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February 1, 2013

TD Ameritrade: No Tax On ADRs

By Peter Chapman

In an interview with Traders Magazine, a senior TD Ameritrade official expressed dismay that the new financial transactions tax being levied by France extends to trading in the United States.

The French law, which went into effect Dec. 1, takes in American depository receipts issued on French stocks.

"It's outrageous," said Paul Jiganti, TD Ameritrade's managing director of market structure and routing strategy. "I'm concerned that, like a cancer, it will spread to the other European countries that are in the process of passing similar laws."

Paul Jiganti

About 80 French ADRs are subject to the tax, according to data provided by the Securities Industry and Financial Markets Association, which is fighting the tax. Most trade in the over-the-counter market in small quantities, but some are listed on the New York Stock Exchange. NYSE-listed ADRs such as Alcatel-Lucent, France Telecom, Sanofi and Total trade millions of shares every day.

The tax, crafted in the midst of the European debt crisis and anti-Wall Street spirit of recent years, applies to trades in French companies with market capitalizations of at least 1 billion euros. The levy is equal to 0.2 percent of the value of the shares traded and is paid by the buyer in the trade.

Although it is primarily directed at trades of French stocks on French soil, the law also extends the reach of the French treasury outside the country's borders. The law covers trading in stocks, derivatives and depository receipts, which are certificates issued by a U.S. bank representing a specified number of shares in a foreign stock and traded on a U.S. exchange.

"It has cost us a lot," Jiganti said of the French tax. "We've been eating it for now, but we'll eventually pass it through to our customers."

TD Ameritrade charges its mostly retail customers $10 per trade. On a $10,000 trade, the French transaction tax is $20.

Other European countries are in the process of imposing taxes on stock trades as well. On March 1, the Italian government will debut a trading tax of its own that will also apply to trades by U.S. citizens of Italian ADRs in U.S. markets. Meanwhile, the European Union is crafting a trading tax that may be adopted by its members. A majority of all 27 European Union finance ministers would have to approve the measure for the tax to take effect among those nations that support it.

There are efforts to combat the applicability of the French tax to U.S. securities trades. In December, SIFMA and the Investment Company Institute jointly authored a letter to the Internal Revenue Service asking it to take a position that a clause in the U.S.-France Tax Convention of 1994 exempts U.S. trades of French stocks or their proxies from a stamp tax.

Although there has been no official response from the IRS, individuals close to the agency tell Traders that the IRS is in agreement with the two trade organizations.

On another front, Congressman Tom Price, R-Ga., authored a bill in November that would bar the U.S. government from enforcing a tax by foreign governments on securities trades in the U.S. H.R. 6616 has six co-sponsors has been referred to the House Ways and Means Committee.

A paper put out by SIFMA for its members notes that the French government, by itself, is unlikely to enforce a tax on the trading of French ADRs in the U.S.


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