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French Welfare Reform Includes Plans For VAT Rise

by Ulrika Lomas,, Brussels

16 January 2012

French Budget Minister and government spokesman Valérie Pécresse recently confirmed that plans to reform the financing of the welfare system in France will inevitably lead to an increase in value-added tax (VAT).

The minister nevertheless provided her assurances that any reform would be cost neutral.

Defending the government’s plans to raise the 19.6% standard rate of value-added tax (VAT), dubbed a “social VAT” (la TVA sociale), to finance a reduction in social contributions, the minister argued that from this point of view, VAT is an “extremely efficient” tool as it is an indirect tax levied on the sale of all products consumed, whether imported or made in France, and denounced as “immoral” the practice of social dumping, whereby countries with minimal welfare protection systems for their employees sell cheap products in France.

Pécresse revealed that the precise details of the planned reform would be determined following the forthcoming summit meeting with the country’s social partners on January 18, and would be included in a bill submitted to parliament ahead of the spring presidential elections.

The minister reaffirmed that the proposals were not part of the government’s deficit reduction plans, designed to generate additional revenues for the state, and maintained that the provisions would not result in an increase in compulsory taxes as the reform would be tax neutral.

The debate on the introduction of a social VAT has gathered pace in France in the last month, becoming one of the key election battlegrounds.

French President Nicolas Sarkozy’s centre-right Union for a Popular Movement (UMP) party is championing the idea of a social VAT as a means of reducing the burden on businesses in France, increasing competitiveness and supporting a flagging economy.

President Sarkozy unveiled plans at the beginning of the month to hike VAT before upcoming elections, to allow for a reduction in social security contributions paid by companies.

At the time the President insisted that the increase would bring in additional revenues as part of a government plan to increase employment and cut labour costs thus boosting the attractiveness of the nation's tax regime for businesses, explaining that the tax measures would be in place before April 2012, with details of new tax rates expected in the coming weeks.

A 1% rise in the standard VAT rate is expected to yield in the region of EUR7bn (USD8.9bn) in additional revenue for the state, which could be used to offset the planned reduction in labour charges.

Unions, the Left, and public opinion remain, however, hostile to the idea, arguing that the plans are yet another attack on the purchasing power of consumers, already hard hit by the crisis.

TAGS: tax | business | value added tax (VAT) | employees | budget | tax rates | social security | France

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