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Bercy’s ignorance about our small business world

Sunday 1 July 2012, by Nathalie DROAL

There are not enough gazelles in France because our Treasury and the organ establishing tax laws (the DLF) show deep ignorance about business creations.

Bercy’s ignorance about our businesses world

Is this because of the training of our senior civil service? It this because, though they graduate often from executive business schools, they have never worked in small companies? Their lack of knowledge about the French businesses world is enormous.

Companies represent more than 75% of French employment and collect approximately 80% of tax revenues. If we do not create new companies, we have no chance to ever balance our budget.

Is this the result of Sciences Po -Institute for Politic Studies - or of ENA -School of National Administration - teachings? The evidence about the creation of the Madelin tax advantage makes us suppose so. Under the cover of helping business creation, the development of public service only creates comfortable jobs for public servants.

The options chosen by our senior public servants are not understandable

Bercy’s and the DLF’s attitude concerning tax incentives is hard to understand. Those are indeed necessary to have independent Business Angels and to finance the start and growth of gazelles which create jobs.

Systematic opposition to incentives

Since the avantage Madelin, Bercy and the DLF did everything they could to avoid creating Independent Business Angels. Such BAs are those who invest more than 100 000 Euros a year in gazelles.

In 1958 the U.S. created the Subchapter S that encouraged their emergence: since then, the state takes in charge roughly half of the financial risk of creating a new business. In 2010, President Obama even suppressed capital gains taxes for investment in companies with equity capital under 50 million dollars. In the UK, 30% of investments can be deducted from income tax. Up to 1 million pounds can be deducted for an individua income for income tax purpose, 2 million for a household.

The DLF systematically opposed such ceilings and drastically limited them (40 000 € for the Madelin advantage and 66 666 for the so called “ISF TEPA”).

It discourages Independent Business Angels. They rather choose more lucrative investments: artwork, real estate, social constructions in French overseas territories. It encourages financial intermediaries and they do not invest in gazelles.

The tax incentives for gazelles, introduced in 2006 by Renaud Dutreil, secretary for small businesses, were ridiculous. They are complicated and they are not real incentives. They are sufficient to prove Bercy’s lack of interest for business creation.

Moreover, the DLF managed to make the French version of Subchapter S ineffective. Bercy’s director assistant said it would be a regression considering the “tunneling” of incomes (that limit deduction of losses to gains of the same nature), an invention of the DLF.

Bercy does not take any interest in companies, especially if compared to its English counterpart

English law restricts tax incentives and therefore eliminates the ones with no risks for investors. But there are no limitations for French tax incentives. French treasury complained that tax incentives have been used to finance cigar cellars and solar investments, already guaranteed at 100%. But nothing was done to avoid it. We had to mention those blackholes to the Treasury Secretary’s tax adviser to make appear the first limitations.

It took five years from 2007 to get what we were fighting for . Tax incentives have finally been limited to companies under 50 employees (PEC) and not to all small and medium size businesses (up to 250 employees). The latter do not need as much starting equity. Europe recommend to limit tax incentives to PEC’s and the U.K. already did it with the EIS.

French Treasury and the DLF are reluctant to introduce high tax ceilings because they fear –and they are right- that they will be twisted by financial set up, for pure tax purposes.

The British anticipated the problem. English companies which want to benefit from this tax advantage have to get a preliminary agreement from the Treasury. It is delivered within about a month.

To make sure the plan is working, a special service has been created, with two branches, and one of them is established at Cardiff. This service is dedicated to the delivery of agreements and make sure that companies respect their obligations.

The British understood that companies must be cherished and developed and they set up appropriate policies.

Almost one billion pounds are directly invested each year in PEC’s, and two third of them in individual investments of more than 75 000 pounds, from Independent Business Angels. That is the reason why the U.K. has been so successful to create gazelles. French Treasury does not have to do exactly the same of what the English did but we should follow their example.