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France To Slap New Tax On Dividends

by Ulrika Lomas,, Brussels

26 September 2007

Amid worrying signs with regard to the state of the French government's finances, the French authorities have reportedly confirmed plans for a new tax on dividends to offset a growing deficit in the social security system.

The proposed tax on share dividends is expected to raise EUR1.3 billion (US$1.84 billion) next year, the Health Ministry stated as it announced the budget for the social security system for 2008. But after a 2.3% rise in the health care element of the budget has been offset, the government will receive about EUR870 million of this revenue.

Concerns over growing deficits and the viability of France's public finances have come to the fore in recent days, after dire warnings from Prime Minister Francois Fillon that the budget is in a "critical" state and that the French government was effectively in "a state of bankruptcy".

"With 1,150 billion euros of accumulated deficit at the end of 2006...the situation is no longer sustainable," the Prime Minister told RTL radio recently. "Any businessman, any parent, any farmer can comprehend that it is impossible to keep borrowing in order to pay for day-to-day running costs," he added.

The draft government budget for 2008 is expected to show a deficit of EUR41.5 billion.

Fillon's honesty was welcomed by Jean-Claude Trichet, president of the European Central Bank (ECB), who noted that the French PM's words reflected the bank's view that the French public finances "are in very great difficulty", and that Fillon "is probably right to point it out".

However, such negative sentiments will not be music to the ears of President Nicolas Sarkozy, who is trying to push through radical reforms of the French tax, welfare and labour market systems, in an attempt to create more of an enterprise culture and boost economic competitiveness. Sarkozy has already pushed through tax cuts which are said to be worth about EUR13 billion, with more tax cuts likely to be in the pipeline. Observers have suggested that there is a growing rift between the President and Prime Minister on the pace of fiscal reform. However, some observers are of the view that Fillon is the most impatient for change.

The two key proposals contained in Sarkozy's ‘Work, Employment and Buying Power’ (WEB) legislation, approved in May 2007, are designed to encourage investment in the property market through tax relief on mortgages and an increase in Inheritance Tax thresholds. The tax package also caps wealth taxes at 50% (down from 60%) and cuts taxes on overtime.

In a bid to shore up the revenue base however, Dow Jones Newswires revealed last month that the French government is also revisiting a contentious proposal for a minimum tax, which would seek to prevent individual taxpayers from exploiting loopholes in the existing tax laws to reduce their tax liability. Similar proposals by previous governments have been blocked by the French constitutional court, but it is thought that the minimum tax, if successful, could block an estimated EUR45 billion revenue drain.

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