Following days of speculation, the French President has decided that 'prelevement a la source', otherwise known as Pay As You Earn, will become a reality as of 1 January 2019.
The policy change, which was announced on Tuesday night by Prime Minister Edouard Philippe, means that payroll will deduct French workers' annual income tax from their monthly wages in future rather than taxpayers having to pay it themselves in between one and three instalments the following year.
The decision appears to settle a much-delayed policy uncertainty. President Emmanuel Macron's predecessor Francois Hollande had backed the measure as far back as 2015. At that time, adoption was supposed to start in 2016, with full roll out scheduled for 2018.
But Macron was unsure about the measure and last September initially pushed implementation back to 2019. As late at last week, he said that he wanted “precise answers” before deciding whether to introduce the policy as planned next January, leading many to believe it could be abandoned.
According to Politico EU, French daily newspaper Le Parisien published confidential information from the scheme's test run over the last few days, which revealed "calamitous" mistakes in tax collection.
But Budget Minister Gerald Darmanin refuted the claims on Twitter saying: "The errors identified concern less than 1% of taxpayers, they have since been resolved. The technical mechanism functions. It is ready!"
The shift to PAYE for 38 million households could reportedly cost upwards of E300 million (US$349 million) to implement. There have also been fears of a "psychological effect", in which consumers spend less money because their monthly take-home pay appears to have shrunk - an idea that was attributed to Macron's hesitation.
When the new regulations come into force next year, companies with staff in France will be obliged to deduct money at an appropriate tax rate for each of their employees based on guidelines from the Direction Générale des Finances Publiques (DGFIP), according to TMF Group.
They will then collect the necessary monthly withholding tax on employee net salaries and declare the amounts on payslips accordingly. These amounts will then be paid on a monthly basis to the DGFiP using the Declaration Sociale Nominative reporting standard, a few days after making salary payments.
France is one of the few developed economies that does not impose income tax for the current year of work. Instead, it calculates tax based on the previous year’s earnings and allows taxpayers to choose whether they pay every month or three times a year.
But business groups such as the Medef employers’ federation have warned that companies need more time to prepare for the switch, as they will be responsible for collecting their employees’ taxes for the first time.
Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.
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Following days of speculation, the French President has decided that 'prelevement a la source', otherwise known as Pay As You Earn, will become a reality as of 1 January 2019.
The policy change, which was announced on Tuesday night by Prime Minister Edouard Philippe, means that payroll will deduct French workers' annual income tax from their monthly wages in future rather than taxpayers having to pay it themselves in between one and three instalments the following year.
The decision appears to settle a much-delayed policy uncertainty. President Emmanuel Macron's predecessor Francois Hollande had backed the measure as far back as 2015. At that time, adoption was supposed to start in 2016, with full roll out scheduled for 2018.
But Macron was unsure about the measure and last September initially pushed implementation back to 2019. As late at last week, he said that he wanted “precise answers” before deciding whether to introduce the policy as planned next January, leading many to believe it could be abandoned.
According to Politico EU, French daily newspaper Le Parisien published confidential information from the scheme's test run over the last few days, which revealed "calamitous" mistakes in tax collection.
But Budget Minister Gerald Darmanin refuted the claims on Twitter saying: "The errors identified concern less than 1% of taxpayers, they have since been resolved. The technical mechanism functions. It is ready!"
The shift to PAYE for 38 million households could reportedly cost upwards of E300 million (US$349 million) to implement. There have also been fears of a "psychological effect", in which consumers spend less money because their monthly take-home pay appears to have shrunk - an idea that was attributed to Macron's hesitation.
When the new regulations come into force next year, companies with staff in France will be obliged to deduct money at an appropriate tax rate for each of their employees based on guidelines from the Direction Générale des Finances Publiques (DGFIP), according to TMF Group.
They will then collect the necessary monthly withholding tax on employee net salaries and declare the amounts on payslips accordingly. These amounts will then be paid on a monthly basis to the DGFiP using the Declaration Sociale Nominative reporting standard, a few days after making salary payments.
France is one of the few developed economies that does not impose income tax for the current year of work. Instead, it calculates tax based on the previous year’s earnings and allows taxpayers to choose whether they pay every month or three times a year.
But business groups such as the Medef employers’ federation have warned that companies need more time to prepare for the switch, as they will be responsible for collecting their employees’ taxes for the first time.
Emma Woollacott is a freelance business journalist. Her work has appeared in a wide range of publications, including the Guardian, the Times, Forbes and the BBC.
OTHER ARTICLES THAT MAY INTEREST YOU
Income tax withholding to apply to all staff in France from early 2019
France to scrap 30% 'exit tax' on top earners to attract foreign investors
Luxembourg and France sign new double taxation treaty
