In 2016, the French government voted to reform the way employees in the country are taxed. As we reported in February, the announced changes promise to significantly affect the way income tax is paid to the French tax authority - by shifting responsibility from employees, to French employers - who will now be obligated to withhold tax at source.
Originally scheduled to come into effect on the 1 January 2018, the reforms have been pushed by a year (to January 2019) by recently-elected President Macron, who promised the postponement throughout his election campaign. The delay was announced on September 23, 2017, by official government decree.
The Existing System
France’s income tax system currently involves no withholding mechanism on the part of employers. Employees receive their net salary, and then must file their own annual income tax return in May of the subsequent year - that is, a year after their income is earned. Tax is calculated each year by a regional tax centre, taking into account taxpayers’ household income, before individual tax bills are sent out. Employees pay the tax they owe in instalments over the course of the year.
The Reformed System
The reforms the French government voted for in 2016 will introduce a PAYE system to the French tax landscape, and place withholding obligations on employers - per individualised rates set by the tax authority.
Under the new system, an employer’s payroll department, or payroll provider, must file a tax report (via the ‘DSN’ system), provide details of employees’ tax contributions in their monthly payslips, and pay the collected tax to the local corporate tax centre. Once payment has been received, the corporate centre can dispatch the contributions from each employee on to local tax centres.
Transition & Impact
With businesses scrambling, President Macron initiated the delay to allow finance and payroll departments more time to prepare for the implementation of the reforms. The delay impacts the existing tax environment in a number of ways:
- Income tax accrued in 2017 is to be paid in 2018 under the existing regulations.
- A national tax credit (Crédit d'Impôt de Modernisation du Recouvrement - CIMR), originally intended for 2017, will now be applied to taxes on income earned in the 2018 tax year. Since French income tax collection is deferred a year, the CIMR is designed to avoid double taxation (in 2019) when the monthly withholding system is introduced.
- For the self-employed, monthly withholding is also deferred until 2019. The national tax credit self-employed workers receive will depend on their taxable profits from 2015-2017.
- The 30% rebate due to households incurring childcare expenses will now be delivered in 2019.
Many French businesses and taxpayers continue to express concerns about the PAYE reforms. By placing the withholding obligations on payroll rather than taxpayers, business owners expect a significant amount of extra administrative work, along with the risk of potential compliance penalties. Employees, on the other hand, are obviously worried about a reduction in net income - and the privacy issues associated with handing over certain sensitive tax-related information to employers.
Having expected the reforms to come into effect a year earlier, French businesses are already communicating the practical implications of the changes to their employees, and making suitable financial plans for the new tax landscape. Although the implementation date has been set, the future of the reforms is not yet certain: after the publication of the decree, President Macron now has three months to present a draft ratification bill to parliament. Essentially, delaying the tax reforms offers extra breathing room for the government to address concerns, and tweak the implementation of the PAYE system, during what is shaping up to be an interesting 12 months in France’s economic history.
For more information on France’s tax reforms, and their consequences for payroll administration, browse activpayroll’s Global Insight Guide.