France lowers the corporate income tax rate to 25%

Over the course of President Emmanuel Macron's first five-year term, the French corporate income tax (CIT) rate has gradually decreased from the original rate in 2017, a rate of 33.3%, to 2022, now a rate of 25% (a drop of 8.3% in five years).

This measure was enacted through the 2017 Finance Act (the Act) to make French companies more competitive, avoid profit evasion and bring rates in line with the rest of Europe and Organization for Economic Cooperation and Development (OECD) countries. The Act has been a significant effort for the state budget. Over the past five years, taxes have been reduced by $11 billion euros.

Now with a tax rate of 25%, France is approaching the average rate practiced in most OECD countries.

Summary of changes

The 2022 Finance Act provides for the following changes to the CIT rate:

Computing deferred taxes

Enacted tax rate reductions have a direct impact on the calculation of deferred taxes at year-end for consolidated financial statement purposes, even when the rate reduction is not effective until a future period.

Almost always, there are differences between the book accounting result and tax result for the year. Some of these differences are definitive. For example: permanent: expenses that will never be deductible/income that will never be taxed); while others are related to timing – temporary: expenses that will eventually be deductible/income that will eventually be taxed.

For consolidated financial statement purposes, timing (temporary) differences give rise to the recognition of deferred taxes. The purpose of calculating deferred taxes on an entity-by-entity basis is to reflect the deferred tax position for the group. The recognition of deferred taxes in the consolidated financial statements provides financial statement users with a better representation and understanding of the group's tax position (current and deferred) at the end of the financial year.

Deferred taxes are intended to account for timing differences that will reverse in the future and therefore, are accounted for at the tax rate that will be applicable when the temporary difference is expected to reverse. When rates are set to gradually change over several years, companies must schedule the reversal of the timing items and apply the rates that are applicable in those periods. A change in tax rate, especially when over a number of years, generally increases the complexity of the deferred tax calculation.

Tax rate to remain stable

Since the enactment of the Act, companies have had to schedule the reversals of the timing differences and apply the expected CIT applicable to each period. Given the gradual rate reduction over the last five years, this has added some complexities when determining how to apply these new CIT rates (or which CIT rate to apply). Specifically, in the 2018 and 2019 tax years, companies also needed to assess which rate to use since the CIT rates varied according to the amount of taxable income in that year.

For the foreseeable future, the 25% CIT rate is set to remain intact. As a result, deferred scheduling is no longer necessary when determining the applicable tax rate for French companies. Companies have reached the period in which the current and deferred rates are the same. The harmonization of the CIT rate makes calculating deferred taxes less challenging on a go-forward basis.

Implications for U.S. multinationals

From an ASC 740 perspective, the impact of the change in tax rates should already have been reflected in the financial statements when enacted into law. Once again, the benefit in the current period is that companies do not need to be concerned with multiple tax rates. The calculation has simplified in nature.

A decrease in the CIT can often have a positive impact an organization’s global tax rate and ultimately reduce economic double taxation. However, U.S. multinationals subject to the global intangible low-taxed income (GILTI) and subpart F regimes will want to closely monitor their ability to make the high-tax exclusion election (HTE). For instance, the annual HTE allows eligible taxpayers to exclude certain high-taxed income of controlled foreign corporations (CFCs) from their GILTI and/or subpart F computation(s) on an elective basis. Generally, income is considered high-taxed when that income is subject to a tax rate in the relevant foreign country greater than 90% of the U.S. corporate tax rate (i.e., 18.9%). While the CIT of 25% remains above the current tax rate threshold of 18.9%, the rate differential is becoming narrower. In certain tax years, making an election can prove problematic when there are tax treatment discrepancies between U.S. and foreign law.

Generally, a lower CIT yields a lower foreign tax credit (FTC) (e.g., less foreign tax being paid). U.S. multinationals will want to analyze how this impacts their ability to maximize FTCs.