You’re probably familiar with the Benjamin Franklin quote “in this world nothing is certain but death and taxes”. I fear we’ll soon be able to change it to “nothing is certain but death and rising taxes”. You may think we’ve had more than enough tax increases in France, but with France having lost its valued AAA credit rating and its ongoing efforts to reduce the budget deficit, I expect there are still more to come, one way or another.
As I write this, the electoral battles are starting to heat up with parties outlining their plans to improve the economy. Presidential hopefuls prefer to steer clear of saying they will raise taxes, but this time they want to show they have an action plan for the economy and so unusually tax rises are on the agenda.
On 29th January President Nicolas Sarkozy announced new measures to fix France’s ailing economy. This includes a 1.6% rise in the standard rate of VAT to 21.2%, a measure that will affect everyone and not just the wealthy this time. It is due to come into effect in October.
The revenue generated will compensate for the cost of a proposed cut in payroll taxes paid by employers. This would make France more competitive since it reduces the cost of labour and would encourage companies to employ more people, thus reducing the number of unemployed.
It has been labelled social VAT (“une TVA sociale”), but shouldn’t be confused with social charges.
This doesn’t mean there will be no change to social charges, however, because Sarkozy also announced a 2% increase in the contribution sociale généralisée (CSG) social charge applied on investment income, such as bank interest and dividends, and capital gains. This would take the total social charges rate on such income up to 15.5%. Again, it would be effective from 1st October 2012.
He also believes bankers and financers must pay a larger share of their profits to aid the “real economy” and announced a 0.1% tax on financial transactions in France – the so called “Robin Hood tax”. He has been trying to persuade all European countries to follow suit, so far unsuccessfully. This will start in August 2012.
These tax increases will need to be approved by parliament, and of course there is the small matter of winning the election first.
François Hollande, the presidential frontrunner as I write this, has also been talking about tax rises and he is targeting the wealthy. “If there are sacrifices to be made, and there will be, then they will be for the wealthiest to make”, he said.
He has said that he will ease the current government’s unpopular pension overhaul and increase spending by €20 billion over five years. This would need to be paid for and he aims to lift tax receipts from the current 45.1% of gross domestic product to 46.9% in 2017.
He plans to introduce a new, higher rate of income tax for those who earn more than €150,000 a year, by raising their marginal tax rate from 41% to 45%.
Sarkozy has already introduced a surcharge on high earners for two years, taking the top rates to 44% and 45%, but this is for income over €250,000 and €500,000 respectively so Hollande’s lower threshold will hit many more households. It is expected to generate approximately €400 million for the state.
He has also said that he will abolish around €29 billion of tax breaks for wealthier people which had been introduced under Sarkozy. I understand he may introduce further tax reforms that would increase taxation on the sale of shares and other investments for higher earners, as well as reinstate the original wealth tax scale.
He will also up taxes on banks and remove a series of tax breaks for big corporations.
All this would be on the top of the tax rises that have already been imposed on French taxpayers over recent years. I wouldn’t blame you if you were now looking for ways to lower your tax bill in France, but you do need to be very careful about the methods you use and be sure your tax planning will stand up to the taxman’s scrutiny.
The French government has been taking a very tough stance on tax evasion, and I expect this to continue and intensify whoever is in government.
It was reported in January that the finance ministry was preparing a series of tough measures to strengthen its tax fraud arsenal. It intends to toughen the sanctions imposed on people with undeclared bank accounts held abroad. The penalties imposed (on top of paying the tax due and interest) will be proportional to the undeclared sum. The ministry is also planning a tenfold increase in the penal sanctions applied where tax fraud involves tax havens, so fines could be up to €1m and imprisonment up to two years.
Anti-tax evasion measures have been proving profitable for the government. Since 2007 the tax authorities have recovered €50 billion of rights and penalties. In November 2011 budget minister Valérie Pécresse reported that tax audits had increased by €1 billion from 2009 to 2010, taking the total collected in 2010 to €16 billion. More and more people are now declaring offshore bank accounts rather than risk hiding them.
Pécresse also announced details of new measures against tax fraud, including communication with banks and the introduction of Evafisc database which lists non-disclosed bank accounts held abroad by French residents and legal entities. The authorities will examine payments made with foreign bank cards to identify French residents with accounts abroad.
France has been calling for automatic exchange of tax information between all European countries. It rejected an offer of a withholding tax deal with Switzerland similar to those signed by the UK and Germany, even though it would bring in much needed revenue, as it believes tax evaders should be held accountable.
This doesn’t mean it’s impossible to lower your tax bill on your savings, investments, pensions and wealth, because there are still compliant and legitimate arrangements available in France that could help you do this. You need to seek personalised advice for your circumstances from a professional adviser.
By Bill Blevins, Managing Director, Blevins Franks
31st January 2012
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.