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Sarkozy Would Cut French Corporate Tax

by Ulrika Lomas,, Brussels

10 April 2007

French presidential hopeful Nicolas Sarkozy has reportedly pledged to cut the rate of corporate tax by 5% to ensure that France does not get left behind in Europe's race to lower company tax rates.

In an interview with French business daily La Tribune, Xavier Bertrand, a spokesman for the centre-right presidential candidate, said that Sarkozy wants to lower the rate of France's corporate tax to 25%, bringing the tax down to about the average rate in the European Union.

However, unlike France's European partners, Sarkozy is keen to link a cut in corporate tax to a series of governance criteria, and companies would have to demonstrate that their employment, wage and investment strategies were "synchronised".

"We must make the question of corporation tax cuts a key element of forthcoming discussions with social partners ... to create a win-win system," Bertrand told the paper.

The Sarkozy camp has not given an indication as to the timeframe over which such a corporate tax cut would take place, but Sarkozy himself has hinted that he would be keen to implement a number of key tax and welfare reforms within the first few months of his leadership if he is elected President in the upcoming round of elections. These would form part of a package of austerity measures that he has dubbed "tough love," and which are designed to provide for a clean break with the previous policies practiced by a succession of governments. It is unclear whether tax cuts would form a part of these early measures.

"I don't think we'll be having much of a holiday this summer," Axel Poniatowski, member of Sarkozy's election team, told Britain's Daily Telegraph. "We cannot miss the opportunity of the first months, when we have won and we can do things without obstructions."

"If Mr Sarkozy wins, things will change very quickly indeed. It will be a kind of tough love," Poniatowski was quoted as saying, adding that Sarkozy is promising a "real economic revolution" if he wins the election, the first round of which takes place in three weeks.

It is estimated that a 5% cut in corporate tax would cost the French government about EUR8 billion in revenues which could be financed by a 1% increase in the rate of value-added tax. However, Sarkozy fears that with key European competitors having recently announced corporate tax cuts, including Germany, Spain and the UK, France risks becoming increasingly unattractive as a place to do business and cannot afford to do nothing.

Under plans agreed by Germany's coalition government, the effective corporate tax burden there will fall to below 30% from almost 40% in January 2008, while the UK's Chancellor of the Exchequer Gordon Brown announced a 2% cut in corporate tax in his recent budget speech. The old EU15 also continue to face growing tax competition from the new EU entrants in Central and Eastern Europe, such as the Czech Republic, where the government has announced proposals for a 15% flat tax on personal income and a 5% cut in corporate tax to 19%.

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