The question of taxation of French expatriates is a recurring subject in the political debate in France, a leitmotif, when it is not simply the Arlesian one, as the idea provokes reactions, good and bad. Recently, the French left proposed making French tax expatriates pay income tax, a measure that could have significant political and economic implications.
What would in fact be the potential impacts, and the challenges linked to existing bilateral agreements, of subjecting tax expatriates to income tax?
Taxing tax expatriates: a not so new idea
The proposal to tax French expatriates is not new. It has been mooted by various political parties over the years, but has never been implemented due to the significant legal and practical challenges it would pose. The French left, notably the New Popular Front (NFP), recently relaunched this idea as part of the fight against tax evasion, an idea still supported by Lucie Castets, a candidate for her nomination to the post of Prime Minister of France on behalf of the NFP, last July.
Political implications
- Political support and opposition
The proposal to tax expatriates has sparked mixed reactions within the National Assembly. Supporters of the measure, mainly from the left, believe that it would help fight tax evasion and guarantee greater tax fairness. On the other hand, opponents, particularly in the center and on the right, fear that this measure will dissuade French talents from expatriating and will negatively affect France’s image abroad.
- Impact on international relations
The implementation of this measure would require a renegotiation of existing bilateral agreements between France and other countries (> 120). Currently, most bilateral tax agreements are based on the residency principle, meaning that expats pay their taxes in the country where they reside. Moving to a nationality-based system, like that of the United States, would involve complex negotiations and it could certainly lead to diplomatic tensions.
Economic implications
- Impact on tax revenue
One of the main motivations behind this proposal is to increase tax revenues for the heavily indebted French state. According to a study by the Institute of Public Policies (IPP), taxing tax expatriates could generate additional revenue of several billion euros per year. However, this estimate depends on many factors, including the ability of the tax administration to correctly identify expatriates affected by the measure and to collect taxes from expatriates.
- Effects on the French economy
Taxation of tax expatriates could have mixed effects on the French economy. On the one hand, it could discourage some French people from expatriating, which could reduce the flight of talent and capital, but on the other hand, it could also dissuade foreign investments in France, if companies that want to invest perceive this measure as a sign of fiscal instability.
Challenges related to bilateral agreements
- Complexity of renegotiations
France has signed 129 bilateral tax agreements with other countries, and many of them are regularly updated. Renegotiating these agreements to include a nationality-based taxation clause would be a long and very complex process. In addition, some countries could refuse to modify their existing agreements, which would limit the effectiveness of the measure.
- Coordination internationale
Implementation of this measure would require close coordination with the tax authorities of other countries concerned. However, the United States, for example, implemented the “Foreign Account Tax Compliance Act” (“FATCA”) to require foreign financial institutions to declare accounts held by American citizens. France could then consider a similar approach, but this would require cooperation agreements with many other countries.
Rare examples of taxation on the “nationality criterion”
In the USA
The United States is one of the few countries that taxes its citizens on the basis of nationality. In 2020, the U.S. government collected approximately $5.8 billion in taxes from its expatriate citizens. This figure shows the potential tax revenue that France could generate by adopting a similar approach.
In Eritrea
There is a similar taxation system based on nationality.
In France
According to INSEE data, around 2.5 million French people live abroad. If France managed to collect on average 2,000 euros per tax expatriate, this would represent additional revenue of 5 billion euros per year. However, this estimate is theoretical and depends on many factors, in particular the ability of the tax administration to collect these taxes.
Co-rapporteur, with MP Éric Coquerel, of an information report on the subject, MoDem MP Jean-Paul Mattei declared that “ if such an amendment is voted on, it will be necessary to ensure that it does not sanction people who go abroad for a career, but only those who want to benefit from more advantageous tax conditions “, that is to say that the measure should not target all tax expatriates but only tax exiles, these French people abroad who have activities in France but who, living abroad, do not pay income tax.
Conclusion
The proposal to make French tax expatriates pay income tax is an ambitious measure that could have significant and damaging political and economic implications between countries.
Although it has the potential to increase tax revenues and reduce tax evasion, it also poses significant challenges in terms of renegotiation of bilateral agreements and international coordination. Implementing this measure would require careful planning and close cooperation with tax authorities in other countries.
