French Parliament Passes Transaction Tax in Hollande Budget

Finance Minister Pierre Moscovici
Finance Minister Pierre Moscovici said the bill’s passage into law marks “the first step toward fiscal reform and a move toward justice.” Photographer: Fabrice Dimier/Bloomberg

France’s parliament passed President Francois Hollande’s revised 2012 budget, including a 0.2 percent transaction tax on share purchases that takes effect today.

Both houses of Parliament approved the budget law, which includes 7.2 billion euros ($8.9 billion) of tax increases to meet deficit-reduction goals. The budget law was voted on last night by the National Assembly and the Senate, both of which are controlled by Hollande’s Socialist Party.

The bill’s passage into law marks “the first step toward fiscal reform and a move toward justice,” Finance Minister Pierre Moscovici said in a statement.

With the vote, France becomes the first European country to impose a transaction tax on share purchases. The Hollande government is doubling the levy to 0.2 percent from the 0.1 percent tax initially advocated by former President Nicolas Sarkozy, according to a copy of the text. Many institutional investors may escape the tax using so-called contracts for difference, or CFDs, offered by prime brokers that let them bet on a stock’s gain or loss without owning the shares.

The measures come as Hollande seeks to keep his pledge to cut the budget deficit to 4.5 percent of gross domestic product this year from 5.2 percent in 2011. Hollande’s revised 2012 budget has focused largely on raising taxes rather than cutting spending. The budget for 2013 will be unveiled late next month.

The French president’s promise to cut the budget deficit has brought France record low borrowing costs even as government bond yields in Spain and Italy have soared. French 10-year bonds yielded 2.03 percent compared with 6.64 percent for Spain.

Transaction Tax

The new budget also includes higher taxes for the wealthy and increases levies for large companies.

The transaction tax, aimed at curbing market speculation, will be paid on the purchase of 109 French stocks with market values of more than 1 billion euros ($1.2 billion), including Pernod Ricard SA and Vivendi SA.

The U.K., home to Europe’s biggest financial center, has a stamp duty while opposing a transaction tax. German Chancellor Angela Merkel said on June 22 that she and the leaders of France, Italy and Spain agree on the need for such a levy. The other countries have yet to put one in place. Investors buying U.K. shares pay a stamp duty of 0.5 percent on their purchase.

“The stamp duty has deformed the market in the U.K. with people buying more derivatives instead of stocks,” said Pierre-Yves Gauthier, head of strategy at Alphavalue SAS in Paris. “The example coming from the U.K. shows us that this sort of tax makes the market more dangerous.”

ADR Delay

The new budget law will be applied to transactions resulting in “a transfer of property” of companies trading in Paris, regardless of where the buyer or seller is based, and may be expanded next year along with some European partners.

France’s new tax will be applied with a delay on American Depository Receipts, or ADRs. The certificates that allow investors to trade foreign stocks like domestic shares will only be taxed starting Jan. 1, the Budget Ministry said. ADRs are issued by U.S. banks and make trading easier by eliminating currency exchanges or the need to trade on a foreign exchange. How the tax will be imposed on ADRs wasn’t immediately clear.

France estimated that the doubling of the tax will bring in an additional 170 million euros in 2012 and 500 million euros next year. The state will start collecting the tax in November, Budget Minister Jerome Cahuzac’s press office said.

The government estimated that the doubling of the tax will cut the volume of stock purchases to 800 billion euros from 1.05 trillion euros with a 0.1 percent levy and 1.3 trillion euros with no transaction tax.

The revised 2012 budget law also includes a tax on fuel inventories corresponding to 4 percent of the average value of volumes on the books in the last quarter of the year 2011. The measure will take effect on Oct. 1 and be a one-time contribution.

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