PAYE-style income tax system in France

When is France switching to a PAYE-style income tax system?

22 March 2017

The requirement to submit French income tax returns online for households whose income exceeded €28,000 in 2015 (€15,000 for 2016), is the first step of a major reform planned to the tax system by 2018: the implementation of taxation at source on a household’s various incomes, similar to “Pay As You Earn”. 

Under the present arrears system, we are assessed this year on last year’s income. Households that have income tax to pay, make three or ten payments on account during the current year in anticipation of last year’s final tax assessment. Once the tax bill is issued, households then pay the balance remaining or receive a rebate if their payments on account result in an overpayment.

So the question arises, if we as tax payers already pay-on-account (based on the previous year’s assessment) what will change by implementing a source tax system? The government considers that under the current system, it is one year behind on its tax revenue and moving to the tax at source system will bring tax revenues up to date and improve its resources.

One of the main reasons for this reform is to make it the employer’s responsibility to withhold tax at source on their employees’ payslips and pay it directly to the government. This simplifies things for employees, whose net salary will be after all taxes and social charges and represents their real disposable income (though there remain other taxes to pay, such as TVA/VAT and local taxes).

It is planned to put this system into place from January 2018.

So to avoid 2017 earnings being taxed twice in 2018, revenues earned this year will be skipped, unless there is exceptional income earned (as compared to the household’s assessments in the previous three years). Households will still be required to file a return in 2018 for 2017 revenues, to enable the tax office to evaluate whether or not there has been an exceptional element that warrants a change in the source tax rate applicable to the 2018 revenues.

This question was answered by Olaf Muscat Baron who is a Fellow of the Chartered Association of Accountants UK, a French expert comptable and an International tax advisor. He is the principal accountant of Fiscaly, an accountancy firm based in the Dordogne.

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