LONDON Deals from the multi-trillion euro a day foreign exchange market could in principle be included in a tax on financial transactions, a legal opinion from European Union lawyers seen by Reuters said.
While effectively ruling out the inclusion of the vast forex market from a transaction tax proposal now on the table, it leaves the door open for the sector to be included later on.
Legal opinions from the bloc's lawyers in Brussels have heft and a previous one last September which questioned the legality of one aspect of the planned tax triggered a long delay and a fundamental rethink.
The tax is aimed at recouping "a fair and substantial contribution" from banks after the public money they received in the 2007-09 financial crisis.
Eleven countries from the EU's single currency area, led by Germany and France, are trying to reach an outline deal on a transaction tax by May.
Attempts to introduce a global or pan-EU tax failed due to opposition from countries like the United States, Sweden and Britain, the latter challenging the plan in the bloc's top court.
The legal opinion, dated 14 March, says that, in principle, including spot currency transactions in a tax "would not necessarily be incompatible with the free movement of capital".
Adding foreign exchange transactions to the existing proposal, however, would exceed the powers of member states to amend it, the legal opinion added.
A tax on foreign exchange would take the levy back to its theoretical roots - the levy on currency trades floated by economist James Tobin in the 1970s to smooth out market volatility, but it was never introduced.
The European tax proposal was written by the bloc's executive European Commission which left out foreign exchange from the list of transactions to be taxed, such as those in stocks, bonds and derivatives.
The EU executive believed the bloc's treaty prohibits curbs on the movement of capital such as for payments for goods and services.
The opinion said this reasoning overlooks the case of including spot currency transactions that are not linked to any underlying transaction, meaning speculative trades.
The legal opinion says because spot currency transactions are not "financial instruments" under EU securities law, they cannot be added to the current proposal which only mentions taxing legally defined financial instruments.
"In this respect, the inclusion of spot currency transactions in the scope of the proposal would... expand to a wide range of transactions that are not related to financial markets," the opinion said.
Spot currency transactions mainly concern day-to-day transactions of the real economy that are not related to the recent financial crisis, the opinion added.
The forex market is under intense regulatory scrutiny following allegations that banks have rigged benchmarks adding to public anger over banks which have been fined for manipulating the LIBOR interest rate benchmark.
(Editing by Keiron Henderson)