EU executive document says transaction tax plan legal

By Huw Jones

LONDON (Reuters) - The proposed tax on financial transactions in 11 European Union countries complies with EU and international laws, the bloc's executive said, hoping to revive the flagging project.

The tax on stock, bond and derivatives trades has been proposed as a way of raising about 35 billion euros a year from banks starting in 2014 to claw back the taxpayer aid they received in the financial crisis.

A legal opinion for member states in September said a core element of the tax was illegal because of the way it impinged on countries like Britain that won't take part and threatening to derail the project in its current form.

This legal opinion and pending elections in Germany, one of the tax's biggest backers, had led to drift.

The European Commission's own legal advisors dismissed the member state legal opinion in a 20-page analysis seen by Reuters on Wednesday.

"Based on the above analysis the Commission's services come to the conclusion that ... the proposed FTT directive is in conformity both with customary international law and EU primary law," the document says.

Now that the Commission's legal advisors have rebutted challenges to the proposal's legality, representatives from the 11 countries are due to meet next week to see how a redrafted proposal can be pushed forward.

Britain, outside the 11 taking part, is the biggest securities trading center in the EU and is challenging the proposal in the bloc's highest court.

The document says the proposal does not lead to any "inadmissible" effects in countries outside the 11 taking part.

"What the Council Legal Services perceives as discrimination is in reality nothing but a disparity between different national tax regimes," the document adds.

"The provision has no impact on the freedom of non-participating member states to exercise their own tax competence in whatever manner they see fit."

Britain and 15 other EU countries have refused to support the financial transaction tax (FTT) which has been backed by Germany, France, Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia.

The 11 countries taking part met last week when France sought to water down the proposal and bring it in line with the more limited "stamp duty" type of tax it has introduced.

The agenda for last week's meeting, seen by Reuters, also showed that the 11 countries were considering a "step by step" approach to introducing the tax rather than a "big bang" start.

Due to worries over the possible impact on bond markets, several "carve outs" or exemptions are also being mulled for "public" bonds and some derivatives, the agenda showed.

Non-financial firms could also be shielded with other changes to stop pension funds being hit.

The formation of a new government in Germany will also lend fresh momentum to the FTT, with the new coalition there agreeing that its scope should extend to currencies as well.

(Reporting by Huw Jones, editing by Chris Vellacott and David Evans)