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Why France’s FTT will be short lived

COMMENT: France stands at the crossroads as the world watches to see the outcome of its new financial transaction tax (FTT). But given progress with the European Commission’s broader model, it is unlikely to last long.

The French FTT came into effect this week. When it was first proposed by ex-President Nikolas Sarkozy, it was intended to apply a 0.1% tax on the transfer of shares and other equity instruments issued by French-listed companies which have a market capitalisation exceeding €1 billion. When François Hollande won the presidential election earlier this year, he doubled the rate to 0.2%.

The media has made much of France leading the way in introducing an FTT, but despite the name, its tax differs quite significantly from the Commission’s model and is actually much closer to the UK’s stamp duty. Eventually one version is likely to win out and, given the wider support for the Commission’s version, this is the one that will probably be adopted in the long-run.

The government expects the tax to raise €170 million ($209 million) this year and around €300 million next year.

While its effects remain to be seen, initial reactions have been mixed.

The Robin Hood Tax campaign argues that by taking the lead, “France is signaling the direction of travel following the economic crash that is still affecting us – that the financial sector has to pay a greater share in taxation from now on”.

This sentiment certainly fits a public mood calling for banks and other financial institutions to pay for their role in creating the economic turmoil and the cost of bailing them out and the FTT enjoys support from both of France’s main political parties.

Bankers, however, say that the final incidence of the FTT is likely to be on consumers and that rather that robbing from the rich, like the English folk hero Robin Hood, it will rob from pension funds.

“The government is effectively taxing pensioners,” one banker told International Tax Review. “Fund managers acting on behalf of pension funds are being charged the 0.2% purchase tax and passing it on.”

Despite UK Prime Minister David Cameron’s offer to “roll out the red carpet” for any French tax exiles, the head of tax at one multinational bank said: “it is cleverly designed and will be particularly hard to avoid, even if no other country adopts an FTT”.

If France’s model does cause the mass exodus of French financial institutions, as happened when Sweden introduced an FTT, efforts to tax financial transactions at a European level may be dead in the water. If it is successful, it may encourage other countries to adopt an FTT and will lend weight to the European Commission’s proposals.

The UK has been particularly vocal in its opposition to an FTT, however the French model is actually much more similar to the UK’s stamp duty than the Commission’s proposal, which would see a 0.1% tax on trading in shares and bonds and a 0.01% rate applied to derivatives transactions across the EU.

“The UK government is standing firm in its opposition to the Robin Hood tax, though in fact the French FTT is modeled on the UK's own 0.5% FTT on shares (the stamp duty), which brings in over £3 billion ($4.6 billion) every year,” said the Robin Hood Tax Campaign. “Curiously, the UK government rarely mentions the stamp duty - perhaps as it undermines their arguments against the FTT.”

The French model may be harder to avoid than the Commission’s proposal, so it makes sense to pursue it while France is going it alone. But now that 10 member states, including France, are pressing ahead with the Commission’s model under enhanced cooperation, France may soon have to abandon its version of the FTT.

“Member states that join the EU FTT will have to align any FTT they have at national level to that which is agreed at EU level,” said Emer Traynor, European Commission spokeswoman.

Therefore, whether or not France’s FTT brings in the expected revenue, whether it causes relocation or is passed onto customers, it is expected that the French model will be short lived and the Commission’s broader version will win out.

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