France eyes local tax overhaul to help competition

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From the Financial Times - 11 October 2008

The French government is to reform the country's system of local taxation within three years in a bid to improve the competitiveness of its business, according to the industry minister.

Luc Chatel told the Financial Times that Paris would initiate an overhaul of the taxe professionnelle in the new year and aim to put the changes in place before the end of President Nicolas Sarkozy's five-year term, which ends in 2012.

"All the industrialists I talk to complain about the taxe professionnelle," Mr Chatel said. "Each car produced in France on average costs €150 extra because of the taxe professionnelle. It weighs on industry. Reform of the taxe professionnellewould help competitiveness."

The tax, unique in Europe, has long been one of the principal bugbears of the business community because it is levied not on profits but largely on the cumulative value of a company's fixed assets, thereby discouraging investment.

The way it is levied means it falls particularly heavily on industrial businesses. They account for more than two-thirds of the €27bn ($37bn, £21bn) raised.

Mr Chatel said one possible reform was to exclude new investments in equipment from the tax altogether, so that the base shrunk over time. New investments are currently excluded for three years. Another option would be to replace it completely with a property-based tax, he said.

However, the government has not yet worked out how to pay for the changes and much will depend on a lengthy planned reorganisation of local government. The tax accounts for half of the income of town councils and regional governments.

France has five layers of administration, from the commune to national government, a system Mr Chatel described as "hellish". He said at least one layer would be scrapped, providing scope to cut back on local taxes.

"Reform of the taxe professionelle will be closely linked to the future reorganisation of local government.

"It will take two to three years to put in place. But that's not a problem. What is important is the signal it sends."

The focus on local tax reform, which many former governments have tried to change, is a sign of Mr Sarkozy's determination to remove what it regards as the most damaging and peculiarly French hindrances to competitiveness.

Mr Chatel said the government had "finished off" the 35-hour maximum working week and cut taxes on overtime. It would soon turn its attention to an expensive but ineffective system of professional training.

While removing the "straitjacket" of red tape, Mr Chatel said there was still a need for government "activism" in the form of incentives for investment, innovation and retraining of workers.

Mr Sarkozy provided an example yesterday at the Paris motor show when he unveiled a €400m four-year programme to help the French motor industry produce more environmentally friendly cars.  The president believes the state should intervene to preserve France's industrial strengths and called yesterday for changes to EU competition rules to allow state aid to help develop low emissions cars.