European Commission lawyers have hit back at their counterparts representing the EU member states in the Council in an ongoing public spat over the legality of the financial transaction tax (FTT).

In a leaked opinion dated 6 September, the legal service of the EU Council, which represents the EU's 28 member countries, made clear that it deemed the FTT incompatible with EU law and that it was likely to distort competition within the bloc.

A leaked opinion from Commission lawyers has rebutted the Council opinion, and accuses their counterparts of legal misinterpretation. The opinion will be circulated amongst experts from all 28 member states meeting to discuss the FTT next week (12 December) in Brussels.

The FTT, also known as the Tobin tax, is set to be adopted by 11 EU states (Germany, France, Italy, Spain, Belgium, Austria, Portugal, Greece, Slovenia, Slovakia and Estonia).

Legal questions over enhanced cooperation

Legal proposals to launch the tax were tabled by the European Commission two years ago under the so-called “enhanced cooperation” procedure, which allows a small vanguard of at least nine EU countries to move forward on matters of common interest.

According to the leaked September opinion from the Council, the institution's lawyers believe that the FTT proposal "exceeds member states' jurisdiction for taxation under the norms of international customary law."

The plan is not compatible with the EU treaty "as it infringes upon the taxing competences of non-participating member states,” they argued, adding that the proposal was "discriminatory and likely to lead to distortion of competition to the detriment of non-participating member states.”

The Council legal service’s opinion is legally non-binding, but it cast doubt over the Commission’s proposed “residency principle”, which proposes to tax financial institutions depending on where their headquarters are based, rather than where financial trades are executed.

Commission lawyers hit back

In the leaked opinion from the Commission's legal services, each of the Council’s reservations is addressed.

“The proposed FTT Directive is in conformity both with customary international law and EU primary law,” and “does not lead to any inadmissible extraterritorial effects of the FTT,” claim the EU executive’s lawyers.

The opinion slams the Council’s legal interpetations.

“The Opinion of the Council (legal service) is based almost entirely on the proposition that a state has no tax competence in circumstances where another state has a "more relevant interest". There is no such principle in public international law generally or in the law relating to tax competence in particular,” according to the Commission’s legal opinion.

It adds that the FTT provision “has no impact on the freedom of non-participating Member States to exercise their own tax competence in whatever manner they see fit,” and “does not give rise to discrimination among financial institutions nor to distortion of competition between such institutions in the EU, since it merely concerns the allocation of taxing powers.”

Addressing the crux of the debate the Commission’s lawyers say that what their counterparts in the Council see as discrimination, is “in reality nothing but a disparity between different national tax regimes”.

A Council source said the institution did not comment on legal opinons. “We have our own opinion, which was not made public. Such opinions are intended to provide clarity and to contribute to the debate,” the source added.

The dispute has pitched the institutions’ lawyers – usually consummate backroom operators who rarely surface in public debates over EU issues – in a terse stand-off, accusing each other of being wrong.