Controversy over France joining Britain in anti-bonus move

09:25, December 18, 2009      

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by Chen Li, Zhang Xin

France has followed Britain in launching controversial new taxes targeting bankers' bonuses.

The French move comes a week after the British government announced a 50 percent tax on bank bonuses, which has aroused controversy among policy-makers and traders.

According to the French proposal, an investment banker's 2009 bonus in excess of 27,500 euros (about 40,086 U.S. dollars) will be taxed at a rate of 50 percent on payments made in 2010.

The tax will affect 2,000-3,000 investment bankers and traders working in France, and will not be applied on hedge funds or private equity firms.

The revenue of the planned super tax is estimated to be 200 to 250 million euros (291.5-364.4 million dollars), which would be used to supplement the government's deposit guarantee fund. However, details such as taxing cash or stock options still need to be fixed.

The bill will be eventually brought before the French Parliament and expected to be adopted into the amendment of Financial Law in January 2010.

Despite protests from bankers and traders, the measure was considered no big change to the current regulation framework as the finance ministry had announced on Oct. 23 it would impose a levy on French banks to expand the national deposit guarantee fund and compensate savers when banks file for bankruptcy.

EU SUPPORT FOR IMPOSING TAX

The tax proposal, which would discourage financial institutions from giving fat bonuses to their employees, was in line with the principles at the G20 Pittsburg summit regarding banking and financial reforms.

Moreover, policy-makers believe that banks should take advantage of improving economic conditions to strengthen their capital stock rather than reward their executives.

Britain announced its temporary windfall tax on British-based banks on Dec. 9.

Chancellor Alistair Darling announced a one-off 50 percent surcharge on bankers' bonuses over 25,000 pounds (about 40,930 U.S. dollars), which would affect 20,000 bankers.

The Treasury estimated the super tax would generate a total of 550 million pounds (900.4 million dollars) for the state.

One week later, as the first G20 country which passed a banking professional rules and an administrative order concerning the term, amount and type of bankers' variable remuneration, France has now taken the next step by echoing the British initiative. French President Nicolas Sarkozy emphasized that a planned tax on bank bonuses was to force banks to strengthen their risk capital ahead of distributing bonuses.

Two days later, at the European Union Summit in Brussels, France and Britain called for other countries to follow them to curb fat-cat bankers, saying the "comprehensive system of oversight" was "applicable to all world financial centers."

The British-French call won support from EU leaders. The European Union also underlined the need to impose eventually a global tax on financial transactions to limit the risk.

German Chancellor Angela Merkel commented that the super tax plan was "charming" and expressed her support for it. However, in Germany itself, she prefered the measure of taxing financial transactions and recommended the IMF to take the lead in such issues.

U.S. OPPOSITION AGAINST TAXING TRADERS

In the United States, a spokeswoman for the Treasury said the country was not ready to impose a special tax on bank bonuses in 2009.

According to estimations, Wall Street performance bonuses may hit 26 billion dollars this year, a jump of 40 percent from 2008.

Sandwiched between pressure from Wall Street bankers and publicanger, the Obama administration has gradually backed away from endorsing a tax on bonuses in international talks.

Last Friday, the Treasury Department told four bailed-out companies that they could not pay some of their senior executives more than 500,000 dollars cash per year.

Canada's Finance Minister Jim Flaherty also clearly rejected calls for an international tax on bank bonuses, saying the government was not interested in punishing those who worked in a prized sector of the economy and would like to grow Canada as a financial center.

Flaherty said he expected Canadian banks to voluntarily practise more responsible bonus schemes.

MIXED PUBLIC REACTION

While governments were divided on the issue, so were public reactions.

Josef Ackermann, chairman of the Institute of International Finance (IIF) and chief executive of Deutsche Bank, said the financial industry should exercise restraints on bonuses and recognized that "the recent rise in profitability at many firms is attributable in part to exceptional support from governments."

However, IIF also admitted that using tax policy to restrain bonuses was a very blunt instrument that could induce unintended consequences.

Tax professionals also pointed out that, in the context of one-off policy, banks, in order to avoid high costs, could consider postponing payouts in 2009 and re-compensate the missing part in following years.

In London, investment bankers were outraged at the tax plan, arguing that, after being levied social contributions (about 13 percent) and individual income tax (40 percent), the bonus actually would be about 100 percent taxed.

They warned that businesses would definitely move to other welcoming countries such as Switzerland, Canada and the United States, and London would lose its position as a global financial center.

The French Banking Federation said it regretted the decision was unilateral and would "further damage Paris' competitiveness", adding that France's professional rules regarding bankers' remuneration passed in November were already enough to make the French banking industry a leader in regulating bonuses.

Given the background of upcoming elections in Britain and France, the majority ordinary taxpayers suspect the super tax involves electioneering.

British Prime Minister Gordon Brown is struggling in opinion polls ahead of parliamentary elections scheduled for June 2010 while Sarkozy is suspected of using the anti-bonus plan to attract voters for local elections in March, making it hard to determine the motivation behind the tax moves.

Source: Xinhua
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