Firms Remain in Dark Over French Financial Transaction Tax

Terry Flanagan

Market participants are warning that the new French financial transaction tax, which is set to be rolled out in less than two weeks’ time, is ill thought out, confusing and will potentially lead to many firms leaving the country to avoid the punitive levy.

The French plan, which was originally thought up by former president Nicolas Sarkozy in January, is now being championed by newly-elected socialist president Francois Hollande in a bid to tax the nation’s wealthier individuals. Hollande has since doubled the tax, from the 0.1% proposed by Sarkozy to 0.2%, which will affect equity securities and equity instruments issued by companies with a capitalization of more than €1bn. There will also be a levy imposed on high-frequency trading and a tax on naked sovereign credit default swaps.

There appears to be confusion in the market, though, as firms are unsure as to who exactly will be affected, what products will be caught by the levy and how the tax will be collected, despite it being due to come into force in less than two weeks’ time.

“The industry will need to adapt a lot to the French financial transaction tax,” Marc-Etienne Sébire, a solicitor at French law firm CMS Bureau Francis Lefebvre, told Markets Media.

“The problem is that the tax administration has written guidelines to how the tax is to be implemented but it is still in draft form. At this stage, some points are still being discussed and the final form of the guidelines may not be published before August 1, the day the tax is due to come into force. Further amendments are also being discussed before the French parliament. The problem for banks and brokers is everything is not final but they already have to adapt.”

It is also likely that all overseas firms trading in French shares will be forced to amend their contracts with French brokers because, at present, the rules say that the entity liable to pay the tax is the investment service provider that purchases the shares on the market. French brokers will, likely, want to shift this burden of tax on to their clients.

“The financial transaction tax in France is a bit schizophrenic,” Guillaume Dehan, director of business development at Molinero Capital Management, a quantitative hedge fund based in London, told Markets Media.

Dehan, who was born in France, added: “AMF [Autorité des marchés financiers], the French regulator, has recently come out in support of the hedge fund industry and with helping setting up new hedge funds. But this financial transaction tax will make things even harder. There are huge barriers to entry in France as it is. London, for example, is an environment that doesn’t have this risk.

“There is a lot of political risk to it; it’s still up in the air. We have been contacted by our fellow hedge fund friends in Paris asking about what it takes to open a shop in London as they are worried about this tax.”

Earlier this year, Edouard Carmignac, chairman of French firm Carmignac, one of Europe’s largest fund managers, said that the is tax is “not as fair as it may seem”.

He added: “This tax will have to be trickled down from the buyers, to the sellers, to the intermediaries and the savers. This will affect pensions and there will be economic growth consequences.”

The rollout of the tax in France is likely to be judged by many market participants as a pre-cursor to the proposed financial transaction tax that is set to be introduced in some form, possibly some time next year, across parts of Europe.

Proposals on the table at the moment regarding any financial transaction tax in Europe revolve around a breakaway group of between nine and 12 nations—including the main eurozone countries of Germany, France, Italy and Spain—asking the European Commission to draw up plans for a so-called “enhanced co-operation” on the controversial tax. If the procedure succeeds, these countries will be able to go off on their own and implement the tax without the other European Union countries on board.

The U.S. has blocked attempts to introduce a financial transaction tax at G20 level, arguing that taxing the financial sector might be counterproductive. The U.K. and Sweden who, with others, have stymied a Europe-wide levy, are the main protagonists obstructing progress within the EU using similar arguments.

Hungary is also planning on introducing its own bespoke financial transaction tax, after its parliament this week voted through a measure to introduce a tax on financial transactions from January 1, 2013, including on operations by its central bank and the treasury.

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