Time to Prepare for France’s New Tax Withholding Law
By William Kirwan, Vice President, Advisory Services
Effect on Multinationals
The new rules will not apply to employees who are employed by a non-French resident entity. That is, the employer will not be required to deduct income tax in these cases. However, it is very likely that, where the employee is resident in France for tax purposes, the employee will need to arrange for monthly payments directly to the tax authorities. Multinationals with expat employees in France should therefore carefully review their employees’ tax status and determine how the new law applies to any shadow payroll operations and tax equalized arrangements they have in place. They should clearly communicate any changes to employees well in advance.
Employers who use tax equalization may want to revise their payment schedules to ensure they provide adequate cash flows for expats affected by the withholding. Those who don’t use equalization should be aware of the law’s impact on their workers.
Employers, not workers, will be held responsible for collecting the right amounts and transferring them to the government at the right times. They can be charged a fine of 5 percent for unpaid taxes or errors in calculations (though rates are supplied by the government).
The new law has raised privacy concerns among the French, who are not used to sharing their individual tax rates with employers. As a result, employees will have the option of sharing a “non-personalized” rate with employers instead. This rate will not account for deductions or payments relating to personal family circumstances, and employees who choose it will be responsible for making any additional payments they owe to the government at year’s end.
It’s important to respect employee decisions not to share individual rates. Employers can be fined 15,000 euros or sentenced to a year in prison for violating employee confidentiality.
Bugs in the System
The French government has been testing the new system with hundreds of participating companies for over a year. A recent report in French newspaper Le Parisien found over 350,000 glitches. Employers who mistakenly sent lists of employees to the government twice would have caused the employees to pay twice if the system had been live. Some people would have been charged at the tax rate of other individuals with the same name.
In addition, the newspaper found "massive and completely random mistakes," some of which were recurrent. Though these errors were eliminated by June, they started to reappear in July and August, the newspaper said.
Despite the report, the government claims the technology is working and ready for implementation. Some former ministers who served under Holland when the plan was created say that the glitches are insubstantial or that the report is false and politically motivated.
Possible Psychological Effects
Under the law, companies will be required to display on employee pay slips not only the tax rate and the amount of income tax withheld, but the amount that would have been paid to the employee without income tax withholding.
Some officials, particularly those in Macron’s party, worry about the psychological effects of this procedure, fearing that workers who are constantly reminded of how much money the government is taking from them may demand higher wages or sour on the current administration. Despite Macron’s attempts to spark the economy through corporate and individual tax cuts, growth has stalled and unemployment is at 9 percent.
Whatever the consequences of the new law, employers in France must start preparing for it now if they haven’t already. They should be adapting their software for payroll and audits — as well as their shadow payrolls and tax equalization policies for expats — to account for the new rules.