Frances Financial Transaction Tax (FTT) will take effect from Aug. 1 2012 and will apply to investors purchases of French equities and naked sovereign credit default swaps.
Transactions executed prior to this date but settle in August will not be subject to the new tax. The tax was initially set at 100 bps. However, the French Parliament recently rubber stamped raising that to 200 bps. It is expected the French Senate will imminently approve the increase upon which the tax of 200 bps will be applied on a retroactive basis after Aug. 1.
Various indications about how the tax should be applied by custodian banks have been published but it remains unclear how French corporations ADR programs, or swap contracts should be reported. The industry is also awaiting clarity on what would happen if a trade fails to settle on time or whether buy-side firms can claim rebates if they purchase shares through one broker and sell the same shares with another.
The tax is based on a net daily buying position at the end of each day of each investor, rather than individual gross trades. For example, if a broker bought 100,000 shares and sold 80,000 shares in the same security and for the same investor, then the net taxable position for taxable reporting would be 20,000. Given the basis for the tax, day traders (such as high frequency trading firms) are expected to largely avoid it.
Unlike the UK, which has stamp duty levied based on a transaction-by-transaction basis recorded by the CSD, the FTT is not directly linked to the settlement activity recorded by the French CSD. Furthermore, the tax applies to a wider scope of firms than just depository members and a significant portion of French equities trades are conducted by non-Euroclear France clients. In effect, Euroclear France will receive declarations sent directly or indirectly by taxable parties (mostly brokers) detailing the list of taxable or exempted transactions. Dan Toledano, product manager at Euroclear France, explained that brokers which are not members of Euroclear France will provide the tax declarations and actual tax payments to their settlement agent, or (I)CSD which in turn will pass them on to Euroclear France. The CSD will pass on all the proceeds to the French tax authorities.
The tax will affect 108 French equities belonging to companies with a market capitalization of over 1 billion.
Investment Services Providers (ISP) or the brokers, which have executed a transaction on behalf of the custodians clients, is the accountable party and is responsible for declaring eligible transactions to the French Tax Authorities (FTA) regardless of the execution location.
Where there is a change in ownership of a security executed without an ISP or broker, the accountable party will be the custodian. Clients will have the responsibility to ensure accurate information is provided to the custodian for these transactions in order for the FTT to be paid and declared on their behalf to the French tax authorities. Clients will be liable for any penalties resulting from late or incorrect information provided.
The responsibility would lie with the broker to declare what trades they have executed. Contrary to what has so far been reported, the tax targets French and non-French broker dealers and interestingly, a substantial portion of French equities are traded by non-French institutions.
Securities lending and borrowing transactions are exempt from the FTT.
Additionally, although the tax application date is Aug 1, there is a three-month cushion in which to report. In this sense, no immediate taxable declaration is expected.
(JDC)