France's effective corporate tax rate often much lower than headline figure

THE FRENCH Agency for International Investment –- France’s equivalent of the IDA – cites an effective tax rate of 8.2 per cent in advertising literature aimed at attracting foreign business to the country.

The agency’s promotional documents note various tax mechanisms reduce the effective tax rate significantly from the nominal rate, citing a PricewaterhouseCoopers report that claims the effective rate is 8.2 per cent.

With French president Nicolas Sarkozy insisting Ireland raise its 12.5 per cent rate as a condition for having the interest rate on its bailout loans reduced, Minister for Finance Michael Noonan hardened the Irish rhetoric last week when he challenged France on its own tax regime.

“I was pointing out to them,” he said after a meeting of the European People’s Party in Brussels, “that while our rate was 12.5 per cent, we had eliminated practically all allowances so our effective rate was over 11 per cent, whereas France, with a 32 per cent nominal rate, had an effective rate of 8.1, the research would show.”

His point was clear: Ireland was upfront about its comparatively low tax on company profits, but France was being hypocritical by railing against Irish “fiscal dumping” while offering generous credits and incentives.

It appears Noonan’s figures are drawn from the same report cited by France’s inward investment agency: Paying Taxes 2011, published by the World Bank and PricewaterhouseCoopers.

However, when The Irish Times put Noonan’s remarks to the French finance ministry, to which the investment agency is attached, a spokesman said they were inaccurate.

“It’s not at all automatic,” he said of France’s generous credits. “There are a lot of companies that don’t avail of these mechanisms, and they pay 33.3 per cent, so it is inaccurate to say that in France it’s lower than in Ireland.”

So how much corporate tax do companies pay in France? For large firms, the standard rate is 33.33 per cent. Those with taxable profits at the standard rate of more than €2.3 million must pay an additional “social contribution” of 1.1 per cent, bringing the effective rate to 34.43 per cent. To help small and medium-sized businesses, there is a reduced rate of 15 per cent up to €38,120 of profits, and the standard 33.33 per cent rate applies to the remainder.

But then there is a range of tax breaks and incentives, including credits for hiring older workers or for setting up in a poor region. By far the most important is the research credit of 30 per cent which, as the agency notes, is more attractive than Ireland’s 25 per cent credit and represents “one of the most generous in the world”.

“For the past five years, France has been pursuing an ambitious policy to reduce corporate tax,” the agency explains.

“Although the nominal rate of corporate tax [33.33 per cent] is higher than the European average, the corporate tax system has become just as competitive as in other European countries.”

Any study claiming to pin down the effective tax rate inevitably comes with built-in limitations, however. The World Bank/PwC report is based on a specific and simplified set of hypothetical facts: namely, a domestic small or medium enterprise that manufactures and sells ceramic flower pots. Different models are bound to produce different results.

The hypothetical company in this report is always in its second year of operation, so set-up costs don’t theoretically apply. But in Ireland a tax deduction for set-up costs is available when a company incurs them, whereas in France they’re spread over a longer period, and would be available into the second year of operation.

Overall, the French corporate tax system works strongly to the advantage of the country’s major CAC40 companies. In a report last October, the Cour des Comptes – the equivalent of the Comptroller and Auditor General’s office – revealed huge variations in tax liabilities among the biggest firms from year to year.

For example, Pernod Ricard paid 21 per cent in 2008 and 10 per cent in 2009, while Carrefour paid 33.2 per cent in 2008 and 58.3 per cent in 2009. The variations are partly explained by losses being spread over longer periods and the effect of improved tax credits introduced by the Sarkozy government in recent years. A separate report by KPMG recently put the effective French rate at 15.4 per cent.

Frédéric Laureau, an associate lawyer at Ernst Young in Paris, says the World Bank/PwC report reflects a certain reality – but he warns against drawing too many conclusions. One of the most important factors is the French concept of territoriality, whereby a company only pays tax on the basis of its French results.

“So for a company that generates a large part of its results outside France, you arrive at what this report finds – in other words, a particularly low effective rate,” Laureau says. And because the French landscape is overwhelmingly dominated by CAC40 powerhouses that operate around the world, this pushes down the effective average rate.

But if France’s effective rate is much lower than the headline rate, why is lowering the Irish rate such an issue for Sarkozy?

Part of the explanation is a genuine and long-standing ideological opposition to what is seen as an unfair distortion due to Ireland’s tax regime. But domestic French politics also play a role. France has done everything it can in recent years to make its tax system more competitive – everything short of reducing the rate, that is. That leaves it with what one specialist calls a “marketing problem” when seeking inward investment, and many in Paris would like that resolved.

But no French government could be seen to lower taxes on business while so many ordinary people are suffering the effects of the economic crisis, whereas a common European rate agreed in Brussels would provide some political cover. Ireland has become the exclusive target mainly because Dublin’s request for a lower interest rate gives Paris leverage.

Finance minister Christine Lagarde recently described corporate tax convergence as “the grail and l’Arlésienne”, a musical reference that suggests something everyone discusses but which never appears. The Irish Government’s fear, as expressed by Taoiseach Enda Kenny, is that the debate over a common base is a “back door” to a single rate.

Some agree.

"It's clear," said Le Figaro,"that in a system that shares a common currency and a common tax base, the logical next step would be harmonising the rates."