It's not just President Donald Trump who has big ambitions for tax reform only to see them crushed and need to start again. Over in Europe, France is dealing with some back and forth on tax, which is likely to have consequences on the fourth-quarter earnings of the nation's biggest companies.
In October, the French Constitutional Court declared illegal a 3% tax on dividend distributions that was introduced in 2012 and that companies had paid on all dividends distributed in cash since then. This means the government now must return around €10 billion ($18 billion) to these companies. Ironically, the government will make the companies pay for the privilege.
To avoid breaching its 3% budget deficit ceiling, the French government decided to temporarily increase the corporate tax rate to 38.33% from 33.33% for companies with more than €1.0 billion in revenues and to 43.33% for those with revenues exceeding €3.0 billion. It calculated that this will raise €5.4 billion from 320 companies.
Equity strategists at Société Générale have identified some of the main winners and losers of this mess. The tax on dividends was only paid on cash dividends, so they looked at which companies paid the biggest cash dividends in the past five years to estimate how much cash they would get back.
Of course, some of those companies also fall in the categories that have been hit with the temporary corporate tax increase, so the strategists have offset that expense against the cashback windfall. The strategists stressed that their calculations are just estimates, because French companies do not need to break down revenue by country; consequently, it is difficult for them to calculate how much extra tax they will end up paying.
The 10 French companies that will benefit the most in absolute terms from the temporary tax reform because they get the most net cash back are oil major Total (TOT) , luxury fashion firm LVMH Moët Hennessy Louis Vuitton (LVMHF) , drug manufacturer Sanofi (SNY) , power firm Engie (ENGIY) , media group Vivendi (VIVEF) , cosmetics giant L'Oréal, energy management company Schneider Electric (SBGSY) , insurer Axa (AXAHY) , gas firm Air Liquide (AIQUY) and bank BNP Paribas.
The 10 biggest losers because they must pay back more than they get are infrastructure group Vinci (VCISF) , personal insurance provider CNP Assurances (CNPAY) , telecommunications provider Iliad (ILIAF) , construction group Eiffage (EFGSF) , aerospace group Safran (SAFRY) , credit insurance provider Hermes, retailer Carrefour (CRERF) , carmaker PSA Group, airline Air France-KLM (AFLYY) and mobile telephony Orange (ORAN) .
Investors with exposure to these stocks should not be surprised if they see some volatility in their fourth-quarter earnings. Still, overall, the French economy is in good shape and the prospects for growth are good.
