Summary:
– The CICE would contribute to a recovery in the price competitiveness of French exporting companies and to the net creation of 300,000 jobs in France
– However, the effectiveness of this measure could be limited by poor financial forecasts (anticipated results and payroll) and poor refinancing conditions with financial intermediaries (interest rates and risk premiums)
– Finally, the effectiveness of the measure could be hampered by a significant time lag between its administrative implementation and its payment, which would limit the attractiveness of this tax incentive to companies
The CICE (Tax Credit for Competitiveness and Employment) is the main measure to come out of the « Gallois » report, which was submitted to the government in November 2012 in response to the loss of price competitiveness among French companies. The initial idea behind this tax credit is to reduce labor costs in order to improve price competitiveness, which is conducive to companies’ export-led growth strategy. Ultimately, this could create 300,000 jobs in France, according to official ministerial statements. Improving competitiveness is therefore seen as a means of boosting employment in France.
The principle of the CICE
A tax credit is used to influence the behavior of an economic agent through a tax incentive. In practice, this translates into a tax reduction that can take different forms: tax reduction or tax refund. In the case of the CICE, the principle is to calculate a tax credit of 4% for salaries below 2.5 times the minimum wage, in other words for salaries below €3,875 gross per month. In exchange for this tax reduction, companies must make investments likely to improve their price competitiveness. The amount of the CICE will normally be increased to 6% in 2015 and should represent a total credit of around €20 billion over three years.
Ultimately, the government expects the CICE to create 300,000 net jobs (400,000 jobs created, adjusted for the 100,000 jobs lost due to its financing). It should bring about 1% additional economic growth (GDP) and mainly benefit industry, to the tune of €4.4 billion, and trade, to the tune of €3.7 billion.
The government wanted to launch the CICE in January 2013, but its actual financing will only be effective from 2014 due to the application of VAT (which represents 50% of the CICE’s financing) and the reduction in public spending (also 50%) at that date. As a result, the Ministry of Economy has developed a tax credit advance system, which can be summarized in its simplest form as follows:
1) First, at the beginning of the year, the company must determine the amount of tax it will have to pay at the end of the year on the sum of salaries below 2.5 times the minimum wage in order to apply for the tax credit.
2) Next, as the government does not have the means to finance this measure directly, it calls on banks to act as intermediaries. Companies applying for the CICE must therefore ask a commercial bank to grant them the amount they estimate they will receive under the CICE for 2013 profits, payable in 2014.
3) The commercial bank then grants a loan to the company in anticipation of the government’s reimbursement. The commercial bank charges for its service by applying an interest rate. However, it is not the company that repays the commercial bank, but the State, on which the commercial bank then holds a debt security. Once the financing is secured, the State will therefore not reimburse the companies, but the commercial banks that have provided the sum necessary to finance the CICE.
The CICE scheme could be ineffective for five reasons
The first reason is the time lag involved in this measure. While the competitiveness and cash flow problems faced by companies are immediate, the CICE mechanism means that there is necessarily a delay between the time the application is made and the time the funds are released, which can further exacerbate the difficulties by increasing working capital requirements.
The second reason concerns the company’s commitment to make an investment « effort, » the definition of which remains unclear. It is not specified whether it is the total amount of investment that will be important or the change in investment expenditure. In other words, a company that has already invested heavily in the past will not necessarily be considered to be making a significant investment effort if the most significant investments have already been made. Conversely, a company that has never invested but is investing today may be considered to be making a significant investment effort.
The third reason is accounting-related. The CICE takes into account full-time salaried work, without absences or overtime, and is therefore capped at 35 hours per week (i.e., a maximum of 1,820 hours per year). In the case of part-time employees, who may have been ill or worked overtime, the calculation can be complex. As a result, very small businesses (TPE) may not have the necessary resources (human resources, accounting department) to accurately quantify the CICE based on changes in their payroll. Added to this risk is the uncertainty associated with companies’ revenue forecasts for the current year, which are taken into account for the application of the CICE.
The fourth reason is related to the fact that the CICE can only be claimed for salaries below 2.5 times the minimum wage, a condition that is likely to create a threshold effect. Employers may therefore postpone or cancel salary increases that could push certain employees into the higher salary bracket, thereby preventing them from benefiting from the CICE. Employers will therefore be encouraged to maintain a lower salary scale. A second risk would be to limit the number of employees benefiting from profit sharing for accounting purposes when calculating the total payroll before and after tax.
Finally, the fifth reason is that the CICE scheme has three types of cost for the company. The first is an opportunity cost related to understanding and implementing the scheme. The second cost is banking, since going through a commercial bank necessarily involves bank charges and the payment of interest, which may ultimately cancel out or reduce the tax benefit of the CICE. The third cost is financial, since if the company has miscalculated the amount of its CICE, the government has announced that it will withdraw, thus placing the risk of non-repayment on the commercial bank. As a result, commercial banks are charging higher rates to protect themselves against this risk of non-guarantee, which increases the risk premium.
