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France's Corporate Tax Reform Could Help Contain Regions' Tax Revenue Volatility

PARIS (S&P Global Ratings) Oct. 7, 2020--S&P Global Ratings believes planned corporate tax reform by France (unsolicited; AA/Stable/A-1+) could improve French regions' budgetary performance by curtailing the volatility of tax revenue.

The proposed reform was outlined on July 30 and confirmed in the central government's draft finance bill for 2021, presented on Sept. 28 to the French council of ministers. The draft confirms the French government's intention to abolish in January 2021 the tax on corporate value-added (CVAE) that French regions receive, for an estimated amount of €9.7 billion in 2020. The CVAE is levied by the French state, and redistributed to French LRGs, accounting for more than 30% of regions' operating revenues. As compensation for this, regions would receive a fraction of the national value-added tax (VAT) in 2021 equal to the proceeds of the CVAE for 2020. The net cost to the French state would be less than €9.7 billion. Companies benefited from rebates of about €2 billion that the central government paid, with no impact on the CVAE French regions received. The total regions receive will fluctuate with economic activity, but it should be guaranteed at least at the 2021 level. The mechanism should be similar to the one when French regions were granted a share of VAT instead of their general central government transfer, the dotation globale de fonctionnement.

We believe this reform could reduce the volatility of regional tax revenue. The CVAE is collected via installments that companies can adjust, so it can be subject to significant swings between years. For instance, from 2011-2019, the CVAE has been almost 3x as volatile as VAT receipts.

The guaranteed level could also reduce downside risks. We previously expected a drop in French regions' operating balance and balance after capital accounts owing to the effects of COVID-19 (for more information, see "COVID-19: French Departments Face Marked Revenue Losses, While Regions Swerve Near-Term Fallout," published May 28, 2020, on RatingsDirect). French regions would benefit from a stable revenue source in 2021 (the share of VAT would equal the 2020 proceeds of CVAE), dynamic and less volatile revenue in 2022 due to the expected rebound in economic activity, and a guaranteed level of revenue in case of economic downturn. We believe this, combined with higher investment grants, could help region to deliver their substantial capital expenditure plan accounting for about 30% of their total expenditures.

S&P Global Ratings rates three French regions: Auvergne-Rhone-Alpes (AA/Stable/A-1+), Hauts-de-France (AA-/Stable/A-1+), and Pays de la Loire (AA/Stable/A-1+). Regions are among the highest rated among French LRGs, thanks notably because of their highly predictable institutional framework and solid budgetary performance. The actual impact of the reform on our ratings will depend on, among other factors, how each LRG reacts to the new legal and financial framework.

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

Primary Credit Analyst:Hugo Soubrier, Paris;
Secondary Contacts:Stephanie Mery, Paris (33) 1-4420-7344;
Etienne Polle, Paris (+33) 01 40 75 25 11;

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