ADAPTING
CORPORATE TAX
TO AN OPEN ECONOMY
Summary
December 2016
Conseil des prélèvements obligatoires
The Council of Mandatory Contributions
2
Summary - The Council of Mandatory Contributions
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This document is designed to help readers to more
easily read and use the « Conseil des prélèvements
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»
(The
Council
of
Mandatory
Contributions)'s report. Only the report is binding
upon the Council.
CONTENTS
3
Summary - The Council of Mandatory Contributions
Introduction
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
1
The initial coherence of corporate tax is being put
to the test by an increasingly open economy . . . . . . . . . . . . . . . . . .7
2
The economic environment and changes
to the supranational legal framework call
for changes to be made to corporate tax . . . . . . . . . . . . . . . . . . . .13
3
Continuing the combating of tax avoidance,
legal security and rate convergence: a winning
short- and medium-term strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Conclusion
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Proposals
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Summary - The Council of Mandatory Contributions
4
INTRODUCTION
Corporate tax, which has existed in its current form since 1948,
was introduced in a much less open economy than currently prevails, before
the integration of the European market, and long before the eurozone
was created.
Gross corporate tax, in other words tax before reductions and tax credits,
which is paid by half of taxable companies, amounted to €51bn in 2013.
It is the largest direct tax, and the second largest mandatory levy borne
by companies, which were liable for total direct taxes of €102bn in 2013,
rising to €319bn if we include effective social security contributions (€196.2 bn)
and the residual share of VAT payable by companies (€20.3bn).
Corporate tax as a share of the mandatory levies payable by companies in 2013 (%)
Source: French national accounts, INSEE (French statistics office). CPO calculations, % rounded
to the nearest unit
In 2015, total corporate tax, net of refunds and rebates (€17.5 bn), amounted
to €33.5bn.
These refunds and rebates include the research tax credit
(CIR, €5.3bn in 2015) and the tax credit for competitiveness and employment
(CICE, €12.5bn in 2015), which are more like mechanisms for financing public
policy by way of corporate tax.
5
Summary - The Council of Mandatory Contributions
In an economic environment where capital, companies and high-skilled individuals
are mobile, multinational firms are looking for tax optimisation and there is fierce
tax competition between countries to attract companies, deeper European
integration and the combating of tax avoidance and optimisation are resulting in
major changes to, and the reexamination of, national frameworks for the taxation
of company profits.
The French economic environment is also in flux, particularly due to the
implementation of Brexit, which could prompt the UK to cut its profit tax rate still
further.
The lowering of corporate tax rates has already begun in France, moreover, with the
2017 finance bill.
French corporate tax, which taxes companies operating in an open economy,
must undergo change, which may be a source of opportunities.
For France, this means developing a medium-term strategy aimed at building
a framework that is simultaneously more in harmony with its European partners,
is able to effectively combat the erosion of tax bases and tax avoidance, and is more
attractive for companies.
This report contributes towards this aim by analysing the advantages and needs
influencing French corporate tax in terms of the tax base, applicable rates and legal
security for taxpayers.
The issue is considered very much from the perspective of the supranational
economic environment, whose features include intense tax competition between
countries and its consequences for their economic appeal. The most recent
European legal changes are also taken into account, specifically the ATA directive
to combat artificial profit shifting and the CCCTB directive proposals for the
creation of a common consolidated corporate tax base.
As a result of these analyses, the Summary - The Council of Mandatory
Contributions is able to set out precise reform scenarios based on the need to
continue combating tax avoidance, while increasing legal security and ensuring
the convergence of tax rates.
INTRODUCTION
Summary - The Council of Mandatory Contributions
6
7
Summary - The Council of Mandatory Contributions
1
Coherence put to the test
by an increasingly open
economic environment
Traditional thinking about corporate
tax appears out of date in the light of
recent developments.
A tax whose rate is high, but whose
revenue is low, despite the significant
expanding of the tax base since 2011
Corporate tax is paid by half of taxable
companies, which account for nearly
two thirds of the added value produced
in France. In 2013, 51% of companies
were
liable
for
corporate
tax
(i.e. 1.5 million businesses) and only
27% effectively paid it, as the others
(i.e. 1.4 million) were subject to income
tax because of their legal status.
Breakdown of companies (by number)
according to their tax regime in 2013
Breakdown of the added value of
companies according to their tax regime
in 2013
Source: INSEE data
84% of the 1.5 million taxable
companies were microenterprises and
around 300 were large corporations.
Corporate tax represents only 15.4%
of the mandatory levies payable by
companies
. Revenue is so low due
mainly to the low profitability of
companies, which explains most of
the difference in the tax revenue from
one point of French corporate tax and
one
average
point
of
European
corporate tax.
Coherence put to the test by
an increasingly open economic environment
The net revenue from corporate tax,
of €33.5 bn, is also greatly affected by
its use as a "cost allocation vehicle"
for two major subsidy schemes, one of
which is based on R&D expenditure
(the research tax credit-CIR), and the
other on payroll (the tax credit for
competitiveness and employment-
CICE).
Due to the complexity of the tax
base, the nominal rate of tax alone is
not an adequate indicator of the
actual tax pressure on companies
France
applies
the
principle
of
territoriality,
making
it
relatively
atypical, as European Union member
states generally apply the principle of
the globality of profits.
Summary - The Council of Mandatory Contributions
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Relative importance of the various sources of differences in the net corporate tax
revenue
in France compared with the UK and the European Union average in 2012
Source: Eurostat and CPO. Average calculated for the 23 EU countries for which the data are available
Taxable income is not easy to locate,
however,
especially
because
of
transfer pricing
, whereby the stable
establishments of companies with
operations in a number of countries
invoice each other in connection with
cross-border flows, for example the
purchase and sale of goods or services,
royalties, interest, guarantees, or the
assignment or granting of the right to
use
intangible
property
such
as
trademarks or patents.
There
are
differences
between
accounting
income
and
taxable
income.
The tax base is defined based
on accounting income, but differs from
it due to a number of mechanisms,
the main ones being loss carry -
forwards
and
carrybacks,
the
elimination of double taxation, the
Coherence put to the test by
an increasingly open economic environment
9
Summary - The Council of Mandatory Contributions
Corporate tax would create a bias towards debt
Under the corporate tax rules, interest on loans and dividend payouts are treated
differently, the former being a tax deductible expense, and the latter, as a choice
of income appropriation, being non-deductible. Applying a different tax treatment
to the costs linked to these two financing methods creates a bias towards debt.
The reality of the bias towards debt must be assessed by considering the
effect of the tax system as a whole, and particularly income tax, as dividends
paid to shareholders are included in their taxable income. Rules on tax credits
or rebates on dividends received may reduce the tax payable by individuals
to factor in the tax already paid by companies, making corporate tax a kind
of downpayment on shareholders' income tax.
Assessing the tax bias is more complicated in an open economy, however,
as shareholders are not necessarily residents subject to French income tax.
treatment of groups of companies and
the deductibility of financial expenses.
France's 38% maximum nominal tax
rate is the highest of the European
Union's 28 member states.
The nominal tax rate stands at
33.33% in France, to which the social
security contribution on profits is
added (3.3% of the corporate tax
payable by companies with revenue of
at least €7.63 m if their corporate tax
liability exceeds €763,000). Eurostat
adds the exceptional contribution,
which brings the maximum nominal
tax rate to 38.0%.
France also sets itself apart by
granting a lower, 15% rate to SMEs
,
which is applicable to profits up to
€38,120
for
companies
whose
revenue is less than €7.63m (cost for
the public finances of €1.47bn).
The implicit tax rate can be used to
compare different countries' tax
systems, but this requires more
advanced methods
The implicit tax rate offers a way to
compare countries' tax systems that
differ both in their rates and tax base
rules
.
It sets the amount of tax collected
against its economic base so that the
actual tax burden can be assessed (in
this case the numerator is the amount
of
corporate
tax
before
loss
carryforwards or carrybacks and the
charging of tax expenditure).
Coherence put to the test by
an increasingly open economic environment
Summary - The Council of Mandatory Contributions
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Source: CPO, mainland France tax return data; calculations
exclude
agricultural,
financial,
insurance
and
real
estate activities
by size, including all profit-making companies
(method used in the French Treasury's memo of June 2011)
Implicit tax rate of companies (tax before carryforwards or carrybacks/operating income):
by size, including all companies that pay corporate tax (taxable income > 0)
In a memo dated June 2011, the French
General Directorate of the Treasury
arrived at the following implicit rates for
the
fiscal
year
2007:
27%
for
microenterprises, 32% for SMEs, 25%
for mid-cap companies and 24% for
large corporations.
The
idea
that
large
groups
are
managing, through various deduction
and profit shifting mechanisms, to
significantly reduce the tax that they
pay, while small and medium-sized
businesses
are
bearing
a
dispro -
portionate tax burden by comparison,
now seems to have little validity.
The differences between implicit tax
rates must be interpreted with caution,
however, which argues in favour of
establishing a rigorous method to
allow
consensual
comparisons
of
implicit rates.
National tax systems still fail to offer
adequate legal security, which is vital
for investors
The tax standard
, which itself depends
on the framework rules governing
retroactivity and the consideration of
existing situations when there are legal
or regulatory changes, needs to be
made more predictable in France.
Implicit tax rates have changed since:
Category
of company
2011
2012
2013
2014
Microenterprises
27.0%
27.0%
26.1%
25.7%
SMEs
33.3%
33.8%
32.7%
31.0%
Mid-cap companies
27.8%
30.0%
30.0%
30.8%
Large corporations
25.2%
23.9%
29.5%
31.0%
Category
of company
2011
2012
2013
2014
Microenterprises
22.4%
22.3%
21.3%
20.6%
SMEs
30.4%
30.6%
29.3%
27.4%
Mid-cap companies
24.2%
25.7%
25.3%
25.7%
Large corporations
19.6%
19.8%
23.0%
24.3%
Change in the number of tax measures regarding companies between 2010 and 2014
for six European Union countries
Source: "Nouvelle donne fiscale en 2015 – points clés et perspectives", EY Société d'Advocats, January 2015.
Rulings, which are issued by the tax
authorities in response to questions
from
taxpayers
about
the
interpretation of tax rules, and are
binding upon the authorities, have
recently been reinforced by a recent
decision by the French Council of
State whereby an appeal against an
unfavourable ruling may be brought
before an administrative court on the
grounds of abuse of power.
Coherence put to the test by
an increasingly open economic environment
11
Summary - The Council of Mandatory Contributions
The speed with which the tax
authorities respond to questions
from taxpayers
is therefore
an
important issue.
Finally,
with
regard
to
tax
inspections, which are a means of
ensuring fair competition,
a balance
must still be found between their
enforcement role and the building of a
relationship of trust between the tax
authorities and companies.
Summary - The Council of Mandatory Contributions
12
13
2
The economic environment and
the changes to the supranational
legal framework call for changes
to be made to corporate tax
Summary - The Council of Mandatory Contributions
Significant changes should be made
to corporate tax in the next few years,
driven by multiple factors that France
is more or less able to influence.
Corporate income tax rates have a
measurable
effect
on
economic
appeal
France's corporate tax rate puts it in
a unique position in Europe.
In the
mid-80s, the normal French tax rate
was gradually lowered from 50% to
33.3%. This rate, which was one of the
lowest in the European Union at the
time, stayed the same, while the tax
rates of the other member states
continued to fall.
Change in the normal corporate tax rate in a selection of countries from 1980 to 2015 (%)
Source: OECD. Rates resulting from the combining of the normal rates applied at national and local levels
The
available
data
on
effective
average and marginal tax rates also
show a divergence in the trend for
France and the European average.
Comparison of the change in the effective
average rates of taxation of company
profits
Comparison of the change in the effective
marginal rates of taxation of company profits
Source: Oxford University Centre for Business Taxation
2005
2010
2015
France
29.7%
29.3%
32.4%
EU15 average
26.2%
23.7%
23.0%
46 country average
24.9%
22.6%
22.1%
2005
2010
2015
France
17.8%
17.5%
19.9%
EU15 average
15.7%
14.3%
13.3%
46 country average
16.4%
15.2%
14.8%
Countries with high market potential,
like France, would be well advised, in
terms of their appeal, to set an
average
tax
rate,
rather
than
competing
on
tax
and
aligning
themselves with the lowest rates.
The average corporate tax rate of
France's partner countries in the
European Union is around 25%.
France
is
not
included
in
the
calculations of the average rate that
follow, as the aim is to assess the
effect on France of the tax decisions
of the other member states, and the
level arrived at by its large country
peers.
A rate of 25% might be a target for a
large European economy like France
,
the more so as there are no signs of the
tax competition easing up at present,
given that an announced objective of
the United Kingdom is to lower its rate,
like Hungary and Luxembourg, and,
outside Europe, the US).
The economic environment and the changes
to the supranational legal framework call
for changes to be made to corporate tax
The tax rate has an impact on where
companies choose to locate their
operations.
Countries with a potentially high
market potential for companies have
higher rates of taxation of company
profits, on average, than countries
with a low market potential. From this
perspective, France is a large country
within the context of the European
Union, which is in line with its initial
positioning as a country with a
comparatively high corporate tax rate.
Economic
integration
may
have
pushed large countries to react to
competitive
pressure,
however,
which has tended to close the gaps
between tax rates
, with a member
state
reacting
to
a
one-point
reduction in corporate tax by another
country by reducing its own rate by
0.86 points if another member state
is involved, and only 0.02 points if the
original reduction was by a third-party
country.
Where there is tax competition, the
tax rate may influence companies'
choice of location for their operations
.
Summary - The Council of Mandatory Contributions
14
Weighted (for the private sector's added value) and unweighted average corporate tax rate
within the European Union
Source: Oxford University Centre for Business Taxation
Taxes
included
EU
Average
Excluding
France
Eurozone
excluding
France
Large EU
economies,
excluding
France
All taxes on
company
profits
Unweighted
22.2%
23.9%
25.1%
Weighted
25.6%
28.4%
26.2%
Corporate tax
as strictly
defined
Unweighted
21.7%
23.1%
22.9%
Weighted
22.0%
22.9%
21.7%
Summary - The Council of Mandatory Contributions
15
The economic environment and the changes
to the supranational legal framework call
for changes to be made to corporate tax
The
factors
enhancing
France's
appeal in terms of the tax base are
declining
France has not followed the rate-
cutting
trend,
while
measures
designed to reduce the taxable base,
which have long been a distinguishing
feature of the French tax system, have
become less favourable.
The possibility of deducting financial
expenses has lost some of its appeal.
In 2013, France set a general cap on
the deductibility of loan interest,
reincluding 25% of the interest paid in
excess of €3m in the tax base. This cap
is combined with measures to combat
optimisation, such as those aimed at
under-capitalised companies. France
is the only country to have combined
these two types of measure, and one
of the only ones to have adopted a
general cap mechanism for budgetary
reasons.
Loss carryforward mechanisms no
longer give France a comparative
advantage.
Since 2011, there have been no time
limits on loss carryforwards, but the
amount has been capped at €1m, plus
50% of any losses over this amount.
This rule is one of the strictest in the
OECD and contrasts with the absence
of a cap, which was the case until
2010.
In the same year, the time limit on the
carryback option was reduced from
three years to one.
The conditions for the exemption of
capital gains from the disposal of
equity
securities
are
not
very
advantageous.
Capital gains from equity securities
are partially exempt from tax in the
majority of OECD countries, reflecting
the
taxation
of
dividends.
Apercentage for fees and expenses is
reincluded in taxable income, and was
raised in France from 5% (the rate for
dividends) to 10% in 2011, and 12% in
2013. This is one of the highest levels
in the OECD.
The benefits of the French tax
integration framework have lessened.
This framework in fact includes the
consolidation of the profits and losses
of all of a group's entities, and the
elimination
of
a
number
of
transactions carried out purely within
the group, such as the payment of
dividends
from
one
member
to
another.
This
mechanism
was
invalidated following a decision by the
European court, in the name of
freedom of establishment.
The future of the preferentialtax
treatment of income from intellectual
property also seems uncertain.
France has a special tax measure for
income derived from intellectual
property, which is taxed at the lower
rate of 15%. Work by the OECD has
led to a "nexus" approach, which, in
the form in which it should be
interpreted by the European Union,
could result in the conditions for
eligibility for the French measure
being viewed as too permissive.
The changes to the international and
European
tax
framework
for
companies
will
affect
national
systems
French corporate tax is set to change
significantly in the coming years,
especially due to European legal
harmonisation.
The European ATA directive aimed at
combating the erosion of tax bases,
adopted in July 2016, will have to be
transposed into French law
by the
end of 2018. Although the French tax
system mostly already has anti-abuse
rules in the areas covered by the
directive, it is likely that several
measures will need to be changed:
The economic environment and the changes
to the supranational legal framework call
for changes to be made to corporate tax
Summary - The Council of Mandatory Contributions
16
International sources of changes to corporate tax
Theme
Source
Possible margins for manoeuvre
Deductibility
of loan interest
Anti-tax avoidance
(ATA) directive
Mandatory European harmonisation
Possibility of introducing a stricter measure than
the capping of net financial expenses at 30%
of the EBITDA of multinational groups
Preferential treatment
of intellectual property
Anti-BEPS/Code
of conduct work
France might argue that the long-term capital gain
rules for income from disposals and from granting
the right to use patents are not harmful.
Probable changes due to the characteristics
of the French rules, which differ from those
recommended by the
nexus
approach.
Group -
tax integration rules
Developments
in ECJ case law
Gradual reexamination of intragroup eliminations
that go beyond the scope of merely offsetting
the losses and profits of integrated companies.
•The
deductibility of interest
, limited,
above total interest paid of €3m, to a
fixed ratio equal to 30% of the
company's EBITDA;
•A
general anti-abuse clause
must be
adopted by all member states that
differs from abuse under French law.
The rules set forth by this directive are
only a
minimum standard
; national or
treaty-based measures may still be
applied to maintain a higher level of
protection of the national tax bases
for corporate tax.
Summary - The Council of Mandatory Contributions
17
The economic environment and the changes
to the supranational legal framework call
for changes to be made to corporate tax
and distribution of the tax base could
"return" taxable income to them. This
would depend on the distribution key,
which should be based on three
weighted factors: consumption, payroll
and
productive
assets,
excluding
intangible assets.
According
to
estimates
by
the
European Commission, in 2010 the
French corporate tax base accounted
for 8.3% of all the European tax bases,
whereas
if
tax
bases
were
consolidated
Europe-wide,
then
distributed
between
countries
according to the CCCTB proposal's
criteria, the French taxable base
would be 10.0% of the total.
The benefits of such a harmonisation
of corporate tax across Europe lie in
the development of the exchanges
that could result from simplifying the
tax rules for companies established in
several member states, and in the
lessening of tax competition between
European partners.
France supports this initiative in
theory,
although
the
technical
means of implementation must be
examined in greater depth over the
next few years.
The case law of the European Court
of Justice (ECJ) is undermining the
French tax integration rules
The case law of the ECJ is calling into
question numerous tax measures
reserved for resident companies in the
name of freedom of establishment
(particularly through the
Papillon
,
X Holding BV
and
Stéria
decisions).
The proposed CCTB/CCCTB directives
for the European harmonisation of
the corporate tax base could affect
the unique features of the French
corporate tax rules.
The European proposal has two
aspects : firstly, the convergence of
national calculation rules towards a
common corporate tax base (CCTB)
and,
secondly,
examining
the
possibility of consolidating the base
and distributing it between countries
(CCCTB).
For large countries like France, which is
less
aggressive
in
terms
of
tax
competition, the convergence of the
tax base rules would make their
position even more unfavourable with
regard to rates, but the consolidation
Summary - The Council of Mandatory Contributions
18
Summary - The Council of Mandatory Contributions
19
3
Continuing the combating of
tax avoidance, legal security
and rate convergence : a winning
short- and medium-term strategy
France will need to address its tax
base, rate and the legal security
attached to corporate tax, in the short
to medium term, adopting a coherent
approach that does not prevent
certain opportunities from being
seized.
The consolidated European corporate
tax base will be introduced in the
medium term, but France must bear it
in mind as of today
France's support for the CCCTB
proposal should not be unconditional
.
It could suffer a negative impact from
starting with tax rule convergence and
postponing the consolidation and
distribution of the tax base to a later,
hypothetical, stage, especially if its tax
rate stays at its current level.
France could make sure, during the
negotiation of the directive, that the
period
of
harmonisation without
consolidation or distribution of the
tax base was as short as possible. If
the transition from the CCTB to the
CCCTB cannot be achieved, it could
make progress on the common tax
base
conditional
upon
the
introduction of a "rate tunnel" similar
to the one in place for VAT.
Likewise,
the
introduction
of
a
system
of
notional
interest
to
mitigate the bias in favour of debt
requires the measuring of its effects
beforehand, with regard to both the
reality of the economic benefits to
be expected and its cost for the
public finances.
By enabling the
deduction, from the taxable base, of a
"normative"
level
of
theoretical
dividends, as part of the company's
costs related to the return on capital,
this system would reduce the level of
taxation, and therefore lower the cost
of capital and boost investment.
Several French measures might need
to be adjusted, such as the limiting of
loan interest deductibility,
for which
the European directive proposals give
member states that already have
domestic legal measures with an
equivalent effect some leeway in the
deadline and also, partly, the means,
for the transposition of these rules.
This
is
also
the
case
for
the
deductibility
of
research
and
development expenses, which should
take the place of the research tax
credit
, as the overdeduction of R&D
expenses provided for by the draft
CCTB directive is less advantageous
than the CIR.
Summary - The Council of Mandatory Contributions
20
Continuing the combating of tax avoidance,
legal security and rate convergence :
a winning short- and medium-term strategy
Comparison of the tax advantage gained
through the CIR and the framework set
forth
in the CCTB proposal
More generally, there must be an
analysis of the compatibility of the
tax expenses attached to corporate
tax, which are relatively numerous in
France, with the future European
common tax base
. The reexamination
of certain tax expenses would be an
important element in ensuring that
the public finances do not lose out
from this reform.
The convergence of the corporate
tax
rate
towards
the
average
European tax rate is desirable in the
short to medium term
The lowering of the tax rate, which
was started with the 2017 finance
bill, and the gradual introduction of a
28% rate for all companies by 2020,
must continue.
To avoid suffering too much from the
effects of tax competition on its
appeal and the competitiveness of its
companies, and without embarking on
a race that would be unsustainable to
say the least, France might aim for
The justification for having different
tax rates for different sizes of
companies is debatable
, given that,
unlike the taxation of households, the
desirability of redistribution between
these economic players is not self-
evident.
Source: CPO
CIR
CCTB
CCTB Small business in the startup phase
R&D expenditure amount
Subsidy amount
Country
Lower rate for small-
and medium-sized
enterprises (%)
Normal
corporate
tax rate
(%)
Germany
No lower rate for SMEs
30.2
Belgium
24.3
34.2
South Korea
10.0
24.2
Spain
No lower rate for SMEs
25.0
United States
15.0
38.9
France
15.0
34.4
Greece
No lower rate for SMEs
29.0
Ireland
12.5
Israel
25.0
Italy
27.5
Japan
15.0
30.0
Norway
No lower rate for SMEs
25.0
Netherlands
20.0
25.0
Portugal
No lower rate for SMEs
28.0
United
Kingdom
20.0
Sweden
22.0
Source: CPO, according to the OECD Corporate tax
database
Lower rate for small businesses
in the main OECD countries
greater
convergence
of
its
rate
towards the European average for
large economies, of around 25%.
The lowering of the tax rate should
be applied to all companies
, whereas,
in 2014, 670,000 SMEs benefited from
a lower, 15% rate.
In 2015, less than a third of OECD
member countries (10 countries out
of 34) had a lower tax rate for SMEs.
Continuing the combating of tax avoidance,
legal security and rate convergence :
a winning short- and medium-term strategy
Summary - The Council of Mandatory Contributions
21
1
Gross operating surplus to value added ratio.
2
Net cash flow to equity ratio.
P
rofit ratios of companies
(excluding agriculture and financial
services)
Secondly, the return on equity
2
for
non-financial companies has been
higher for SMEs than for mid-cap
companies and large corporations
since 2007.
C
hange in return on equity by category
of company between 2003 and 2014
The difference in the implicit tax rate
for SMEs and large corporations is
largely absorbed.
The assumption that small companies
are less profitable is not borne out by
the evidence
. Firstly, the profit ratios
1
of small companies with employees
(not including microenterprises) were
comparable, in 2012 and 2013, to the
profit ratios of companies with more
than 250 employees, or even higher for
companies with between one and nine
employees.
Scope: France, profiled companies and legal units with
employees mainly in commercial sectors, excluding
agriculture and financial services, and excluding self-
employed
entrepreneurs
and
microenterprises,
as defined in tax terms
Source: INSEE, Les entreprises en France, 2015 edition
Scope: Non-financial companies as defined by the
LME (law for the modernisation of the economy)
Source: Banque de France, FIBEN database (SMEs
with revenue of more than €750,000), December
2015
(%)
Change in the implicit tax rate
(corporate tax before loss carryforwards
or carrybacks/operating income)
by category of company
Source: French General Directorate of the Treasury,
calculations carried out for the CPO
Category of company
Scope of the 2011 French
Treasury memo
(companies with operating
profits)
2007
2011
2014
Microenterprises
24.2%
25.7%
22.5%
SMEs
30.5%
30.5%
27.8%
Mid-cap companies
25.6%
24.0%
24.6%
Large corporations
22.3%
20.6%
23.5
1 to 9 employees
10 to 249 employees
1st quartile (Q1)
3rd quartile (Q3)
Median
250 employees
or more
SMEs
Large
corporations
Mid-cap
companies
Overall
Continuing the combating of tax avoidance,
legal security and rate convergence :
a winning short- and medium-term strategy
Summary - The Council of Mandatory Contributions
22
Financing margins are available to finance the convergence of tax rates
.
Financing margins may be found, particularly due to European and international
tax developments.
Different scenarios can be planned such as:
Financing scenarios for a rate cut
Source: CPO
The lowering of the corporate tax
rate from 28% to 25% may be partly
self-financed by changes to the tax
base
and
the
tax
calculation
methods
. The issue of whether the
remainder to be financed should be
provided by reducing or eliminating
certain tax expenses attached to
corporate tax, by reducing public
expenditure, or by increasing other
levies, is a political decision.
The
rise
in
economic
activity
following the lightening of the tax
burden may limit the measure's long-
term cost for the public finances.
Measures
Current
situation
Possible change
Impact in €m
of a 25% rate
Minimal alignment
Exemption of a percentage for fees
and expenses - capital gains (groups)
0%
Elimination (ECJ, uncertain risk)
146
Lower rates for patents
15%
Nexus approach (OECD)
Positive
Total
-
-
>146
European harmonisation of the tax base
Declining-balance depreciation
Current
Elimination (EU convergence)
Positive
Extraordinary depreciation
Current
Elimination (EU convergence)
75
Overdepreciation
End of 2017
Elimination (EU convergence)
326
Carrybacks
1 year
Elimination (EU convergence)
Positive
Carryforwards
Limited to 50%
above €1m
Unlimited (EU convergence)
Negative
Tax integration: scope
According
to choice
All or nothing (EU convergence)
Positive
Tax integration: thresholds
95%
50% of votes and 75% of equity
(EU convergence)
Negative
Tax integration: eliminations
Multiple
Elimination (EU convergence)
~750
Lower rate for SMEs
15%
Elimination (EU convergence)
1,467
Total
-
-
2,617
The need to continue to combat tax
avoidance and increase legal security
remains the same
Tax
base
and
rate
convergence
measures might be supplemented by
continuing with initiatives, begun on a
European and international scale, to
combat aggressive tax optimisation
,
for example by improving international
transfer pricing standards, doing more
to stop artificial profit shifting in tax
treaties, and eradicating "tunnel state"
practices within the European Union.
Legal security is very important in a
country like France, where the tax
law is frequently changed.
It is vital for companies that tax cuts
are predictable, so that economic
players know what to expect and
investment decisions can be made.
The French reform strategy might be
implemented gradually and early.
It is just as important to correctly
factor in current economic situations
and to ensure effective dialogue with
the tax authorities
. Various techniques
used in Germany and the UK, which
give economic players more security
and predictability without lessening
the sovereignty of policymakers, could
be usefully adapted to France. These
techniques include "grandfathering"
clauses, which allow the existing tax
framework to be permanently or
temporarily maintained for current
situations.
Continuing the combating of tax avoidance,
legal security and rate convergence :
a winning short- and medium-term strategy
Summary - The Council of Mandatory Contributions
23
Summary - The Council of Mandatory Contributions
24
CONCLUSION
Over the next few years, corporate tax
must successfully combine a complex
set of opportunities and needs:
•
Making
sure
that
companies
effectively contribute to the financing
of the public services from which they
benefit, particularly by combating
aggressive optimisation;
•
Enhancing the country's appeal and
competitiveness, through tax base
and rate rules that ensure that France
does
not
compare
unfavourably
internationally,
that
support
its
companies' development abroad and
that are able to accommodate the
most diverse production setups;
•
Ensuring the security and stability of
the legal environment.
The guidelines proposed by the CPO
for the adaptation of corporate tax are
intended
to
be
effective
and
pragmatic. They are based on four
sets of measures, relating to the tax
rate, the tax base, the combating of
tax optimisation and the increasing of
legal
security,
which
might
be
introduced gradually and early.
Summary - The Council of Mandatory Contributions
25
PROPOSALS
Summary - The Council of Mandatory Contributions
26
1. Establishing a rigorous and consensual methodological framework for
comparing the implicit tax rates for different companies
that also
encompasses companies in the financial sector;
2. Converging the corporate tax rate towards the average for large economies
in the European Union
(which is around 25%), by following a clear, predefined
timetable, and providing for the application of this rate to all companies,
regardless of their size, while managing the transition for businesses that
currently benefit from a lower rate of tax on all or part of their profits;
3. Contributing to the financing of this rate convergence through
adjustments to the tax base and the methods for calculating corporate tax:
• Bringing the application of the lower, 15% tax rate for income derived from
intellectual property into line with the OECD's nexus approach ;
• Aligning the French rules on the deductibility of depreciation charges with
European
standards,
by
eliminating
declining-balance
depreciation,
extraordinary depreciation, and overdepreciation measures;
• Eliminating the possibility of carrying back losses;
• Making tax integration a simple mechanism for profit consolidation,
by eliminating the numerous possibilities for eliminating intragroup
transactions, including the exemption of a percentage of the fees and expenses
relating to capital gains from the disposal of equity investments;
• Requiring that all direct subsidiaries and sub-subsidiaries that meet the tax
integration criteria are automatically included in the consolidation scope,
according to the "all or nothing" principle.
In the short term:
the convergence of the corporate tax rate
In the
short and medium term:
increasing legal security
4. Making the tax environment more predictable for companies when
changes are made to taxation,
through:
• The application of "grandfathering" clauses that allow the maintaining
of the existing tax framework for current situations;
• The limited application of changes to the tax rules to new operations;
• Their deferred introduction to give economic players time to adapt.
5. Making the spontaneous tax adjustment procedure more flexible to make
tax inspections easier to conduct
, even if penalties are applied (excluding
penalties other than those applied to taxpayers acting in good faith), so that
cases are settled and taxpayers pay more quickly, and legal disputes are avoided.
PROPOSALS
In the medium and long term:
the convergence of the corporate tax base
6. With regard to the draft CCTB and CCCTB directives, supporting the
European Commission's initiative in theory, but examining and negotiating
its content :
• Supporting the European Commission's initiative in theory;
• Ensuring the examination of the various measures proposed by the Commission,
and particularly the rules governing the deductibility of loan interest and notional
interest based on changes in equity, and the basis for the distribution of the tax
base between member states;
• Negotiating a stipulation that, if the consolidation and distribution of the common
tax base between member states is not adopted within a certain time, a corporate
tax rate tunnel, similar to the VAT rate tunnel, must be introduced.
7. Before the CCTB is implemented, analysing the alignment of the French
framework with European standards regarding the carrying forward of losses
and tax integration thresholds:
• By eliminating the limits on loss carryforwards introduced in 2011;
• And by lowering the tax integration thresholds to 50% of voting rights and
75% of equity.
Summary - The Council of Mandatory Contributions
27
PROPOSALS
Summary - The Council of Mandatory Contributions
28
Ongoing:
the continuing of measures to combat aggressive optimisation
8. Making greater use of the existing anti-avoidance tools, and especially the
most recent
(mutual administrative assistance with the recovery of tax
receivables and automatic information exchanges), which requires continued
measures to enhance the professionalism of the tax authorities' tax inspection
teams;
9. Continuing the work on defining reference standards for transfer pricing:
• On an international scale, by clarifying the OECD guidelines, particularly by
inserting real examples;
• On a national scale, by publishing tax instructions explaining the principles and
methods that the tax authorities intend to implement to apply them;
10. Doing more to combat artificial profit shifting in tax treaties
by including
the general anti-abuse clause in all of France's treaties, by spreading the
practice of inserting effective beneficiary clauses in treaties, and by clarifying
the definition of this concept and continuing to strengthen national anti-
avoidance measures;
11. Continuing action against "tunnel state" practices within the European
Union:
• By acting in favour of revising parent-subsidiary and interest and royalty
directives to insert an obligation for all member states to introduce a
withholding tax on dividends and royalties leaving the European Union, with a
floor rate;
• By advocating the negotiation of single tax treaties for the whole of the
European Union with third-party states, to prevent the optimisation behaviour
that might result from differences in the web of treaties of member states;