Chirac proposes reduction of French corporate tax rate

French president Jacques Chirac yesterday put a big cut in the country's corporate tax at the top of his new year's economic wishlist as he underlined his determination to have an impact on the pre-election debate.

Mr Chirac said France's corporate tax rate should drop from 33 per cent, well above the European average, to 20 per cent over five years. Pollsters said his address to business and trade union leaders sounded like a campaign speech just four months before elections.

Corporate tax is a big issue in most European states. Some European politicians have floated the idea of harmonising taxes, while countries like Germany, and now France, have spoken of cutting their rates. Ireland currently has one of the lowest rates in Europe at 12.5 per cent.

Mr Chirac's announcement was welcomed by business groups, but it was met with scepticism from economists, who said that Mr Chirac had made similar ambitious fiscal promises in previous new year's speeches that have since proved empty.

A French official said that the proposal was in line with the "downward trend" in Europe's corporate taxation.

Angela Merkel, Germany's chancellor, has promised similar cuts. The official said that the cost would be partly offset by removing numerous tax breaks through a flat tax.

"The major issue for the coming years is tax competition between nations. To preserve our companies and attract others, we must act on corporate taxes," said Mr Chirac.

This year's budget forecast to raise €44 billion from corporate tax constitutes 15 per cent of the French government's overall tax income.

Mr Chirac's plan sets up a clear electoral split with the Socialist opposition, which has promised to reverse recent tax cuts.

Nicolas Sarkozy, the leading candidate on the right to succeed Mr Chirac, has made a party manifesto promise to bring corporate taxes in line with the European average.

Laurence Parisot, head of business lobby Medef, welcomed the proposal as setting "the right direction", while adding that other taxes were more onerous for small and medium-sized companies. Mr Chirac suggested a lower 10 per cent rate for companies that shared profits equally between shareholders and employees.

He said that private equity groups should be forced to distribute a share of the profits - up to 20 per cent - to employees when they sell companies.