EU criticises French reduced VAT

Tue 26th Jul 2016

The European Commission has issued a report that criticises heavily indebted France for over use of reduced VAT rates.

The report estimates that France’s extensive use of reduced VAT costs it around 1% in GDP compared to other EU member states. Given that France has missed the Euro currency 3% deficit limit for almost ten years in a row, the report suggests a rethink.

VAT is relatively easy to administer for governments, and is less damaging to economic growth compared to income or employment taxes. It has therefore become a much more popular source of revenues than income taxes for EU member states. The average share of VAT to total revenues in the EU is 17.5%. However, it is only 14.5% in France mainly due to the frequent application of reduced rates and full exemptions.

The current French standard VAT rate is 20%. This compares to the average EU VAT rate of 21.6%. France has three reduced VAT rates: 2.1%; 5.5%; and 10%. The EU VAT Directive only permits two reduced VAT rates, the lower of which must be 5% or above.