ADAPTING CORPORATE TAX

TO AN OPEN ECONOMY

Summary

December 2016

Conseil des prélèvements obligatoiresThe Council of Mandatory Contributions

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This document is designed to help readers to moreeasily read and use the «  Conseil des prélèvementsobligatoires  » (The Council of MandatoryContributions)'s report. Only the report is bindingupon the Council.

CONTENTS

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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

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INTRODUCTION

Corporate tax, which has existed in its current form since 1948, was introduced in a much less open economy than currently prevails, beforethe 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), amountedto €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 publicpolicy by way of corporate tax.

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In an economic environment where capital, companies and high-skilled individualsare mobile, multinational firms are looking for tax optimisation and there is fiercetax competition between countries to attract companies, deeper Europeanintegration and the combating of tax avoidance and optimisation are resulting inmajor changes to, and the reexamination of, national frameworks for the taxationof company profits.

The French economic environment is also in flux, particularly due to theimplementation of Brexit, which could prompt the UK to cut its profit tax rate stillfurther.

The lowering of corporate tax rates has already begun in France, moreover, with the2017 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 moreattractive for companies.

This report contributes towards this aim by analysing the advantages and needsinfluencing French corporate tax in terms of the tax base, applicable rates and legalsecurity for taxpayers.

The issue is considered very much from the perspective of the supranationaleconomic environment, whose features include intense tax competition betweencountries and its consequences for their economic appeal. The most recentEuropean legal changes are also taken into account, specifically the ATA directiveto combat artificial profit shifting and the CCCTB directive proposals for thecreation of a common consolidated corporate tax base.

As a result of these analyses, the Summary - The Council of MandatoryContributions is able to set out precise reform scenarios based on the need tocontinue combating tax avoidance, while increasing legal security and ensuringthe convergence of tax rates.

INTRODUCTIONSu

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1 Coherence put to the test by an increasingly openeconomic environment

Traditional thinking about corporatetax appears out of date in the light ofrecent developments.

A tax whose rate is high, but whoserevenue is low, despite the significantexpanding of the tax base since 2011

Corporate tax is paid by half of taxablecompanies, which account for nearlytwo thirds of the added value producedin France. In 2013, 51% of companieswere liable for corporate tax (i.e. 1.5 million businesses) and only27% effectively paid it, as the others(i.e. 1.4 million) were subject to incometax because of their legal status.

Breakdown of companies (by number)according to their tax regime in 2013

Breakdown of the added value ofcompanies according to their tax regime

in 2013

Source: INSEE data

84% of the 1.5 million taxablecompanies were microenterprises andaround 300 were large corporations.

Corporate tax represents only 15.4%of the mandatory levies payable bycompanies. Revenue is so low duemainly to the low profitability ofcompanies, which explains most ofthe difference in the tax revenue fromone point of French corporate tax andone average point of Europeancorporate 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 byits use as a "cost allocation vehicle"for two major subsidy schemes, one ofwhich is based on R&D expenditure(the research tax credit-CIR), and theother on payroll (the tax credit forcompetitiveness and employment-CICE).

Due to the complexity of the taxbase, the nominal rate of tax alone isnot an adequate indicator of theactual tax pressure on companies

France applies the principle ofterritoriality, making it relativelyatypical, as European Union memberstates generally apply the principle ofthe globality of profits.

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Relative importance of the various sources of differences in the net corporate taxrevenue

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 oftransfer pricing, whereby the stableestablishments of companies withoperations in a number of countriesinvoice each other in connection withcross-border flows, for example thepurchase and sale of goods or services,royalties, interest, guarantees, or theassignment or granting of the right touse intangible property such astrademarks or patents.

There are differences betweenaccounting income and taxableincome. The tax base is defined basedon accounting income, but differs fromit due to a number of mechanisms, the main ones being loss carry -forwards and carrybacks, theelimination of double taxation, the

Coherence put to the test by an increasingly open economic environment

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Corporate tax would create a bias towards debtUnder the corporate tax rules, interest on loans and dividend payouts are treateddifferently, 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 theeffect of the tax system as a whole, and particularly income tax, as dividendspaid to shareholders are included in their taxable income. Rules on tax creditsor rebates on dividends received may reduce the tax payable by individualsto factor in the tax already paid by companies, making corporate tax a kindof 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 andthe deductibility of financial expenses.

France's 38% maximum nominal taxrate is the highest of the EuropeanUnion's 28 member states.

The nominal tax rate stands at33.33% in France, to which the socialsecurity contribution on profits isadded (3.3% of the corporate taxpayable by companies with revenue ofat least €7.63 m if their corporate taxliability exceeds €763,000). Eurostatadds the exceptional contribution,which brings the maximum nominaltax rate to 38.0%.

France also sets itself apart bygranting a lower, 15% rate to SMEs,which is applicable to profits up to

€38,120 for companies whoserevenue is less than €7.63m (cost forthe public finances of €1.47bn).

The implicit tax rate can be used tocompare different countries' taxsystems, but this requires moreadvanced methods

The implicit tax rate offers a way tocompare countries' tax systems thatdiffer both in their rates and tax baserules.

It sets the amount of tax collectedagainst its economic base so that theactual tax burden can be assessed (inthis case the numerator is the amountof corporate tax before losscarryforwards or carrybacks and thecharging of tax expenditure).

Coherence put to the test by an increasingly open economic environment

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Source: CPO, mainland France tax return data; calculationsexclude 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 FrenchGeneral Directorate of the Treasuryarrived at the following implicit rates forthe fiscal year 2007: 27% formicroenterprises, 32% for SMEs, 25%for mid-cap companies and 24% forlarge corporations.

The idea that large groups aremanaging, through various deductionand profit shifting mechanisms, tosignificantly reduce the tax that theypay, while small and medium-sizedbusinesses are bearing a dispro -portionate tax burden by comparison,now seems to have little validity.

The differences between implicit taxrates must be interpreted with caution,however, which argues in favour ofestablishing a rigorous method toallow consensual comparisons ofimplicit rates.

National tax systems still fail to offeradequate legal security, which is vitalfor investors

The tax standard, which itself dependson the framework rules governingretroactivity and the consideration ofexisting situations when there are legalor regulatory changes, needs to bemade 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 taxauthorities in response to questionsfrom taxpayers about theinterpretation of tax rules, and arebinding upon the authorities, haverecently been reinforced by a recentdecision by the French Council ofState whereby an appeal against anunfavourable ruling may be broughtbefore an administrative court on thegrounds of abuse of power.

Coherence put to the test by an increasingly open economic environment

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The speed with which the taxauthorities respond to questionsfrom taxpayers is therefore animportant issue.Finally, with regard to taxinspections, which are a means ofensuring fair competition, a balancemust still be found between theirenforcement role and the building of arelationship of trust between the taxauthorities and companies.

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2The economic environment andthe changes to the supranationallegal framework call for changesto be made to corporate tax

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Significant changes should be madeto corporate tax in the next few years,driven by multiple factors that Franceis more or less able to influence.

Corporate income tax rates have ameasurable effect on economicappeal

France's corporate tax rate puts it ina unique position in Europe. In themid-80s, the normal French tax ratewas gradually lowered from 50% to33.3%. This rate, which was one of thelowest in the European Union at thetime, stayed the same, while the taxrates of the other member statescontinued 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 effectiveaverage and marginal tax rates alsoshow a divergence in the trend forFrance and the European average.Comparison of the change in the effectiveaverage rates of taxation of company

profits

Comparison of the change in the effectivemarginal rates of taxation of company profits

Source: Oxford University Centre for Business Taxation

2005 2010 2015France 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 2015France 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, interms of their appeal, to set anaverage tax rate, rather thancompeting on tax and aligningthemselves with the lowest rates.

The average corporate tax rate ofFrance's partner countries in theEuropean Union is around 25%.

France is not included in thecalculations of the average rate thatfollow, as the aim is to assess theeffect on France of the tax decisionsof the other member states, and thelevel arrived at by its large countrypeers.

A rate of 25% might be a target for alarge European economy like France,the more so as there are no signs of thetax competition easing up at present,given that an announced objective ofthe 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 wherecompanies choose to locate theiroperations.

Countries with a potentially highmarket potential for companies havehigher rates of taxation of companyprofits, on average, than countrieswith a low market potential. From thisperspective, France is a large countrywithin the context of the EuropeanUnion, which is in line with its initialpositioning as a country with acomparatively high corporate tax rate.

Economic integration may havepushed large countries to react tocompetitive pressure, however,which has tended to close the gapsbetween tax rates, with a memberstate reacting to a one-pointreduction in corporate tax by anothercountry by reducing its own rate by0.86 points if another member stateis involved, and only 0.02 points if theoriginal reduction was by a third-partycountry.

Where there is tax competition, thetax rate may influence companies'choice of location for their operations.

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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

Taxesincluded EU

AverageExcluding

France

Eurozoneexcluding

France

Large EUeconomies,excluding

France

All taxes oncompany

profits

Unweighted 22.2% 23.9% 25.1%

Weighted 25.6% 28.4% 26.2%

Corporate taxas strictlydefined

Unweighted 21.7% 23.1% 22.9%

Weighted 22.0% 22.9% 21.7%

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The economic environment and the changes to the supranational legal framework call for changes to be made to corporate tax

The factors enhancing France'sappeal in terms of the tax base aredeclining

France has not followed the rate-cutting trend, while measuresdesigned to reduce the taxable base,which have long been a distinguishingfeature of the French tax system, havebecome less favourable.

The possibility of deducting financialexpenses has lost some of its appeal.

In 2013, France set a general cap onthe deductibility of loan interest,reincluding 25% of the interest paid inexcess of €3m in the tax base. This capis combined with measures to combatoptimisation, such as those aimed atunder-capitalised companies. Franceis the only country to have combinedthese two types of measure, and oneof the only ones to have adopted ageneral cap mechanism for budgetaryreasons.

Loss carryforward mechanisms nolonger give France a comparativeadvantage.

Since 2011, there have been no timelimits on loss carryforwards, but theamount has been capped at €1m, plus50% of any losses over this amount.This rule is one of the strictest in theOECD and contrasts with the absenceof a cap, which was the case until2010.In the same year, the time limit on thecarryback option was reduced fromthree years to one.

The conditions for the exemption ofcapital gains from the disposal ofequity securities are not veryadvantageous.

Capital gains from equity securitiesare partially exempt from tax in themajority of OECD countries, reflectingthe taxation of dividends.Apercentage for fees and expenses isreincluded in taxable income, and wasraised in France from 5% (the rate fordividends) to 10% in 2011, and 12% in2013. This is one of the highest levelsin the OECD.

The benefits of the French taxintegration framework have lessened.

This framework in fact includes theconsolidation of the profits and lossesof all of a group's entities, and theelimination of a number oftransactions carried out purely withinthe group, such as the payment ofdividends from one member toanother. This mechanism wasinvalidated following a decision by theEuropean court, in the name offreedom of establishment.

The future of the preferentialtaxtreatment of income from intellectualproperty also seems uncertain.

France has a special tax measure forincome derived from intellectualproperty, which is taxed at the lowerrate of 15%. Work by the OECD hasled to a "nexus" approach, which, inthe form in which it should beinterpreted by the European Union,could result in the conditions foreligibility for the French measurebeing viewed as too permissive.

The changes to the international andEuropean tax framework forcompanies will affect nationalsystems

French corporate tax is set to changesignificantly in the coming years,especially due to European legalharmonisation.

The European ATA directive aimed atcombating the erosion of tax bases,adopted in July 2016, will have to betransposed into French law by theend of 2018. Although the French taxsystem mostly already has anti-abuserules in the areas covered by thedirective, it is likely that severalmeasures 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

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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 thanthe capping of net financial expenses at 30% of the EBITDA of multinational groups

Preferential treatmentof intellectual property

Anti-BEPS/Code of conduct work

France might argue that the long-term capital gainrules for income from disposals and from grantingthe right to use patents are not harmful.

Probable changes due to the characteristics of the French rules, which differ from thoserecommended by the nexus approach.

Group - tax integration rules

Developments in ECJ case law

Gradual reexamination of intragroup eliminationsthat 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 afixed ratio equal to 30% of thecompany's EBITDA;

•A general anti-abuse clause must beadopted by all member states thatdiffers from abuse under French law.

The rules set forth by this directive areonly a minimum standard; national ortreaty-based measures may still beapplied to maintain a higher level ofprotection of the national tax basesfor corporate tax.

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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. Thiswould depend on the distribution key,which should be based on threeweighted factors: consumption, payrolland productive assets, excludingintangible assets.

According to estimates by theEuropean Commission, in 2010 theFrench corporate tax base accountedfor 8.3% of all the European tax bases,whereas if tax bases wereconsolidated Europe-wide, thendistributed between countriesaccording to the CCCTB proposal'scriteria, the French taxable basewould be 10.0% of the total.

The benefits of such a harmonisationof corporate tax across Europe lie inthe development of the exchangesthat could result from simplifying thetax rules for companies established inseveral member states, and in thelessening of tax competition betweenEuropean partners.

France supports this initiative intheory, although the technicalmeans of implementation must beexamined in greater depth over thenext few years.

The case law of the European Courtof Justice (ECJ) is undermining theFrench tax integration rules

The case law of the ECJ is calling intoquestion numerous tax measuresreserved for resident companies in thename of freedom of establishment(particularly through the Papillon,X Holding BV and Stéria decisions).

The proposed CCTB/CCCTB directivesfor the European harmonisation ofthe corporate tax base could affectthe unique features of the Frenchcorporate tax rules.

The European proposal has twoaspects : firstly, the convergence ofnational calculation rules towards acommon corporate tax base (CCTB)and, secondly, examining thepossibility of consolidating the baseand distributing it between countries(CCCTB).

For large countries like France, which isless aggressive in terms of taxcompetition, the convergence of thetax base rules would make theirposition even more unfavourable withregard to rates, but the consolidation

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3Continuing the combating of tax avoidance, legal security and rate convergence : a winningshort- and medium-term strategy

France will need to address its taxbase, rate and the legal securityattached to corporate tax, in the shortto medium term, adopting a coherentapproach that does not preventcertain opportunities from beingseized.

The consolidated European corporatetax base will be introduced in themedium term, but France must bear itin mind as of today

France's support for the CCCTBproposal should not be unconditional.It could suffer a negative impact fromstarting with tax rule convergence andpostponing the consolidation anddistribution of the tax base to a later,hypothetical, stage, especially if its taxrate stays at its current level.

France could make sure, during thenegotiation of the directive, that theperiod of harmonisation withoutconsolidation or distribution of thetax base was as short as possible. Ifthe transition from the CCTB to theCCCTB cannot be achieved, it couldmake progress on the common taxbase conditional upon theintroduction of a "rate tunnel" similarto the one in place for VAT.

Likewise, the introduction of asystem of notional interest tomitigate the bias in favour of debtrequires the measuring of its effectsbeforehand, with regard to both thereality of the economic benefits tobe expected and its cost for thepublic finances. By enabling thededuction, from the taxable base, of a"normative" level of theoreticaldividends, as part of the company'scosts related to the return on capital,this system would reduce the level oftaxation, and therefore lower the costof capital and boost investment.

Several French measures might needto be adjusted, such as the limiting ofloan interest deductibility, for whichthe European directive proposals givemember states that already havedomestic legal measures with anequivalent effect some leeway in thedeadline and also, partly, the means,for the transposition of these rules.

This is also the case for thedeductibility of research anddevelopment expenses, which shouldtake the place of the research taxcredit, as the overdeduction of R&Dexpenses provided for by the draftCCTB directive is less advantageousthan the CIR.

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Continuing the combating of tax avoidance, legal security and rate convergence : a winning short- and medium-term strategy

Comparison of the tax advantage gainedthrough the CIR and the framework set

forthin the CCTB proposal

More generally, there must be ananalysis of the compatibility of thetax expenses attached to corporatetax, which are relatively numerous inFrance, with the future Europeancommon tax base. The reexaminationof certain tax expenses would be animportant element in ensuring thatthe public finances do not lose outfrom this reform.

The convergence of the corporatetax rate towards the averageEuropean tax rate is desirable in theshort to medium term

The lowering of the tax rate, whichwas started with the 2017 financebill, and the gradual introduction of a28% rate for all companies by 2020,must continue.

To avoid suffering too much from theeffects of tax competition on itsappeal and the competitiveness of itscompanies, and without embarking ona race that would be unsustainable tosay the least, France might aim for

The justification for having differenttax rates for different sizes ofcompanies is debatable, given that,unlike the taxation of households, thedesirability of redistribution betweenthese economic players is not self-evident.

Source: CPO

CIR CCTB CCTB Small business in the startup phase

R&D expenditure amount

Subs

idy

amou

nt

CountryLower rate for small-

and medium-sizedenterprises (%)

Normalcorporate 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

UnitedKingdom 20.0

Sweden 22.0

Source: CPO, according to the OECD Corporate taxdatabase

Lower rate for small businesses in the main OECD countries

greater convergence of its ratetowards the European average forlarge economies, of around 25%.

The lowering of the tax rate shouldbe applied to all companies, whereas,in 2014, 670,000 SMEs benefited froma lower, 15% rate.

In 2015, less than a third of OECDmember countries (10 countries outof 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

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1 Gross operating surplus to value added ratio.2 Net cash flow to equity ratio.

Profit ratios of companies (excluding agriculture and financial

services)

Secondly, the return on equity2 fornon-financial companies has beenhigher for SMEs than for mid-capcompanies and large corporationssince 2007.

Change in return on equity by category of company between 2003 and 2014

The difference in the implicit tax ratefor SMEs and large corporations islargely absorbed.

The assumption that small companiesare less profitable is not borne out bythe evidence. Firstly, the profit ratios1

of small companies with employees(not including microenterprises) werecomparable, in 2012 and 2013, to theprofit ratios of companies with morethan 250 employees, or even higher forcompanies with between one and nineemployees.

Scope: France, profiled companies and legal units withemployees mainly in commercial sectors, excludingagriculture and financial services, and excluding self-employed entrepreneurs and microenterprises, as defined in tax termsSource: INSEE, Les entreprises en France, 2015 edition

Scope: Non-financial companies as defined by theLME (law for the modernisation of the economy)Source: Banque de France, FIBEN database (SMEswith revenue of more than €750,000), December2015

(%)

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 FrenchTreasury memo

(companies with operatingprofits)

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 Largecorporations

Mid-capcompanies

Overall

Continuing the combating of tax avoidance, legal security and rate convergence : a winning short- and medium-term strategy

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Financing margins are available to finance the convergence of tax rates.

Financing margins may be found, particularly due to European and internationaltax developments.

Different scenarios can be planned such as:

Financing scenarios for a rate cut

Source: CPO

The lowering of the corporate taxrate from 28% to 25% may be partlyself-financed by changes to the taxbase and the tax calculationmethods. The issue of whether theremainder to be financed should beprovided by reducing or eliminatingcertain tax expenses attached to

corporate tax, by reducing publicexpenditure, or by increasing otherlevies, is a political decision.

The rise in economic activityfollowing the lightening of the taxburden 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 feesand expenses - capital gains (groups) 0% Elimination (ECJ, uncertain risk) 146

Lower rates for patents 15% Nexus approach (OECD) PositiveTotal - - >146

European harmonisation of the tax baseDeclining-balance depreciation Current Elimination (EU convergence) Positive

Extraordinary depreciation Current Elimination (EU convergence) 75Overdepreciation 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) ~750Lower rate for SMEs 15% Elimination (EU convergence) 1,467

Total - - 2,617

The need to continue to combat taxavoidance and increase legal securityremains the same

Tax base and rate convergencemeasures might be supplemented bycontinuing with initiatives, begun on aEuropean and international scale, tocombat aggressive tax optimisation,for example by improving internationaltransfer pricing standards, doing moreto stop artificial profit shifting in taxtreaties, and eradicating "tunnel state"practices within the European Union.

Legal security is very important in acountry like France, where the taxlaw is frequently changed.

It is vital for companies that tax cutsare predictable, so that economicplayers know what to expect andinvestment decisions can be made.The French reform strategy might beimplemented gradually and early.

It is just as important to correctlyfactor in current economic situationsand to ensure effective dialogue withthe tax authorities. Various techniquesused in Germany and the UK, whichgive economic players more securityand predictability without lesseningthe sovereignty of policymakers, couldbe usefully adapted to France. Thesetechniques include "grandfathering"clauses, which allow the existing taxframework to be permanently ortemporarily maintained for currentsituations.

Continuing the combating of tax avoidance, legal security and rate convergence :

a winning short- and medium-term strategy

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CONCLUSION

Over the next few years, corporate taxmust successfully combine a complexset of opportunities and needs:

• Making sure that companieseffectively contribute to the financingof the public services from which theybenefit, particularly by combatingaggressive optimisation;

• Enhancing the country's appeal andcompetitiveness, through tax baseand rate rules that ensure that Francedoes not compare unfavourablyinternationally, that support itscompanies' development abroad andthat are able to accommodate themost diverse production setups;

• Ensuring the security and stability ofthe legal environment.

The guidelines proposed by the CPOfor the adaptation of corporate tax areintended to be effective andpragmatic. They are based on foursets of measures, relating to the taxrate, the tax base, the combating oftax optimisation and the increasing oflegal security, which might beintroduced gradually and early.

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1. Establishing a rigorous and consensual methodological framework forcomparing the implicit tax rates for different companies that alsoencompasses companies in the financial sector;

2. Converging the corporate tax rate towards the average for large economiesin the European Union (which is around 25%), by following a clear, predefinedtimetable, and providing for the application of this rate to all companies,regardless of their size, while managing the transition for businesses thatcurrently benefit from a lower rate of tax on all or part of their profits;

3. Contributing to the financing of this rate convergence throughadjustments to the tax base and the methods for calculating corporate tax:

• Bringing the application of the lower, 15% tax rate for income derived fromintellectual property into line with the OECD's nexus approach ;• Aligning the French rules on the deductibility of depreciation charges withEuropean 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 intragrouptransactions, including the exemption of a percentage of the fees and expensesrelating to capital gains from the disposal of equity investments;• Requiring that all direct subsidiaries and sub-subsidiaries that meet the taxintegration 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 whenchanges 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 maketax inspections easier to conduct, even if penalties are applied (excludingpenalties other than those applied to taxpayers acting in good faith), so thatcases 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 theEuropean 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 notionalinterest based on changes in equity, and the basis for the distribution of the taxbase between member states;• Negotiating a stipulation that, if the consolidation and distribution of the commontax base between member states is not adopted within a certain time, a corporatetax rate tunnel, similar to the VAT rate tunnel, must be introduced.

7. Before the CCTB is implemented, analysing the alignment of the Frenchframework with European standards regarding the carrying forward of lossesand 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 and75% of equity.

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Ongoing: the continuing of measures to combat aggressive optimisation

8. Making greater use of the existing anti-avoidance tools, and especially themost recent (mutual administrative assistance with the recovery of taxreceivables and automatic information exchanges), which requires continuedmeasures to enhance the professionalism of the tax authorities' tax inspectionteams;

9. Continuing the work on defining reference standards for transfer pricing:

• On an international scale, by clarifying the OECD guidelines, particularly byinserting real examples;• On a national scale, by publishing tax instructions explaining the principles andmethods that the tax authorities intend to implement to apply them;

10. Doing more to combat artificial profit shifting in tax treaties by includingthe general anti-abuse clause in all of France's treaties, by spreading thepractice of inserting effective beneficiary clauses in treaties, and by clarifyingthe definition of this concept and continuing to strengthen national anti-avoidance measures;

11. Continuing action against "tunnel state" practices within the EuropeanUnion:

• By acting in favour of revising parent-subsidiary and interest and royaltydirectives to insert an obligation for all member states to introduce awithholding tax on dividends and royalties leaving the European Union, with afloor rate;• By advocating the negotiation of single tax treaties for the whole of theEuropean Union with third-party states, to prevent the optimisation behaviourthat might result from differences in the web of treaties of member states;