World Economy

European Commission Criticizes France’s Inefficient VAT System

European Commission Criticizes  France’s Inefficient VAT SystemEuropean Commission Criticizes  France’s Inefficient VAT System

The European Commission has released a paper recommending improvements to France’s “inefficient” value-added tax system, including that the country do away with broadly applying reduced VAT rates.

The paper notes that France faces significant fiscal challenges; Its tax burden is among the highest in the EU, and despite reforms, its high labor tax burden is hampering the nation’s competitiveness, Global Tax News reported.

The commission has recommended that comprehensive reform of the French VAT system could help fund growth-enhancing tax cuts and reduce complexity for taxpayers.

VAT receipts in France were below the EU average in 2014 as a percentage of total tax revenue, at 14.5%, compared with an EU average of 17.5%.

The paper says: “Since VAT is easier to administer and relatively less harmful to growth compared with other forms of taxation, increasing revenues from VAT could be important in alleviating the tax burden on labor, which remains relatively high in France despite the recent policy initiatives to reduce it.”

The paper discusses the current VAT rate structure in France and identifies channels for potential efficiency and revenue gains. It says, in comparison with other member states, the extensive application of reduced rates and the use of exemptions diminish the revenue efficiency of the VAT system.

 Budgetary Costs

“The revenue foregone from reduced VAT rates and exemptions considered as tax expenditures by the French authorities carry a substantial budgetary cost of around 1% of GDP,” the paper says.

The report further highlights that the standard rate in France (20%) is below the average standard rate in the EU (21.6% in 2015). Only four countries (Luxembourg, Malta, Cyprus and Germany) have a lower standard rate than France. Approximately 55% of the products in the price index are subject to the standard rate in France.

In addition, France applies lower tax rates than the EU member states on average for most categories of goods and services subject to reduced VAT rates (2.1%, 5.5% and 10%).

According to the report, the 10% rate is applied to approximately 15% of the products and services in the price index, with almost 20% of products being taxed at the reduced rate of 5%, and a more limited amount of products at the super reduced rate of 2.1%.

Only five member states (Spain, France, Ireland, Italy and Luxembourg) apply a super reduced rate.

Meanwhile, sluggish exports, mainly of transport equipment and pharmaceutical products, drove France’s trade deficit higher to €3.4 billion ($3.77 billion) in June compared to a month earlier, customs figures showed on Friday.