VAT: towards the end of reduced rates?

by | Apr 17, 2023 | Corporate taxation, Current Operation | 0 comments

Faced with inflation, the energy crisis and environmental challenges, there is a strong temptation to implement general or targeted VAT cuts. However, in its report on VAT, the Conseil des prélèvements obligatoires (CPO) points out that these reduced rates are costly for public finances, economically inefficient and rarely evaluated. Explanations.

VAT and reduced rates in France

Value-added tax (VAT) is an indirect tax on consumption collected by businesses and charged to customers on the goods and services they purchase in France.
In 2021, VAT was the third highest revenue-generating tax in France, with a yield of €186 billion, or 17% of compulsory deductions.
However, according to the CPO, VAT yields are threatened by two phenomena: the development of tax fraud, and the multiplication of reduced rates.

To avoid any risk of tax competition between Member States, reduced VAT rates are harmonized at European level.
Until 2022, they were strictly regulated. With the exception of a freeze clause for VAT rates applied prior to 1992, the 2006 VAT directive allowed only one full rate of at least 15% and two reduced rates of at least 5%.
The April 5, 2022 directive on VAT rates has opened up new possibilities for Member States to adopt reduced rates, including new goods and services eligible for these rates and the option for States to apply a reduced rate of less than 5% and a zero rate on a list of priority goods and services.

Reduced rates are expensive

While VAT is intended to finance public services, reduced rates represent a shortfall of around 47 billion euros for French public finances.

Among the reduced rates, the 5.5% rate on water, non-alcoholic beverages and human food products represents a cost of 20.1 billion euros, while the 10% rate for housing work other than energy renovation costs the public purse 3.3 billion euros.

These rates reduce VAT revenues. At the same time, they entail additional costs, with tax authorities having to carry out checks to ensure that companies are applying the various rates correctly.

For businesses, it’s not always easy to determine the applicable rate for certain products and services, and this multitude of VAT rates is also a source of complexity, wasting time and money.

Reduced VAT rates of limited effectiveness

According to the CPO, the economic effects of a VAT cut on prices, employment or business have not been demonstrated.
To boost the economy, he recalls that following the health crisis of 2020, several countries, such as Germany, introduced sectoral or general VAT cuts. However, empirical studies have demonstrated the limited effects of these measures at a high cost.

Similarly, in the face of the energy shock and inflation, a cut in VAT on energy appears less effective than other instruments such as the tariff shield or the energy voucher.

The CPO therefore believes that the adoption of new reduced VAT rates should be avoided in favor of other tools to pursue economic, environmental and public policy objectives, such as targeted transfers, excise duties, the emission allowance system or regulatory standards.

Reduced rates with uncertain consequences

Once introduced, the impact of reduced VAT rates on the sectors concerned is not analyzed. No detailed economic evaluation exists for the reduced VAT rates of 5.5%.

What’s more, when studies do exist showing the ineffectiveness of reduced rates, no conclusions are drawn. For example, a 2014 INSEE study estimated that only 20% of the VAT cut in the restaurant sector would be passed on in prices. Similarly, the 2016 Cour des Comptes report concluded that the 10% rate applicable to non-energy home improvements was not efficient. However, these reduced rates are still applicable.

In the interests of transparency and performance, the CPO therefore recommends that no new reduced rates be introduced, and that existing reduced VAT rates be more closely monitored and evaluated by the CPO or an ad hoc body.

Depending on the results of these analyses, ineffective reduced rates should be eliminated or raised to a higher rate.

The complex paths of taxation are not a problem for us.
Gain peace of mind with experts, plan your strategy!

Articles similaires

Découvrez nos articles similaires, mais n’oubliez pas de nous contacter, c’est mieux !

France’s tax police: towards a repressive tax policy

The fight against tax fraud has become a major preoccupation for tax authorities in France. In response to this problem, the government has introduced a new tool: the tax police. This measure is an important step in the crackdown on tax crime, which is becoming increasingly severe. In this article, we’ll look at the introduction of the tax police in France and its impact on tax policy, as well as the importance of calling on the services of a tax lawyer specializing in criminal tax matters.

What is the annual 3% contribution on real estate?

Legal entities that own real estate in France are subject to a tax of 3% on the value of their properties. This tax on the fair market value of real estate was introduced by the 1983 Finance Law with the objective of ensuring visibility of the chains of ownership of properties by French and foreign entities, allowing the identification of shareholders and thereby verifying the proper application of the Wealth Tax (ISF), now replaced by the Real Estate Wealth Tax (IFI).

What is the 3% annual contribution on buildings?

Legal entities owning real estate in France are liable for a 3% tax on the value of this real estate.
This 3% tax on the market value of real estate was introduced by the 1983 Finance Act, with the aim of ensuring the visibility of chains of real estate ownership by French and foreign entities; making it possible to obtain the identity of associates and thus verify the correct application of the wealth tax (ISF), now replaced by the real estate wealth tax (IFI).

Patronage and taxes: how to benefit from a tax reduction to support causes close to your heart

Corporate philanthropy is an increasingly common practice in the business world, involving the provision of financial support to associations and foundations, without expecting anything in return. In addition to contributing to philanthropic causes, corporate philanthropy also offers attractive tax benefits for companies. However, it is important to distinguish patronage from sponsorship, which is more of a commercial activity with direct rewards.

Tax rescripts

It is often important to know in advance the position of the tax authorities on a factual situation presented to them, but also, more specifically, on the interpretation of a tax text or measure on which they have no position.

In this sense, a tax rescript is a response from the tax authorities to a question from the taxpayer concerning the interpretation of a tax provision in force, or a factual situation with regard to tax law.