OECD Enters French Tax Reform Debate
The Organisation for Economic Cooperation and Development (OECD) has recommended a number of direct tax reforms to build on the French Government’s efforts to improve the nation’s competitiveness in Europe.
The report points out that the tax wedge (the cumulative burden of taxes on workers) in France is among the highest in the European Union. The OECD has recommended that France continue to implement reforms to improve incentives to work and boost the quality of the workforce with a focus on youth employment. Specifically, the OECD has recommended reviewing the tax structure to remove distortions to business employment decisions.
On the corporate tax front, the report says there is a glaring discrepancy between the high rate of corporate income tax and the modest revenues from it, due to a narrow tax base that tends to favor large businesses and certain sectors.
The report acknowledges that the Government’s Responsibility and Solidarity Pact has already set out key reforms to lower the tax burden on businesses, with funding from higher consumption taxes and environmental charges. The OECD said that this should improve the tax structure and serve to stimulate investment, innovation, and productivity.
The Responsibility and Solidarity Pact includes a progressive reduction in business taxes. It will gradually eliminate the Contribution sociale de solidarité des sociétés (C3S) from 2015 to 2017. The corporate tax rate, currently 33.3 percent, will be cut in 2017, and will be lowered to 28 percent in 2020. The 10.7 percent corporate income surtax implemented in 2011 will be eliminated from 2016.
Meanwhile, a carbon tax (contribution climat énergie) was introduced in October 2013. The value of a tonne of carbon will be set at EUR7 in 2014, EUR14.50 in 2015, and EUR22 in 2016. To boost indirect taxation, France increased the value-added tax (VAT) under the Responsibility and Solidarity Pact from 19.6 percent to 20 percent and the intermediate rate from 7 percent to 10 percent, while the reduced rate remained at 5.5 percent.
The OECD said: “The business taxation reforms now under way are positive, and the progressive reduction in the corporation tax and elimination of the C3S are welcome initiatives. France could still benefit from a further reorientation of the tax structure towards less distorting levies, [such as a] greater reduction in labor and corporate taxation with a concomitant increase in environmental taxes and succession duties, and a reconsideration of VAT reduced rates and exemptions.”
The OECD has estimated that these reforms, taken together, could boost France’s economic growth rate by 0.25 percent over the next five years, and by 0.33 over the next ten. Some of this higher growth would come through an increase in employment, it said, but labor tax reforms are key.
