Parliamentary Report Challenges French Tax Shield

by Ulrika Lomas, Tax-News.com, Brussels

16 October 2009

In its recent parliamentary report on the optimization of public spending in France, the law commission has urged the government to remove the social debt repayment contribution from the country’s tax shield, or “bouclier fiscal."

Sparking yet another heated debate on the legitimacy of the highly controversial tax shield, the report has concluded that such a move would be fully justified, given the “exceptional” scale of the country’s social debt. Indeed, the chairman of the law commission, Jean-Luc Warsmann, referred to the repayment of France’s social debt as a moral obligation.

Following the submission of the report, government spokesman Luc Chatel declared the government’s intention to stand firm on the issue. The government will not, under any circumstance, revise the existing system at present, he added. Defending the tax shield, Chatel referred to it as a means of ensuring tax and social justice for all.

Created in 2007, and modified in 2008, the tax shield, emblematic of President Nicolas Sarkozy’s era, now limits direct taxes in France (income tax, wealth tax, and local taxes such as dwelling and real estate tax) to 50% of income. The tax shield includes both social contributions currently levied in France and the general social charge (la contribution sociale généralisée – CSG), and also the tax to provide resources for the repayment of France’s social debt (la contribution pour le remboursement de la dette sociale – CRDS).

Once the total amount of these taxes and contributions exceeds 50%, the taxpayer may recover the excess from the tax authorities, honoring Sarkozy’s pre-election pledge that no one will pay the tax authorities any more than half of what they earn.

The law commission’s report also proposes levying a withholding tax on income from 2011. According to the report, France is one of the few remaining countries not to operate a withholding tax system. The introduction of such a system of taxation would significantly reduce tax collection costs, and could generate in the region of between EUR200m and EUR500m a year, the report noted.

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