French Withholding Tax Change Poses Risks for Unprepared Firms

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By Rick Mitchell

France-based multinationals that bungle implementation of the country’s withholding-at-source system, set to start in 2019, could face fines and even a hit to their reputation, practitioners said.

Under current law, French employees are responsible for setting aside money to pay their yearly income tax bills, which they receive at the end of the summer. That’s will change Jan. 1, when companies have to start withholding tax for employees’ earned income and remit it monthly to the tax authority.

The French Labor Code will require companies to provide employees pay slips that include the basis, the rate, the amount of income tax withheld, as well as the amount that would have been paid to the employee in the absence of income tax withholding, Nathalie Devernay, a Lyon-based partner at Bird & Bird, told Bloomberg Tax.

Employers must apply a “specific tax treatment on remuneration paid to employees in 2018, to avoid double taxation in 2019,” Devernay said.

The main risk for companies is a 5 percent fine on undeclared sums above 250 euros ($297) for failure to pay the withheld amounts to the government, or for errors in payment.

“The system is ready. There is no tolerance or grace period expected for companies,” Colin Bernier, a Paris-based partner at EY Société d’Avocats, told Bloomberg Tax.

A Big Change

France’s biggest federation of business associations, Mouvement des Entreprises de France (MEDEF), and other groups have complained that withholding-at-source will turn companies into unpaid tax collectors for the government. It’s a big change for employees, too.

“For companies and workers in the major English-speaking countries, withholding-at-source is well-known. But for employees in France, it’s really very new. So it’s a real challenge to raise awareness of employees, with information about what’s going to happen,” Bernier said.

The French tax administration has said taxpayers will discover their withholding rates when they declare their 2017 income this spring. The government will communicate rates for individual employees to companies between September and December. “So companies have to have their systems ready, at the latest, in December, to be able to withhold and pay the correct amounts in January,” Bernier said.

What Rate to Apply?

Employees can opt for a non-personalized withholding rate, based on the case of an unmarried, childless employee, but must pay any shortfall at year’s end, the administration says.

Devernay said companies should be ready to communicate “up front” with employees about the coming changes. Among other things, “there will be questions over which remuneration items should be exempted from income tax. The case of seconded or expatriated employees will require particular attention,” she said.

Companies that haven’t prepared, and don’t receive personalized withholding rates for employees, will have to apply the non-personalized rate. One risk for the company is not withholding enough, and then paying a penalty. But if it withholds too much, it may anger employees, although they will get reimbursed eventually, Bernier said.

“That’s a risk to the company’s reputation, and employees’ trust,” he said.

The law creating the new system also calls for a fine of up to 15,000 euros, or up to a year in prison, for employers that violate employee confidentiality.

New Payroll System

Bernier and Devernay said the withholding plan will use the same information technology system attached to France’s “Declaration Sociale Nominative” system, developed over three years in several phases, to let companies electronically transmit payroll data via their payroll software programs or through their third-party payroll providers or certified accountants.

The system aimed to replace France’s notoriously onerous reporting requirements for dozens of social welfare, health insurance, pension and other related public and private agencies that collect social welfare taxes. France’s 13,000 largest companies have been legally required to use the DSN system for reporting social welfare data since May 2015, an obligation that extended to all companies Jan. 1, 2017.

Billed as ‘Modernization’

When it unveiled the withholding plan in August 2016, the government, under then-President Francois Hollande, said the system would modernize France’s tax collection, which created difficulties for some taxpayers because of a year-long time lag between when income is earned and when it is taxed.

President Emmanuel Macron’s government has maintained that simplification argument, although it delayed the plan a year, in the face of business groups’ protests that the plan didn’t allow enough time, and would be especially costly for small and medium-sized enterprises. The government held real time tests of the new system in 2017, with hundreds of volunteer companies.

To be ready for the withholding requirement, companies should adapt their payroll and audit systems and software, whether that is handled internally or by an external provider, Devernay said.

Bernier said the bigger the company, the bigger the challenge. The least stressful way for companies to handle the transition is to communicate about the changes with employees, and in particular, to start working now with their internal payroll team or outside payroll provider. Companies with adequate resources should be able to handle the change internally, he said.

To contact the reporter on this story: Rick Mitchell in Paris at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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