The provision for price rises (article 39 of the French General Tax Code) is a long-established and well-recognized mechanism for taking account of significant price rises. Recognition of this provision has a number of advantages for a company, as it reduces tax and accounting profits, thereby creating a temporary tax saving and - consequently - a temporary cash flow advantage.
Companies concerned by this provision
- All companies subject to corporate income tax, regardless of their form or the nature of their business.
- All companies subject to income tax on their actual profits AND carrying on an industrial or commercial activity.
Assets eligible for this provision
- Materials, products and supplies in stock, whatever their nature
And
- Having undergone a price increase of more than 10% at the start of the previous or current financial year.
Thus, only inventories can give rise to a provision for price increases. Work in progress is therefore excluded from this mechanism.
The amount of this provision
Calculation :
The provision corresponds to the difference between :
- the inventory unit value of the material, product or supply at that date
- 110% of its unit value at the start of the previous financial year or, if lower, at the start of the current financial year.
The calculation is made for each product, material or supply. Certain groupings are permitted.
If a provision is determined on the basis of the unit value at the start of the previous year, it should be reduced by any provision booked at the end of the previous year.
The company has the option of partially funding the price increase, and is not obliged to apply the maximum provision to which it would be entitled.
Ceiling: The amount of the provision may not exceed 15 million euros per twelve-month period (subject to conditions).
The consequences of this provision
- Reduction in tax and accounting income
- Temporary reduction in employee profit-sharing : as the provision reduces taxable income, the basis on which profit-sharing is calculated is automatically reduced.
- Temporary tax savings
- Temporary cash flow advantage
- As a regulated provision, it is included in shareholders' equity and consequently has no impact on net worth ratios (e.g. loss of half the capital or gearing ratio).
- Tax: This provision is automatically deductible from taxable income.
The reversal of this provision
The provision may be reversed at any time without justification. This must be done no later than six years after the end of the fiscal year in which the provision was set aside. The reversal of the provision will then be taxed as normal.
Receipts
The calculation should be detailed, specifying the unit value used and the quantities of each material, product and supply for which the provision is applied.
Your chartered accountant is at your side to analyze your situation and calculate such a provision for the 2022 financial year, contact us.Links :
Article 39 - General Tax Code - Légifrance (legifrance.gouv.fr)
