In the Tax Battle, It's Banks 2, France 0

The headquarters of Societe Generale in the La Defense business district of Paris Photograph by Balint Porneczi/Bloomberg

François Hollande launched his campaign for president of France last January by declaring, “My enemy is the world of finance.” Since taking office in May, his government has unleashed a barrage of taxes and regulations on bankers and other financial-market players.

So far, the enemy appears largely unscathed.

Consider the 0.2 percent tax on share purchases that France started collecting this month. The transaction tax, the first of its kind in Europe, was supposed to rein in hedge funds and other market speculators. But they quickly found a loophole. Brokers have started selling so-called contracts for difference, or CFDs, that let clients bet on a stock’s gain or loss without actually owning it.

The French Finance Ministry now admits that less-sophisticated small shareholders are likely to bear the brunt of the new tax, while professional market players employ derivatives to skirt it. ”The target was supposed to be finance with a capital F,” Jacques Porta, who helps manage $627 million at Ofi Patrimoine in Paris, told Bloomberg News. “Instead, we are punishing small investors who aren’t to blame and already are frightened off by losses in the market.”

While the government initially predicted the tax would raise €530 million this year and €1.6 billion next year, the Finance Ministry now says it’s too early to tell whether those targets will be reached. Hollande himself says the effect on financiers is likely to be “modest.”

Hollande’s plan to limit speculative trading by French banks also could fall short of expectations. The government has said that new banking regulations, to be announced in December, will require banks to place their riskiest activities in separate subsidiaries. Activities such as high-frequency trading and agricultural commodity derivatives would be “ring fenced” and subject to much higher capital requirements than banks’ more traditional businesses, Finance Minister Pierre Moscovici said on Nov. 15.

France’s largest bank, BNP Paribas, however, says it expects less than 2 percent of its corporate and investment banking sales to be affected by the change. (Revenue for its corporate and investment banking division was €2.38 billion; 2 percent of that would be less than €48 million.)

“We have few proprietary activities that can be called speculative in a strict sense,” Alain Papiasse, head of BNP’s corporate and investment bank, told reporters at a meeting in Paris on Nov. 21. “If we have to put a little piece into a specialized unit and capitalize it more, we’ll see if it makes sense, as one says, and we will adapt to the law.”

The planned French regulations are based on recommendations from a European Union-commissioned group headed by Bank of Finland Governor Erkki Liikanen. But France would be the first major economy to adopt such stringent measures.

While the restrictions won’t do much damage to major banks, the crackdown is likely to hasten the exodus of financial market talent from France, says Jeremie Lefebvre, founder of the Blacksmith Group, a financial holding company in Paris that has moved many of its investment-related activities outside the country. “Paris, whether we like it or not, isn’t a financial hub anymore,” he says. “People will go and work for Anglo-Saxon banks who don’t have similar problems.”

Many finance industry professionals are already considering emigration to escape France’s new millionaire tax—a 75 percent top marginal rate on incomes over €1 million. “These people are flexible, their businesses are flexible. They can be based in London and go back and forth,” says Michel Collet, a tax lawyer at the Paris firm of CMS Bureau Francis Lefebvre.

By contrast, big French companies are complaining that the tax hurts their ability to attract and retain highly paid executives, whose operational duties would make it difficult to base them outside France.

The millionaire tax, on top of an existing French wealth tax that is unique in the world, has “changed the profile of people who are looking to emigrate,” Collet says. As recently as five or six years ago, only a handful of France’s superrich left the country for tax reasons, he says. Now his clients seeking tax advice on relocation include young entrepreneurs, established business people, and business owners nearing retirement. “It’s not an easy decision to take,” he says. “But some of them are saying, ‘Enough is enough.’ “

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