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French Report Exposes Costly Local Business Tax Reform

by Ulrika Lomas,, Brussels

13 December 2010

Presenting the Finance Commission’s report on France’s 2010 supplementary finance law, rapporteur general of the French National Assembly, Gilles Carrez, emphasized that the main challenge for the government this year lies in evaluating the true cost to the state of the reform of local business tax.

While acknowledging the fact that the reform of local business tax was both necessary and courageous, serving to strengthen the competitiveness of the country’s economy and therefore growth in the long-term, Carrez underlined the fact that protection of the public finances had not been a guiding principle, noting that the tax relief accorded to companies in France was ultimately of the same magnitude as all of the corporate tax cuts awarded in the last ten years combined. Carrez noted that, in stark contrast, the government’s 2011 finance bill marks a major shift in fiscal policy, as it aims to reduce the structural deficit in order to achieve structurally balanced public finances.

The Finance Commission’s report explained that France’s 2010 finance bill, which provided for a structural reform of company taxation, contained two key measures. Firstly, it contained plans to abolish local business tax, resulting in an estimated cost to the government of around EUR5.8bn. Secondly, it included plans to introduce a carbon tax in France, serving as a new fiscal charge levied on companies, and expected to yield around EUR1.9bn for the government. The net cost of the structural reform was therefore estimated at approximately EUR3.9bn.

Nevertheless, in December 2009, the country’s Constitutional Court rejected the government’s carbon tax proposals, and plans to impose a specific tax on non-commercial profits, declaring that both provisions were unconstitutional. Dealing a significant blow to the government’s plans, the Court’s decision resulted in a shortfall in revenues of EUR2.7bn. According to Carrez, the total cost of local business tax reform is estimated at between EUR7bn and EUR8bn, almost double the government’s original figure.

Determined to abolish local business tax in France (la taxe professionnelle), the government denounced the tax as unjust, harmful to growth and employment, and harmful to companies in France, and cited the tax as a key factor in relocations. The controversial tax was therefore abolished and replaced this year with a new economic contribution for businesses (la contribution économique territoriale – CET).

The CET tax comprises a land tax levied on companies (la cotisation foncière des enterprises – CFE) and a new levy on the value added by a company (la cotisation sur la valeur ajoutée des enterprises – CVAE).

Although it remains as yet unclear as to precisely how much the new CET will serve to generate for the government, local authorities in France, for whom local business tax constituted almost half of their total revenues, will undoubtedly feel anxious about their future revenues.

TAGS: tax | business | fiscal policy | law | carbon tax | France | tax reform

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