PAY YOUR DUES

With the in­tro­duc­tion of a PAYE sys­tem in France on the cards for next year, Ke­hinde Dauda ex­plains how it will work and how you might be af­fected

Living France - - CONTENTS - Ke­hinde Dauda is a bilin­gual char­tered ac­coun­tant and owner of Greenwich Tax­a­tion Ser­vices green­wich­tax.co.uk

Tax ex­pert Ke­hinde Dauda con­sid­ers the implications of a PAYE sys­tem in France

From 1 Jan­uary 2018, France will op­er­ate a pay-as-you-earn (PAYE) sys­tem cov­er­ing var­i­ous types of in­come. This new sys­tem will re­place the cur­rent pay­ment on ac­count ar­range­ment, whereby tax­pay­ers make tax pay­ments on ac­count in the cur­rent year in re­spect of the prior year’s in­come. Any­one liv­ing and/or work­ing in France and nonFrench res­i­dents with French source in­come are po­ten­tially af­fected.

The new sys­tem is a source of con­tro­versy in France and may not even see the light of day – François Fil­lon, one of the can­di­dates in the up­com­ing pres­i­den­tial elec­tions has stated that he will re­scind the law if he be­comes pres­i­dent.

House­holds will still have to file a tax re­turn, which is an in­te­gral part of the sys­tem, be­cause the ac­tual tax and in­come for a given year will be used in cal­cu­lat­ing the PAYE tax to deduct in the fol­low­ing two years.

THE NEW PAYE SYS­TEM

The fol­low­ing types of in­come will be sub­ject to the new PAYE sys­tem: • Em­ploy­ment in­come (i.e. salary). • Tax­able state ben­e­fits (e.g. sick­ness,

un­em­ploy­ment). • Re­tire­ment in­come (pen­sions, life­time

an­nu­ities). • Main­te­nance pay­ments. • Non-French in­come tax­able in France (in­clud­ing UK pen­sions paid to a UK re­tiree res­i­dent in France). • Rental in­come (in­clud­ing French prop­erty

rental in­come of UK res­i­dents). • Busi­ness prof­its.

The fol­low­ing types of in­come/gains are ex­cluded from the sys­tem: • In­vest­ment in­come (i.e. div­i­dends or in­ter­est). • Cap­i­tal gains (real es­tate prop­erty and fi­nan­cial in­vest­ments). • Non-French in­come which is sub­ject to French tax credit in ac­cor­dance with a dou­ble tax treaty (UK rental in­come of a French res­i­dent falls into this cat­e­gory).

COL­LECT­ING THE PAYE TAX AT SOURCE

There are two ways the PAYE tax will be col­lected at source as in­come is earned. Col­lected by the pay­ing agent Salaries, pen­sions and state ben­e­fits will be col­lected at source by who­ever pays them. For salaries, this will be em­ploy­ers, for pen­sions it will be the pen­sion ad­min­is­tra­tors and for un­em­ploy­ment ben­e­fits it will be the na­tional un­em­ploy­ment agency ( Pôle em­ploi).

The col­lect­ing agent is solely re­spon­si­ble for col­lect­ing the cor­rect amount of tax and tax­pay­ers them­selves can­not be held li­able for any er­rors or omis­sions.

If the PAYE tax is col­lected but not paid over to the French tax au­thor­i­ties for what­ever rea­son, the tax­payer is not re­spon­si­ble for pay­ing the tax.

Col­lected by the French tax au­thor­i­ties For other types of in­come (in­clud­ing busi­ness prof­its, rental in­come, main­te­nance pay­ments, pur­chased life­time an­nu­ities, non-French in­come), the French tax au­thor­i­ties will col­lect the tax ei­ther monthly or quar­terly by direct debit from a bank ac­count sup­plied by the tax­payer.

The tax­payer will in­cur penal­ties if the tax au­thor­i­ties are un­able to col­lect the tax, for ex­am­ple due to in­suf­fi­cient funds in the ac­count.

CAL­CU­LAT­ING THE PAYE TAX

The cal­cu­la­tion is ac­tu­ally a bit com­plex but there are two main el­e­ments: a fixed rate per­cent­age and the PAYE in­come. The PAYE in­come is mul­ti­plied by the fixed rate to de­ter­mine the PAYE tax to be col­lected. It is worth point­ing out here that as a gen­eral rule, in­come is de­clared in France for the whole house­hold (the two spouses/civil part­ners and their de­pen­dants).

So­cial charges (cur­rently to­talling 15.5%) will also be ap­plied to any in­come fall­ing within the scope of the PAYE that is sub­ject to these so­cial charges, no­tably rental in­come.

Fixed rate of tax The fixed rate is de­ter­mined us­ing the most re­cently as­sessed in­come. Given the dead­lines

for fil­ing in­come tax re­turns in France, prac­ti­cally this means that in­come earned in a given year will be used to de­ter­mine the fixed rate for Septem­ber to De­cem­ber of the fol­low­ing year, and for Jan­uary to Au­gust of the year after that. This is be­cause the in­come earned in a given year is de­clared on a tax re­turn in May of the fol­low­ing year; the tax bill is then is­sued in Au­gust which means Septem­ber is the first month it can be used to de­ter­mine the PAYE fixed rate.

Be­low is a for­mula for de­ter­min­ing the fixed rate – the tax and in­come are taken from the most re­cent year’s tax as­sess­ment for the whole house­hold as men­tioned above:

‘Neu­tral’ fixed rates will be used when no per­sonal fixed rate is avail­able, for ex­am­ple when the tax­payer is pay­ing tax for the first time and has no his­tor­i­cal in­come to de­ter­mine a per­sonal fixed rate. The neu­tral rates for 2017 have been pub­lished and can be found on­line at economie.gouv.fr/ preleve­ment- a -la-source /quel lecon fi­den­tia lite #taux-neu­tre

Those who do not want their em­ployer to know their per­sonal fixed rate can also opt to use the neu­tral rate. In this case, if the PAYE tax based on their per­sonal fixed rate is higher, they are re­spon­si­ble for pay­ing the dif­fer­ence over to the tax au­thor­i­ties by the fol­low­ing month.

PAYE in­come For salaries and pen­sions, the PAYE in­come is the amount paid by the em­ployer or pen­sions administrator after tax-de­ductible so­cial se­cu­rity con­tri­bu­tions (nearly all so­cial se­cu­rity con­tri­bu­tions are de­ductible).

For busi­ness prof­its, rental in­come, main­te­nance pay­ments, tax­able non-French in­come (all of which are sub­ject to a PAYE tax de­duc­tion directly by the tax au­thor­i­ties), the PAYE in­come is based on the most re­cently as­sessed in­come which will be the same as that used to de­ter­mine the fixed rate.

Ex­am­ple: A house­hold with a tax­able salary of €15,000 (net tax­able salary will be €13,500 after de­duct­ing 10% al­lowance for work-re­lated ex­penses), €26,500 tax­able busi­ness prof­its, €4,500 of in­vest­ment in­come (which is not within the scope of PAYE) and they paid an in-house helper €2,500 (giv­ing rise to a tax credit of €1,250), tax li­a­bil­ity be­fore tax cred­its of €3,511 and tax li­a­bil­ity after tax cred­its of €2,261.

The fixed rate based on this would be:

This rate of 7.60% will be com­mu­ni­cated to the em­ployer of the spouse earn­ing the salary; the em­ployer will ap­ply it to their tax­able monthly salary and pay the re­sult­ing PAYE tax over to the tax au­thor­i­ties. The tax au­thor­i­ties will ap­ply the same rate to the busi­ness prof­its of the other spouse to de­ter­mine the pay­ment on ac­count to debit from their bank ac­count.

TRANSITIONAL AR­RANGE­MENTS FOR 2017 IN­COME

Transitional ar­range­ments have been put in place so that tax­pay­ers are not taxed twice in 2018. In the ab­sence of such ar­range­ments, they would have to pay tax on their 2017 in­come in 2018 and also be sub­ject to PAYE on their 2018 in­come.

A one-off tax credit has been cre­ated which will ap­ply to non-ex­cep­tional in­come earned in 2017. Put sim­ply, the pro­por­tion of the 2017 tax li­a­bil­ity (payable in 2018) re­lat­ing to non-ex­cep­tional in­come is ef­fec­tively waived.

Busi­ness prof­its and in­come of com­pany di­rec­tors can vary ei­ther due to mar­ket con­di­tions or due to the ac­tions of the in­di­vid­u­als run­ning the busi­ness or com­pany. The so­lu­tion for deal­ing with these is to com­pare the an­nual in­come over a long pe­riod (2014 to 2018), fol­low­ing pre­scribed rules in or­der to de­ter­mine the non-ex­cep­tional in­come.

The law also in­cor­po­rates anti-avoid­ance pro­vi­sions with the aim of stop­ping tax­pay­ers from ma­nip­u­lat­ing their in­come and ex­penses in 2017 in or­der to max­imise this one-off 2017 tax credit.

SPE­CIAL SIT­U­A­TIONS

The law also in­cludes pro­vi­sions to cater for spe­cial sit­u­a­tions, which I shall only sum­marise here: • Changes in the house­hold (mar­riage, death, hav­ing chil­dren or adopt­ing chil­dren, di­vorce) will lead to changes in the PAYE fixed rate and/ or PAYE in­come. • Tax­pay­ers are free to ad­just their PAYE fixed rate in or­der to cater for re­cent events caus­ing ma­te­rial changes in in­come, such as be­com­ing un­em­ployed. • In­di­vid­ual mem­bers of the house­hold can opt to have in­di­vid­u­alised fixed rates, rather than the fixed rate for the whole house­hold. • Some tax­pay­ers who ben­e­fit from tax cred­its for em­ploy­ing per­sonal helpers or child­min­ders may have a high PAYE tax com­pared to their true tax li­a­bil­ity. Any over­pay­ment will ul­ti­mately be re­funded after fil­ing a tax re­turn, how­ever to al­le­vi­ate this po­ten­tial cash flow is­sue, the law in­cludes a pro­vi­sion to pay 30% of the tax credit up­front, based on the tax re­turn filed for the year be­fore last.

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