French authorities will give firms until November to declare the trades that qualify for the country’s new financial transaction tax (FTT), but brokers will add a higher-than-expected levy from 1 August, rendering some trading strategies inoperable.
The tax applies to net buy trades in Paris-listed firms with a market capitalisation of over €1 billion. There are around 110 French stocks that fall into this category.
The French National Assembly adopted an amended version of the country’s Finance Bill this morning, which confirmed the tax would be doubled to 0.2%.
While the charge will be implemented from 1 August, brokers – who will hold legal responsibility for collecting the tax – will be given an extra three months before they are required to declare eligible transactions to Euroclear France, the central securities depository (CSD) collecting the tax on behalf of the French government.
But the sell-side has said any extra charges will need to be factored in from the start, meaning brokers are still likely to pass the cost down to their buy-side clients from 1 August.
“We will likely start factoring in a 0.2% charge from 1 August,” said a head of trading at a large investment bank, who wished to remain anonymous. “This could render many types of trading strategies unprofitable for our clients, which is clearly not an ideal situation. The French tax appears to have been designed very quickly and with very little guidance on the optimal solution.”
Confusion reigns
Among the sell-side’s concerns are tax exemptions that they claim are currently vague, how the tax will be handled in the event of a settlement failure and whether buy-side clients could claim rebates on the tax if they buy a stock with one broker but sell it with another.
Exemptions to the tax currently include new primary market issues, clearing and CSD activity, market making and lending and borrowing activity.
Euroclear France is confident the French government will present a decree in the coming days clarifying some of these issues.
"Feedback to the initial draft proposals has already been made and we expect things to be clearer after this release," said Dan Toledano, director, product management, Euroclear France.
Furthermore, a spokesperson for the Association for Financial Markets in Europe said the sell-side trade body had been assured by French authorities that further guidance would be issued shortly.
Unlike the UK stamp duty collection system, which is collected and distributed automatically by Euroclear’s CREST settlement service, the French tax will not be connected to the country’s post-trade infrastructure.
The French FTT will instead rely on a declaration system managed by Euroclear France.
"The operating model will use the custody chain to route the tax declarations and the payments from the taxable party to Euroclear France, then on to the French tax authority," said Toledano. "We expect the majority of taxes to be collected from outside of France because this tax targets mostly blue-chip equities, which we know are actively traded by international firms."
The French FTT was introduced as part of the country’s budget law on 8 February. In addition to equities, the scope of the tax may be extended to include American depository receipts and derivatives.
The European Parliament is also backing an EU-wide tax after adopting a resolution on its creation in April. The European FTT would add a 0.1% fee on equity trades and 0.01% fee on derivatives. However, the EU-wide proposal has run into resistance from various member states, leading Germany – one of the initial drivers of the tax – to suggest Europe consider alternatives.
"I will now back equal alternatives, such as an extended stock market tax and one which has the broadest possible backing," German finance minister Wolfgang Schaeuble is reported to have said in April.