France is one of the few countries where employers do not withhold the employee's personal income tax from their payslip. The employee is responsible for filing and paying their own income tax, one year in arrears. This delay routinely causes problems in the case of a drop in income the next year, and where the employee did not save enough to be able to pay his or her income tax of the previous year.
The French government has decided to implement electronic filing systems in order to increase the accuracy and timeliness of income tax collection. The following reform will be discussed in Parliament by the end of 2016.
Effective 1 January 2018, French employers will be required to withhold personal income tax from their employees’ payslip each month.
The French Tax Administration will calculate an employee’s individual tax rate based on the past year’s annual declaration of income. The calculation will take the employee’s entire household income into consideration. Employers will be notified of an employee’s individual rate via a government-administered secure portal. The employer will use this tax rate to withhold personal income tax from the payslip, and pay the income tax to the tax administration on behalf of the employee.
This change will result in:
- a lower net salary for the employee at the end of each month
- an immediate and equalised payment of the income tax throughout the year, instead of a delayed payment which often disrupts the employee’s cash flow
- an immediate collection of the tax for the French government
- a considerable amount of additional work for the employer’s payroll department.
The controversial reform has naturally raised fears on both the employer and employee sides.
- Employees fear the disclosure of their personal income tax rate to their employer could allow the employer to gain an inappropriate amount of insight into the employee’s financial situation.
- Employees fear they will have to pay income tax twice in 2018 (once on their 2017 income, and once on their monthly 2018 income).
- Employers fear that this new requirement could be an additional administrative burden.
In order to address these fears, the government has decided to take a conservative approach.
- The employee will have control over the tax rate disclosed to their employer; a default “neutral” rate has been created and the employee will be able to choose for this rate to be communicated to their employer, instead of their actual rate.
- The employee will be able to change his or her tax rate option on the secure portal at any time.
- End of 2017: employers will retrieve the employees’ tax rates via the portal and apply them for the entire year 2018. The practicalities for this data collection process are yet to be published.
- Monthly filing to the tax administration will be completed by the employer using the all-electronic “DSN”. Payment practicalities are yet to be published.
At the end of the year, the employee is still obligated to file their usual annual income tax declaration to the tax centre. A reconciliation will be made between their 12 monthly payments by their employer, and their actual tax due. The balance, if any, will be paid by the employee directly to the tax administration.
In the first year – the “transition” year – in order for employees to avoid paying their income tax twice, the government has decided to cancel the annual income tax of year 2017. Exceptional incomes and tax credits pertaining to tax year 2017 will, however, be taken into consideration for the calculation of the tax rate.