France Could Be on its Way to a More Competitive Tax System

On September 27, France released its draft finance bill for 2020, with the final version expected to be enacted by the end of December. President Emmanuel Macron is taking new steps to make good on his promise to improve France’s business environment, proposing further spending and tax reforms.

The budgeted reforms include significant changes to corporate and personal income taxation, cutting taxes by an estimated €10 billion (US $11 billion). In 2020, French households and businesses are expected to pay €9.3 billion and €1 billion less in taxes, respectively.

France ranks last in the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation’s 2019 International Tax Competitiveness Index, a study that measures and compares how well OECD countries promote sustainable economic growth and investment through competitive and neutral tax systems. Once fully implemented, the proposed reforms would help France improve its rank.

Business Taxation

Shortly after assuming office in 2017, Macron announced a gradual decrease of the statutory corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from 33.3 percent to 25 percent by 2022. Because the reduction has not yet begun, and the top rate is still unchanged, France currently levies the highest top corporate income tax rate among OECD countries. The OECD average is about 10 percentage points lower, at 23.6 percent.

The current budget proposal readjusts the trajectory of the rate cut, implementing profit and revenue thresholds. Next year, the 28 percent tax rate will only apply to profits up to €500,000, while businesses with revenues above €250 million will face a tax rate of 31 percent on profits exceeding €500,000. According to the current schedule, all businesses, regardless of size, will benefit from the lower rate by 2022.

Note: The surcharge is a 3.3% surtax on the standard corporate income tax. Source: KPMG, “France: Finance bill for 2020 includes measures affecting corporate taxpayers,” Oct. 8, 2019, https://home.kpmg/us/en/home/insights/2019/10/tnf-france-finance-bill-2020-affecting-corporate-taxpayers.html.
Year	Profit Thresholds	Revenue Threshold	Tax Rate Excluding Surcharge	Tax Rate Including Surcharge
2019	€0 – €500,000	N/A	28%	28.9%
	Over €500,000	<€250 million	31%	32%
		>€250 million	33.3%	34.4%
2020	N/A	<€250 million	28%	28.9%
	€0 – €500,000	>€250 million	28%	28.9%
	Over €500,000		31%	32%
2021	N/A	<€250 million	26.5%	27.4%
		>€250 million	27.5%	28.4%
2022	N/A	N/A	25%	25.8%

And France has implemented a 3 percent digital services tax (DST) on revenues of certain large digital companies. The tax applies retroactively from January 2019, with the first payments due in November. This distortionary tax was introduced despite the OECD’s ongoing efforts to reach a global agreement on taxing the digital economy.

Personal Income Taxes

In addition to business tax reforms, the budget proposal contains significant cuts in personal income taxes, aiming to increase after-tax returns to labor. Starting next year, the income tax rate of the second bracket will be reduced from 14 percent to 11 percent, resulting in an average annual tax cut of €350 for households in that bracket. The rate cut will be partially offset by lowering the income tax thresholds for the third and fourth brackets.

Personal Income Tax Brackets

Source: Olivier Puren, “Le barème d’imposition 2020: Taux d’imposition par tranche de revenu,” Dispofifr, Oct. 9, 2019, https://impots.dispofi.fr/bareme-impot.
Income Earned in 2019		Income Earned in 2020
€0 – €10,064	0%	€0 – €10,064	0%
€10,064 – €27,794	14%	€10,064 – €25,659	11%
€27,794 – €74,517	30%	€25,659 – €73,369	30%
€74,517 – €157,806	41%	€73,369 – €157,806	41%
Over €157,806	45%	Over €157,806	45%

These reforms come after France has taken measures to simplify its contributions to the social security system by abolishing a special tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (CICE) and implementing broad reductions in employer-side social security contributions. Employee-side social security contributions (CSS) have also been lowered, which was offset by higher broad-based general social security contributions (CSG).

These changes in income taxes and social security contributions will reduce the tax burden on labor in France. In 2018, France had the fourth highest average tax wedgeA tax wedge is the difference between total labor costs to the employer and the corresponding net take-home pay of the employee. It is also an economic term that refers to the economic inefficiency resulting from taxes. among OECD countries, at 47.6 percent, behind only Belgium, Germany, and Italy.

After a one-year delay, France has now implemented a Pay-As-You-Earn (PAYE) system, requiring employers to withhold employees’ personal income tax on a monthly basis. Previously, employees paid their income taxes directly and on an annual basis, with employers not involved in the collection process.

Property Taxes

France continues its phaseout of the residency tax (taxe d’habitation), a local tax that is annually levied on an estimated rental value of property. Next year, 80 percent of households will no longer be subject to this tax, and it will be fully abolished by 2023.

As of this year, France no longer levies a capital duty on the issuance of shares, a tax that increased the cost of capital. The current government has also rolled back the expanded scope of the financial transactions tax, undoing the inclusion of intraday transactions.

Conclusion

The government’s 2020 budget proposal takes another step forward to improve the competitiveness and neutrality of France’s tax system, improving the country’s business environment. However, as reflected in our 2019 International Tax Competitiveness Index, France has a ways to go.

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