French 1 Jan 2014 VAT hike follows EU tax strategy

17 December 2013

On 1 January 2014 France will raise its VAT rate to 20%. It will be joining most other EU member states which have been shifting the tax burden from business onto consumers in a bid to attract and retain multi-national businesses. The UK has been a leader in this strategy with its 2011 VAT rise to 20% enabling it to lower corporation tax to 20% by 2015.

TMF Group’s 2014 EU Tax Tracker shows average EU corporate tax rates have fallen from 39% to 24% since 1994, funded by average EU VAT rising from 17% to above 21% over the same period.

Financial crisis accelerates tax competitiveness strategy

EU member states have been reducing their corporate tax rates for 20 years in a bid to sustain employment in the face of low-cost, emerging economies. The financial crisis has added extra pressure, and pushed France and Italy (which raised VAT to 22% Oct 2013) to increase their rates this year to help fund lower business and employment taxes.

This mirrors similar VAT rises in the Netherlands, Ireland, Spain, Portugal, Finland, Greece and many other EU member states.

The TMF 2014 EU Tax Tracker below shows the dramatic pivot from corporate tax to VAT in the EU.

Graph

Why governments prefer to tax consumers

Whilst a potential vote loser, VAT rises present indebted governments with many attractions:

  • It enables them to cut business taxes and attract job-creating global companies
  • VAT is not susceptible to complex, tax avoidance schemes by multinationals
  • Business profits are more volatile (compared to consumption), vulnerable to sharp downturns in the economic cycle, which can leave governments exposed to deficits
  • Since it is charged and collected by businesses, it is the cheapest tax to administer
  • As VAT is not charged on exports, it helps promotes overseas trade.

Head of Tax at TMF Group Richard Asquith said: “France has hesitated for two years on a VAT rise to help it rebalance its deficit. It is questionable how well the economy can withstand more tax but as the rest of Europe has shown, pushing taxes onto shoppers is necessary for countries to remain attractive to international companies and competitive on the global stage.”

 
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