French 'Tax Shield' Under Attack

by Ulrika Lomas, Tax-News.com, Brussels

13 October 2010

Aiming to create a fairer system of taxation in France, more than a hundred members of the President Sarkozy's own Union for a Popular Movement (UMP) party have called for the abolition of both the highly controversial tax shield mechanism (le bouclier fiscal) and the wealth tax (l’impôt de solidarité sur la fortune – ISF) from 2011.

Under the proposal, backed by a third of all UMP party members in the National Assembly, these two measures would be removed and replaced by a 5% rise in the top rate of personal income tax to 46% (after a 1% rise to 41% due to take effect in the next fiscal year) and by an increase in the tax levied on income derived from capital, including income from dividends and from the sale of both transferable and fixed assets.

Quelling the unwelcome uprising from UMP rebels, French Budget Minister François Baroin issued a blunt refusal to consider such proposals within the context of the 2011 budget, emphasizing that the government would not make any changes to either the tax shield or wealth tax in the 2011 finance law.

Alluding to fiscal convergence between France and Germany, Baroin did, however, indicate that a debate could take place early next year within the framework of a “global reflection on taxation”. He also underlined the need to ensure that any proposed new measures have a neutral effect on the country’s public finances.

The timeframe for a forthcoming debate coincides, perhaps rather unsurprisingly, with publication of the Court of Auditor’s report into fiscal convergence, due to be presented at the beginning of 2011. The report, which aims to compare the two systems of taxation, could prove crucial to the future of both the French tax shield and wealth tax. Germany has neither mechanism.

On October 1, French President Nicolas Sarkozy underlined his commitment to ensuring that the two systems of taxation are aligned – and as quickly as possible.

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