|Source: US Congressional Budget Office|
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Since the Irish international economic rescue year of 2010 when Nicolas Sarkozy,
then French president, suggested that the low Irish headline corporate tax rate of 12.5% should be raised, it has been commonly believed in Ireland that the French were hypocrites because they had even a lower effective rate than Ireland's, based on actual tax paid as a ratio of reported taxable income.
The 'Paying Taxes' annual report that is produced by PwC, the Big 4 accounting firm, for the World Bank, showed in that year that France had an 8.2% effective rate compared with Ireland's 11.9%.
Both these rates were misleading.
The 2016 national average effective rates of corporate taxes of 0.4% for France and 12.4%
for Ireland, cited in the September 2017 Comptroller and Auditor General (C&AG) of Ireland's report
, do not reflect the reality for multinational firms. The claims made are very misleading and the French data are false.
In March 2017 six months before the C&AG's report on corporate taxes, the Congressional Budget Office (CBO) of the United States issued a report
on research it carried out on corporate taxes of the 19 member countries of the G20 (Group of Twenty) ─ see chart on top
: these are the leading rich and emerging economies of the world.
Based on 2012 data, the CBO says the average French effective corporate tax rate was 20%.
The C&AG report refers to the 2017 ‘Paying Taxes
’ annual report produced by PwC and the World Bank. Its model company is a small firm with 60 employees which sells all its output of flower pots in its domestic market. The C&AG report says:
“France had the second highest statutory rate at 38% but the lowest effective rate at just 0.4%.”
However, France has a headline rate of 15% for small firms and the PwC/World Bank report for 2014 showed that the model company's effective rate for France, based on taxes paid, was 7.4%. The plunge to 0.4% in 2016 reflects a 6% wages tax credit with a limit of up to 2.5 times the national minimum wage. This tax credit took effect in 2015.
The French 15% rate applies to small to medium companies (SMEs) with a turnover of less than €7.63m and applies to the first €38,120 of profit ─ from 2019 the rate will apply to all SMEs.
The OECD survey of the French economy in 2013 did highlight how large listed companies in the main index of the Paris Stock Exchange, took advantage of particular tax breaks:
France’s high statutory tax rate is coupled with low revenues, measured either as a share of GDP or total tax revenues because of the large number of loopholes and tax breaks. As the Conseil des Prélèvements Obligatoires (French Tax and Social Charges Board, 2009) points out, the result is an effective tax rate paid on realised profits of only 8% for companies included in the CAC40 (the main index of the Paris stock exchange) and 22% for SMEs (firms with up to 249 employees). More generally, the report finds that the effective tax rate diminishes as company size increases. The three major tax expenditures include: i) the tax consolidation regime, whereby the profits and losses of individual companies belonging to the same group may be consolidated (CPO, 2010), ii) the deductibility of interest payments on debt financing, and iii) the tax credit on investment in research and development. The way global corporations consolidate their profits depends on tax rates in other countries, so having a high nominal tax rate naturally encourages businesses to pay taxes elsewhere. If interest income is taxed at the household level, interest deductibility can be justified to avoid double taxation. The government’s decision to cap the deductibility of interest payments on borrowing goes in the direction of double taxation but at the same time will reduce the differential cost of debt and equity financing.
As for the Irish effective rate of 12.4% compared with the headline 12.5% rate for a company such as Google, the tax it declares in Ireland is after massive profit shifting.
In 2015 €12bn was transferred from Google Ireland Limited via a Dutch company to an Irish shell company in Bermuda and Google had an effective tax rate of 6.4% outside the US in 2015.
Apple avoided using the Double Irish loophole and using offshore Irish shell companies was able to report a tax rate of 1.9% on profits made outside the US in 2012
France's standard corporate tax rate 2017 is 33.33% and this headline rate will be progressively reduced to 28% by 2020
These are US Tax Foundation definitions:
The statutory tax rate is the rate levied on the next dollar of taxable profit. While this measure leaves a lot of information out, such as deductions and credits that reduce liability, it can have an impact on some business’s decisions by itself. One important decision it has an impact on is the location of profits. If the next dollar of profits is taxed at the statutory rate, companies have an incentive to locate their profits in countries with lower statutory tax rates. All else equal, high statutory tax rates tend to drive profit shifting.
The average effective tax rate is basically the amount of tax a corporation in a country pays divided by its income. As an all-in measure of tax burden, it considers the statutory tax rate, deductions, and any credits that reduce a corporation’s tax liability. Companies may look at the average effective tax rate when deciding which country to locate a new investment. All else equal, a company would rather put an investment in a country with a lower average effective tax rate because that investment will provide higher returns net of tax over its life.
The marginal effective tax rate is the tax corporations pay on a marginal investment, or an investment that makes just enough (in present value terms) to satisfy an investor, net of tax. This tax rate is mainly a function of the statutory tax rate and deductions corporations can tax on new investments, such as depreciation allowances. The marginal tax rate determines how much a company is willing to invest in a given country. The lower the marginal tax rate on new investment, the lower the pre-tax returns on those investments need to be to satisfy investors on an after-tax basis. As such, companies are more likely to pursue more investment projects when the marginal rate is lower.