UPDATE 1-France to propose tax hike on telecom bundles-source

* France Economy Minster to submit plan to President

* To raise VAT on triple-play under pressure from Brussels

PARIS, Sept 8 (Reuters) - France’s Economy Ministry will submit a plan to President Nicolas Sarkozy to raise the value-added tax on telecom bundles to 19.6 percent, according to a person close to the Economic Minister Christine Lagarde.

The move, if finalised, would hurt operators that sell "triple play" bundles of TV, phone and broadband like France Telecom FTE.PAFTE.PA, Iliad ILD.PA, Bouygues BOUY.PA, and Vivendi's SFR unit VIV.PA.

European regulators have pressured France to change the way it taxes “triple play” services, saying the current scheme of taxing half the bundle, the TV portion, at a lower 5.5 percent rate falls foul of the region’s rules on value-added taxes. [ID:nLDE67N17J]

On March 18, Brussels notified France that its system posed a problem and asked for details about how it worked and how it could be justified.

Now France appears to be moving towards raising the VAT tax on the whole of triple play bundles to 19.6 percent.

“It is the approach that will be submitted to the President for his decision in the coming days,” said the source close to Lagarde. The measure would generate “several hundred million euros” for the state as part of the 2011 budget, said the person.

Telecom operators have protested loudly against the tax hike, saying it could lead them to raise prices paid by consumers and slow their willingness to invest in high-speed fiber broadband networks.

Reporting by Jean-Baptiste Vey; writing by Leila Abboud; editing by Elaine Hardcastle