France’s Corporate Tax Hike Plan Creates More Risks Than Rewards

A temporary corporate tax hike may seem reasonable to address France’s budget deficit. But it might create unintended consequences for the country’s budget by discouraging multinationals from dealing with France.

French domestic and multinational corporations very likely would face a higher tax burden on their profits. This is evident from the general principle that resident companies in France are taxed on a consolidated tax base, including profits or losses of subsidiaries.

For example, LVMH Moët Hennessy Louis Vuitton is a multinational company that generates only 10% of its revenue in France. One would think it unlikely that LVMH would be significantly affected by France’s corporate tax hike. However, the company apparently pays around 50% of its taxes in France.

LVMH Chief Financial Officer Jean-Jacques Guiony said LVMH is expecting to pay as much as 800 million euros ($870 million) in additional taxes next year after France announced plans to raise levies on its biggest companies to help shore up public finances.

The 15% global corporate minimum tax under the OECD/G20’s Pillar Two initiative could interact with France’s temporary corporate tax hike. Although France’s proposal could align with the global minimum tax by ensuring a higher effective tax rate, it must be carefully designed to avoid conflicts with international tax treaties, and to reduce risk of double taxation and the associated negative impact on foreign investments.

Multinationals can choose which countries they do business with and are more likely to deal with countries with lower corporate tax rates. As such, they might reconsider their business strategies and restructure their operations to minimize the impact of the French corporate tax increase.

There also is a potential risk of double taxation for foreign multinationals, which are more exposed due to their extensive operations outside the taxing jurisdiction. This could be a concern for multinationals operating in France if the temporary corporate tax hike isn’t mitigated by tax treaties or other international agreements.

Similarly, domestic French corporations may consider relocating their headquarters to a country with a lower, more competitive corporate tax rate. Increasing France’s corporate tax rate in hopes of reducing their budget deficit may inadvertently increase the deficit if France loses revenue from multinationals.

While Prime Minister Michel Barnier and his finance and budget ministers insist they don’t want to damage France’s success under President Emmanuel Macron in attracting foreign investment, boosting growth, and lowering unemployment, they could end up doing just that.

Companies have voiced concerns about the impact of the proposed corporate tax hike on the economy. Stellantis NV CEO Carlos Tavares said France is making “a short-term choice that will penalize the medium term,” suggesting the tax hike could have negative consequences for France’s economy as a whole.

Some large French domestic and multinational corporations may consider reducing their workforce or increasing their prices to alleviate the higher taxes they’re forced to pay in France. This could hinder the country’s overall economic growth by possibly increasing the unemployment rate, reducing wages, and making more products out of reach for the average household.

In a large study of German municipalities over a 20-year period, researchers found that slightly more than half of the corporate tax burden falls on workers. Another study published by the National Bureau of Economic Research found that consumers could also be impacted by corporate tax changes in the US.

Such findings make logical sense: If corporations are required to pay more taxes, they will consider all options—lowering wages, reducing their workforce, and raising prices on goods—to ensure their bottom line isn’t affected.

Although a temporary corporate tax hike seems good on paper, the consequences for France’s economy could be more detrimental than beneficial.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author information

Michelle DeVos is a tax attorney in Holland & Knight’s Tampa office and member of the firm’s tax, executive compensation, and benefits practice group.

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