal of the Tobin-Spahn Tax fits in with legitimate EU objectives that serve the public interest. Less obstructive options for the low tariff variation with similar budgetary effect do not exist and there is no question of overkill. The higher tariff variation on the other hand, which is supposed to combat harmful currency fluctuations, requires a justification within the framework of the monetary policy (which is a Community matter).

The Tobin Tax must be applied *without discrimination*, that is to say, to all market players and relevant transactions (unless objectively justifiable, non-discriminating distinguishing criteria are used) (see above). Even in its low tariff variation the question arises as to whether a Member State restricts the Internal Market by means of a Tobin Tax in a discriminatory way: this must be assessed from the non-discrimination principle point-of-view as discussed above.

Finally, the Tobin Tax must not be incompatible with specific EC law (such as the tax harmonization directives; see above with respect to the Tax on the Raising of Capital and VAT Directives and the explicit permission under Article 58(1)(a) EC).

The conclusion is therefore that under the EC free movement of capital and related payments principle, Member States may introduce a Tobin Tax with a *low tariff*, which thereby does not really discourage the movement of capital or which, under the Rule of Reason, is justified in the light of its legitimate objectives, that concur with the EC Treaty objectives, and that does not unreasonably or disproportionately restrict the movement of capital.

The Tobin Tax with a *high tariff*, however, whose main aim is not budgetary, but in fact to combat harmful currency fluctuations, serves essentially a monetary policy, which within the scope of the EMU also requires action at the European level. This high tariff tax is, therefore, not necessarily contrary to the EC Treaty if used as an instrument of monetary policy in EU policy.
Do the principles of free movement of goods, persons and services oppose the Tobin Tax? The other fundamental rules of free movement must also be respected. The EU Commission refers for that matter to a possible incompatibility with the free movement of persons (including establishment) and services. Foreign currency transactions can be related to goods, labour and services for which they can be the payment, remuneration or quid pro quo.<fnref n="1" />

A Tobin Tax on payments in foreign currencies can therefore be indirectly restrictive for the free movement of goods and services. Whether the effects of these restrictions have a discouraging effect or are justified demands, in principle, the same analysis *mutatis mutandis* as under the movement of capital, as summarized above. Current case law appears rather to be reluctant in characterizing fiscal measures to be prohibited indirect restrictions of the free movement of goods, services and persons.<fnref n="2" /> Therefore, the principles of free movement of goods, persons and services do not oppose under the Rule of Reason a Tobin Tax that in light of its objectives does not unreasonably or disproportionately restrict the movement of payments.

## SUMMARY OF THE OPINION

The author comes to the following conclusions:

* Does the EU Commission consider the Tobin Tax simply to be contrary to the EC Treaty? The Commission has its doubts, and does not feel it is its immediate responsibility to establish clarity;

* The acceptability of a Tobin Tax must be examined at the level of European law, i.e. in view of:

* the articles on taxation;

* fundamental articles of the treaty that govern the Internal Market including the free movement of capital;

* Does the European Union or one or more Member States have the authority to introduce a Tobin Tax in view of European fiscal norms? The EC Treaty articles (1) do not oppose a Tobin Tax; and (2) make it possible to prescribe the introduction of a harmonized Tobin Tax (at the national level) or to harmonize at the European level the Tobin Taxes introduced at a national level. The European secondary tax legislation must be observed by a national Tobin Tax (and, where necessary, can be adapted by unanimity). Upon the introduction of the Tobin Tax, the Member States must respect other fundamental principles of (non-tax) European law;

* Is the Tobin Tax incompatible with the principles of the European Union and the EMU, freedom of movement in the internal markets without borders, based upon the non-discrimination principle, the free movement of capital, payments, goods, services and persons? There is a concurrence of the objectives of the European Union/EMU and the Tobin Tax: the Tobin Tax, aiming at development policy and monetary stability, is therefore not in principle incompatible with the objectives of the EC Treaty and the EMU; A crucial test for the Tobin Tax is the European non-discrimination principle that, inter alia, contains an almost complete prohibition of discrimination on grounds of nationality (Article 12 EC) and also in the Internal Market's four fundamental principles of freedom of movement. It cannot be concluded that the Tobin Tax would in principle be contrary to the EU non-discrimination principle because the tax is based upon a justifiable differentiation; Under the EU free movement of capital and related payments Member States can introduce a Tobin

<footnote n="1">¹Studies estimate these exchange rate transactions at 5% of international financial transactions.</footnote>

<footnote n="2">²See note *** on page 2 of this annex.</footnote>
Tax with a low tariff which thereby does not really discourage the movement of capital, or that is, under the Rule of Reason, justified in the light of its legitimate objectives that concur with the EC treaty objectives, and that does not unreasonably or disproportionately restrict the movement of capital. The Tobin Tax with a high tariff, however, the main aim of which is not budgetary but, in fact, to combat harmful currency fluctuations, thus serves essentially a monetary policy, which within the scope of the EMU also requires action at European level within the framework of the EMU (within a partnership between EU and national governments, and also in the international sphere). This high tariff tax is therefore not necessarily contrary to the EC treaty if used as an instrument of monetary policy in the EU policy. Also, the free movement of goods, persons and services do not oppose under the Rule of Reason a Tobin Tax that, in the light of its objectives, does not obstruct payments unreasonably or disproportionately.
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