FRANCE: An Introduction to Tax
2023 continued the trends of 2022, with additional geostrategic challenges, but achieving a general stabilisation of the economic environment, it closed with less uncertainties than the ones existing in December 2022.
In the Economic Field
2023 was focused on containing inflation (declining from 7.3% year-on-year in February, to 3.9% in November), and the latest growth projections for 2024 remain conservative (0.9%). However, global trends seem optimistic for the for the following years (1.3% in 2025 and 1.6% in 2026). 2024 should thus remain a year of stabilisation after the upheavals of 2022. Globally speaking, the burden of the public debt, after the COVID crisis, the increase in financing costs, the financing needs to face climate change and geopolitical challenges will become increasingly prevalent in the economic and fiscal policy with a key question – how to keep a proper tax environment to attract investment and allow favourable growth for companies while ensuring a sound public expenditure control?
In the Political Field
With a new Prime Minister, France is expecting to open a new political chapter, but the challenges remain with a relative majority in the Parliament. The line of the new government seems focused on improving the purchasing power of middle classes and determined to fight against fraud and optimisation with a specific focus on tax. This trend is confirmed by a significant increase in tax audits, especially on transfer pricing together with a lowering of the thresholds for specific transfer price requirements from 2024 onwards. Worldwide, 2024 will be the US election year, with about 49% of people expected to vote and major challenges in Europe, United States, Russia and India.
In the M&A Field
After a sluggish first half with a 47% decrease in deal value compared to 2022, the French M&A market has generally been resilient in 2023 with strategic acquisitions of major players. The small cap market remained quite active despite the increase of debt cost and inflation.
In 2024, the uncertainties in the global economic environment should remain with a majority of dealmakers anticipating that inflation and interest rate pressures will remain the most significant obstacles over the next 12 months. However, the players, especially the PE ones, seem more optimistic than in January 2023, and the context can still offer good opportunities for strengthening market positions through external growth.
The trend observed in 2022 and 2023 on the economic terms of transactions favouring non-cash consideration or consideration paid on deferred terms (eg, earn-out), requests for higher warranty and indemnity insurance with specific tax impacts to monitor, should remain unchanged.
In the Pure Tax Field
2024 will be marked by a reinforcement of the tools fighting against tax optimisation with the transposition, in the French legal system, of the EU Minimum Taxation Directive, ensuring a global minimum rate of taxation for multinational groups and large domestic groups that operate in France and have a consolidated revenue of at least EUR750 million generated during at least two of the last four fiscal years (FYs). The purpose of this provision is to implement a specific top-up tax, beyond the corporate income tax, when the effective tax rate of a company member of the groups in any jurisdiction is lower than 15%. In a consistent way, transfer pricing requirements become increasingly constraining with a reduction from EUR400 million to EUR150 million, the revenue/gross-asset threshold triggering the obligation to provide transfer pricing documentation to the FTA upon its request during a tax audit and a presumption of cross-border transfer of benefit when the transfer pricing documentation is not strictly applied.
Other international initiatives should also be on the table for 2024, such as the Unshell EU Directive preventing misuse of shell entities.
All players should also pay attention to the potential procyclical impact of specific rules limiting the deductibility of the financial expenses (30% of the EBITDA) on the financial position of some players facing difficulties in their business while dealing with inflation and debt costs increase.
Finally, as it has often been the case in similar periods, some tax measures supporting distressed companies could be expected, especially in order to ease debt restructuring.
Conclusion
In this global context characterised by a lack of visibility, our clients are more than ever looking for strong expertise for tailor-made solutions that include, beyond the theory, a global vision of all technical, operational, and reputational drivers rather than standard schemes.
This situation also raises the question of how artificial intelligence will impact the value model of advisers to deliver added value to clients’ tax departments staffed with very skilled tax experts.
In 2024, hand-in-hands with our clients, we will face challenges that will force all of us to be increasingly inventive, agile and responsible. Tax advisers will be on board.