Most European Union finance ministers on Tuesday rejected a British-backed plan to exempt financial traders from new rules aimed at tackling practices used by multinationals to reduce their tax bills.
The move is a blow to Britain's giant financial services industry and a sign that relations with EU partners are souring following June's Brexit referendum vote to leave the bloc.
With a perceived inaction on tax avoidance helping fuel the growth of anti-establishment parties across Europe, EU finance ministers were keen to reach an agreement on Tuesday on tackling so-called hybrid mismatches. These are differences in national tax rules which allow multinationals to claim double tax deductions or dodge taxes on dividends.
But the compromise collapsed at a meeting in Brussels after the Slovak presidency of the EU introduced exemptions for financial traders, a move strongly supported by Britain.
"We have a problem," France's Finance Minister Michel Sapin said during a public session of the meeting. He said it was impossible to agree on the "exemption required by Britain for operators of the financial sector", calling it a new loophole through which to avoid the rules.
Under a compromise proposal presented to ministers on Tuesday, securities traders would have been exempted from the new rules. The Slovak proposal, seen by Reuters, said this would avoid "an unacceptable and uncontrollable tax risk on market participants with negative consequences for liquidity in this market."
Advocates of the exemption say that because net income from trading is taxed, individual payments raise little tax risk.
But Dutch Finance Minister Jeroen Dijsselbloem said the exemptions granted to financial traders in the new text went beyond international requirements and were not necessary.
British Finance Minister Philip Hammond, making a rare appearance at the monthly meeting of EU finance ministers, said the compromise was "proportionate".
The proposals are part of a wider plan to reduce corporate tax avoidance in the EU, which has become a priority after the leaked Panama Papers and other revelations about the scale of global tax dodging by multinationals and wealthy individuals.
German Finance Minister Wolfgang Schaeuble said a deal was important to counter growing populism and said he was ready to agree on the compromise proposed by the Slovaks. Ministers had previously set a year-end deadline to reach a deal.
But many other ministers called for favouring "quality over speed" and urged more talks. The discussions will continue next year under the new Maltese presidency of the EU.