Speculators Find Loopholes in French Transaction Tax
Hollande, who called finance his “main adversary” during his election campaign, pushed through in August a 0.2 percent transaction tax on share purchases, making France the first and only country so far in Europe to have such a levy. Many investors have been escaping 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 target was supposed to be finance with a capital F, which is sort of a black box,” said Jacques Porta, who helps manage $627 million at Ofi Patrimoine in Paris. “Instead, we are punishing small investors who aren’t to blame and already are frightened off by losses in the market.”
On Nov. 1, the state started collecting the levy on the purchase of 109 French stocks with market values of more than 1 billion euros ($1.2 billion), including Sanofi SA (SAN) and Vivendi SA. (VIV) While the government expects the tax to add 530 million euros to its budget in 2012 and 1.6 billion euros next year, the finance ministry says it’s too early to say if these estimates are realistic.
The ministry concurred with traders’ and analysts’ assessment that market players will use a range of derivatives to skirt the tax, leaving small investors bearing the burden.
Hollande himself this week conceded that the tax was only a “modest” blow to the finance sector.
His other plan to fight “speculators” includes splitting French banks’ retail and investment activities and increasing taxes on lenders’ salaries and speculative operations. A bank bill will be unveiled on Dec. 19, Hollande said last week.
The French finance ministry official charged with crafting the transaction-tax bill said it was impossible to impose a levy on CFDs, or on any derivative not related to a territory. He cannot be named according to government ground rules.
While the tax’s impact on curbing speculation is limited, it has helped Hollande gain political capital with his base and burnished his Socialist credentials.
“This tax sends a strong political message, even if it’s too early to evaluate its impact on markets,” Gerard Rameix, the head of France’s independent Market Authority Regulator, said in an interview.
Rameix says the tax’s efficiency will improve if its basis is “broadened technically and geographically,” with more than one country imposing it and more products covered.
The tax needs to be accepted internationally for it to be effective and carry a bite, said Matthieu Giuliani, a fund manager at Banque Palatine SA in Paris, which oversees $5.1 billion.
“The idea isn’t bad,” he said. “Governments have been raising taxes in general so why should the financial community be sheltered? But it must be done on an international level. If just a few countries do it, volumes there will decline more than the tax itself, making the tax counterproductive.”
The volume of shares changing hands in CAC 40 (CAC) Index companies was 44 percent lower than the 30-day average as of 2:16 p.m. Paris time today, according to data compiled by Bloomberg. The CAC 40 declined 0.5 percent to 3,383.4, on course for the lowest close in a month.
Hollande said he expects 11 other European countries to join France in imposing the tax, including The Netherlands, Germany, Belgium, Portugal, Slovenia, Austria, Greece, Italy and Spain. These nations may sign off on the tax as soon as December at the EU Council meeting and start imposing it early next year, Hollande said at a press conference Nov. 13.
“The more international it is the better it is for the economy,” Rameix said in a Bloomberg Television interview. The French law was drawn to be “quick and simple, and to avoid too much market trouble,” he said. The European version may look different, he said, calling on Hollande and other countries to include all derivatives to make the tax more effective.
“If we tax one financial product, we have to tax all of them,” said Pierre-Alexis Dumont, a fund manager at Groupama Asset Management in Paris. The tax currently “makes the market less stable,” he said. “CFDs carry credit risk.”
The new tax is being applied to transactions resulting in “a transfer of property” of companies trading in Paris, regardless of where the buyer or seller is based. The tax has begun to skew investment plans, Dumont said.
“We’re limiting our buying and selling orders to keep down our clients’ costs,” he said. “Taxation enters into our investment decisions.”
The levy, first mooted at 0.1 percent by former President Nicolas Sarkozy, was doubled by Hollande, who is seeking to keep his pledge to cut the French budget deficit to 4.5 percent of gross domestic product this year and 3 percent in 2013.
The government estimates the doubling 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 tax collection is being done by Euroclear France, a unit of Europe’s largest trade-settlement group.
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 Dec. 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.
The loopholes and the absence of a transaction tax in other countries “penalizes the French market and we don’t need that,” Groupama’s Dumont said.