Phasing out Company Value Added Tax (CVAE): a poorly targeted measure aiming to boost French industry

The 2023 Finance Act plans to remove Company Value Added Tax (CVAE), in the aim of supporting economic activity and industrial revitalisation. Company contributions were reduced by half in 2023 and were scheduled to be removed altogether in 2024. This has been pushed back to 2027 however, the delay will not have any effect on local authorities.

The removal of this tax is part of the government’s pro-business policy, consisting of increasing companies’ competitiveness by reducing “production” taxes. At this stage, the policy mainly results in the removal of a fiscal resource that has been regularly critiqued in recent years, though it was considered particularly well-designed when implemented in 2008.

Representatives from companies were in favour of the policy, which was implemented with no prior impact study, though this is a mandatory stage according to the constitution. Furthermore, it was approved quickly and without proper consultation of local authorities, for which CVAE represents a significant resource.

It begs the question, who are the main beneficiaries of this policy? And what are the implications and stakes for local authorities?

Industry and intermediate-sized companies - big winners?

There are only a few instances of scientific literature on CVAE. However, a recent report(September 2023) by Rexecode, a private economic analysis and forecasting institute, aimed to identify the main beneficiaries. According to its results, the major winners of the policy are:

1/ The manufacturing industry and intermediate-sized companies (ETIs), which represent respectively 22% and 39% of CVAE revenue;

2/ ETIs, which will benefit more from the reform than very small companies (TPEs) and small and medium-sized enterprises (PMEs).

It is irrelevant to conclude that mid-cap companies, named ETIs in France, are more advantaged thanSMEs and micro-companies, as CVAE is highly concentrated: it only affects around 400,000 companies out of nearly 5 million registered. Only companies with yearly turnover of over €500,000 before tax are subject to it, which excludes the vast majority of SMEs and micro-enterprises.

Furthermore, the CVAE rate is progressive depending on a company’s turnover, which therefore automatically increases the share of CVAE revenue paid by ETIs. A comparison with large companies offers a different perspective. The initial results of our research, as part of a project for the “Finances locales” (Local Finance or FiL) network, indicate that large companies and not other categories are the major winners of this reform, as they are responsible for over 50% of CVAE revenue.

Conclusions about the manufacturing industry must also be questioned. This sector represents only 22% of CVAE revenue, which means that other sectors will receive almost 80% of the benefits of abolishing this tax, a part of which is pure windfall gain. Furthermore, our initial results suggest that commerce and finance are the most advantaged. The impact on trade balance and employment is expected to be modest, as companies operating in these sectors have almost zero exports, preferring to create subsidiaries overseas.

Beyond these consequences for the fabric of production, eliminating CVAE raises questions with regard to the situation and financial capacities of local authorities in the future.

Losses for local authorities

The impact of this reform on the finances of local authorities could be significant: in relation to 2022, the partial removal of this tax will mean a loss of €4.99 billion for intermunicipal bodies and €3.7 billion for French départements.

The question of how to compensate for this loss of fiscal resources has been the subject of many debates. The agreement in principle is to allocate part of 2023 revenue from value-added tax (VAT), with compensation “to the nearest euro”. However, the question remains of what will make up for the loss of revenue for the government. The reform represents a net expense to the order of €4.5 billion for the state.

This new corporate tax cut will increase the fiscal imbalance between households and companies. Households already contribute the majority of tax revenue and are subject to greater tax pressure than companies. The compensation planned for the CVAE-related loss will therefore accentuate the rising contribution of households to the budget of local authorities.

This reform could also lead to significant consequences for local balance sheets. Compensation will be calculated based on the current situation. However, there is no guarantee that changes in the local business landscape will be reflected in the amount of compensation provided. Furthermore, replacing CVAE with VAT further erodes the fiscal autonomy of local authorities. They will lose the small amount of leeway that they had to increase the tax base by attracting new companies.

Reviving the debate around fiscal autonomy

Associations that represent local authorities consider that the removal of CVAE was unwise with regard to economic development initiatives and policies to enhance business attractiveness. It could disincentivise intermunicipal bodies from investing to attract companies and creating a local context that favours employment and wealth creation.

The idea that public services benefit companies, inherited from Canadian-American economist John Kenneth Galbraith in The New Industrial State (1967), also applies at the local level. That is why local authorities seek to create a pro-business environment. However, in the short to medium-term, investment spending for local authorities could decrease, due to the lack of potential financial resources related to the gap between the amount of VAT allocated and local economic development.

Furthermore, local authorities will have to make cuts to balance the budget. This step back from spending on facilities that create a welcoming environment favourable to business activity will have negative impacts on companies, whose growth remains more sensitive to public investment than fiscal pressure, particularly when the former is capped.

Contrary to the objectives of the CVAE reform, the greatest beneficiaries of this cut would therefore not seem to conform to expectations. Furthermore, beyond identifying the major winners, the reform has revived the debate around the principle of fiscal autonomy of local authorities, which reflects their financial autonomy, according to many elected officials. Lastly, the idea that there is room to manoeuvre on spending is debatable, as a large amount of spending is limited or beyond the control of local authorities.