Social charges and tax could merge

THE MERGER of income tax with social charges could be on the horizon, with significant implications for many expats.

A degree of consensus is emerging between the two main political parties on the need to merge the social charges (CSG/CRDS/PS) into the French income tax system.

The idea is supported by the president of the ruling UMP group in the National Assembly, Jean-François Copé.

A similar scheme has also been formally adopted by the Socialist Party based on a proposal made by their former leader François Hollande.

It is likely that the idea will feature strongly in the presidential elections in 2012.

The UMP sees the move as a response to the huge debt burden faced by France and the need for a greater number of households to make a contribution towards reducing the national debt.

Around half of households do not pay income tax, although the net for social charges is cast wider.

At present the income collected from social charges is far higher than that from income tax. Revenue from income tax brings in around e50 billion a year to the French Exchequer while social charges bring e88 billion.
The social charges are mainly used to fund the health system, which is in chronic deficit.

For the socialists the objective is producing greater equality in the tax system, by integrating the social charges into the progressive income tax system.

While there is currently some dispensation on liability for social charges for low income households, they are not progressive taxes in the same way as income tax is (ie. with higher percentage bands the higher your income).
One of the other attractions for both political parties is the savings that will be made in administrative staff.

However the merger is likely to have significant implications on the tax position of tens of thousands of expats.

This is because social charges are not payable on (state or private) pensions of expats who are state old age pensioners. They are exempt from paying because they are covered for health in France through a European E121 form.
What is more, a large number of early retirees who would normally be liable for the social charges on their private pensions do not pay social charges because of inefficiencies in the system of collection.

While income tax is collected by the French tax authorities, social charges are collected by the social security agency Urssaf. As early-retirees will usually not be registered with Urssaf, they often wrongly escape collection of the social charges on private pension income.

So, if social charges are merged with income tax, many expats in France are likely to pay a greater amount in taxes - whether because their private pensions will be picked up for the new tax whereas they might have fallen under Urssaf’s radar before, or whether they end up paying more tax under the new system if their previous exoneration due to the E121 rule is not taken into account.

Those on government pensions (for civil servants etc), whose pensions are not taxable in France, should not be affected.

Robert Kent of tax advisers Kentingtons said that while it was true some expats already living in France could end up paying more tax under the proposed system, this would not be true across the board.

For example, some of those on low-incomes, who do not currently pay income tax but do nonetheless pay social charges may find themselves paying nothing if the two are replaced by a new tax.

This is one reason the measures are favoured by the socialists, he said.

He added that the prospect should not put people off thinking of coming to France. "Most couples pay considerably less income tax in France than they would in the UK, so even if this change were to come into effect, people moving to France will not notice a spike in their income tax payments," he said.

There also remains the issue of how such a huge measure would be implemented, with difficulties likely in the transition from one tax to the other.

One idea being canvassed is that France should introduce something similar to the British Pay As You Earn (PAYE) system for salaried staff, something that does not happen in France, as everyone pays their income tax a year in arrears.

On this point there may be little change for expat pensioners, who would continue to be liable for income tax a year in arrears.