September 2010

LIFE IN THE FAST LANE

 

 

Most people of my generation remember the 1976 album Hotel California by the Eagles. Time is an unforgiving censor and even extreme fame does not last most of the time. As often happens, life comes up with unusual twists. One song on this Hotel California was noticed by very few people; today its title "Life in the fast lane," has become a popular expression used to describe a jet-set lifestyle. The song was not supposed to glamorize such a lifestyle, but to warn about the dangers of drugs, alcohol and bad decisions.

Climbing the ladder of success, driving fast, making quick moves to grab opportunities, to enhance a career, to acquire more power... When did we go from taking the time to thoroughly reflect on our decision, to making quick and often ill-considered decisions in which the risks are underestimated and the value of the immediate return is considered more desirable than that of a wise investment?

 

 

MOVING MY OFFICE THIS MONTH OF SEPTEMBER
There is no such thing as bad timing when it comes to a good business opportunity. For close to two years, I have known that upon the sale of the headquarters of Alliage, the consulting company for which I work, I would be moving in with the other main consultant of Alliage. The issue then was to find a location and space in which all of us could conduct our business in the best way possible. As France fell into the summer lethargy of July and August, we all thought nothing would happen. However, within a couple of weeks we found a buyer and a new office large enough to accommodate us all. Even though it is barely a fifteen-minute walk from the old office near Place Saint Georges, it is in a completely different neighborhood, as so often happens in Paris.

After six rewarding years in my little office with my plants taking over part of the courtyard, I will move during the month of September. For those familiar with Paris, the new office is at the foot of the Montmartre hill near the cemetery, less than a five-minute walk from the Place de Clichy métro station. The address is 7 rue Ganneron, 75018 Paris. For those visiting in person, it is in the courtyard to the left, just up the stairs on the right. I do not have the exact date of the move yet. I expect my office to be closed September 13th and maybe most of that week, depending on how long it takes me to get up and running.

 

 

TAXES OWED FOR THE YEAR ARE DUE SEPTEMBER 15
The payment of income taxes in France has three notable dates during the year: February 15th, May 15th and September 15th. The system is set up so that on each of these dates, people pay a portion of the full amount of taxes due, usually in three approximately equal installments. The first two payments are equal to one-third of the taxes owed the previous year, since the tax collection agency, the Trésor Public, does not know the amount for the current year until after it receives the notice from the Centre des Impôts, which receives the income declaration of the previous year by May 31st.

The French government has been working for a couple of years to implement the president's decision to merge the Centre des Impôts, which calculates the amount of taxes owed, with the Trésor Public, which collects not only taxes but also other money owed to the government. The plan is for the merger to be finalized by the end of this year. The main idea behind ending the 200-year-old separation of the two functions is that the public will be better served if only one person is in charge of a given tax case's entire file. Regardless of whether this idea turns out to be successful, be ready for a chaotic time in the tax office for the rest of this year and most of 2011. The two main problems that can be expected are that payments may not be recorded on time because they get lost in the shuffle, and that if mail does not reach the right person and there is a deadline involved, an immediate 10% penalty will be charged on the amount owed (this is the first and therefore most common consequence of late payment). So make sure you send your forms, your payment deduction form (TIP) or check early enough so that you can monitor it.

 

 

 

SHORT-TERM RENTAL: IS SPEEDING REALLY THAT ILLEGAL?
I have frequently compared the complex issue of short-term rentals with that of speeding in the USA or in France.

When new legislation changes the rules and makes something illegal, people generally pay little attention unless the change affects the general public, in which case there is a government campaign telling everyone what is going to happen.

The current situation arose when the Paris City Hall voted to change the rules governing short-term rental apartments, altering their status from residential to commercial, meaning they are now more akin to little hotels.

There was a time when most highways in France and the USA did not have a speed limit. Close to 40 years later, most people do not remember that. Today we take speed limits for granted, and it would be logical to assume that, since everyone is now aware of them, law-abiding citizens do their best to obey them. But as we all know, this statement is not true, in France or the USA. Therefore, in this situation as in several others, the real issue is as much about enforcement as it is about whether something is illegal.

To be cynical about it – and to disregard the moral issue, which admittedly is important to a lot of people – you are not in trouble unless you get caught.

When it comes to short-term rentals in Paris, the only issue worth talking about is the chance of getting caught, today or in the foreseeable future. It is tempting to think that "since I have not been caught yet, that means I am safe." But the fallacy implicit in that statement should be obvious.

The other extreme is to assume that "since what I am doing is illegal, it is inevitable that I will be caught; therefore, I am not safe and I must find a solution right away."

A recent article in The New York Times www.nytimes.com/2010/07/07/business/global/07rent.html explained the law and described how some apartment owners who had engaged in this activity received letters from the Paris City Hall saying, in effect: "You have been caught." But, unlike with speeding, the sentence in this case is neither immediate nor certain..

Once again, you might ask: "If it is neither immediate nor certain, then where is the danger?" Most people, including many prominent professionals familiar with short-term rentals, state that the danger is vague and remote, and they cite their experience of owners who were caught red-handed being able to get off the hook by selling the property or showing proof of a long-term rental contract, usually through a local management company. This means City Hall is being exceptionally lenient since the consequences of breaking a law (i.e., the fine, in this case) generally apply when the person is caught. No one should assume that this leniency will continue forever.

Because I believe my mission is to protect the interest of my clients and my readers, I have adopted a somewhat different attitude. I look for clues in the current situation indicating what kind of decisions City Hall will make in the future.

The first and most important piece of information I found was that City Hall was sponsoring bed & breakfasts as an alternative to short-term rentals. To me this says they are currently determined to eradicate the short-term rental industry in Paris and replace it with B&Bs. The second thing to note is that, unlike in the business world, where the decisions are motivated by the profit one hopes to get, the political world makes most of its decisions on grounds that are not based on cost or on expected profit. Therefore, citing the costs of eradicating short-term rentals (e.g. lost tax revenue and the need to hire people to carry out this mission) as proof that it will never happen is not valid. Government decisions are motivated by the greater good of the nation, and this is especially true of liberal parties through out the world. The numerous government bailouts we have seen in the last year and a half indicate that very large sums of money indeed can be spent for what is considered to be the greater good of the nation!

This is my analysis of the situation, based on information from right and left. I believe that City Hall has decided to go all out against short-term rental and to help the B&B industry. Thus, in the long run, I am generally pessimistic about the future of the short-term rental industry.

However, there are two big "ifs" in this matter.

1 – The current team of inspectors has so few civil servants that they will not be able to eradicate short-term rentals unless City Hall dramatically increases its hiring. Given the municipal and national budget deficits as well as the sluggish economy, I do not see how the city council can pass such a measure, or how it could be endorsed by other levels of political and judicial authorities. Therefore, the hiring needed to accomplish the task is probably not going to happen any time soon.

2 – A key cultural aspect of B&B seems to have been completely overlooked: traditionally French people do not let many people inside their homes. Thirty years ago I would have said such a plan had zero chance of success because way too few people would get involved in the program. Has France changed so much? Are members of the younger generations ready to welcome strangers into their homes for money? I am not convinced at all, and I am waiting to see if the B&B industry in Paris will be a success. The bottom line, then, may simply be a question of supply and demand. If there are too few B&Bs in Paris to accommodate the number of people wanting to stay in an apartment rather than a hotel, there will still be a market for short-term rental and some people will continue to make money that way, regardless of the risk. Some of those people will be unscrupulous short-term rental professionals, which means that not all guests/clients will receive good service in a decent apartment – a very sad outcome.

Thus, for the current City Hall policy to be successful, the city would have to spend a lot in an environment full of barriers to spending, and the French would have to overcome a cultural aversion. Keep in mind that maintaining a policy that demands a financial effort in a sluggish economy can quickly become unpopular, although in France an unpopular policy on one topic might not have any bearing on a possible re-election.

Too many uncertain elements, linked with a very foggy vision of the future, make it very difficult to predict what is going to happen tomorrow. Therefore, everyone involved should make the decision for himself or herself. We all have different levels of risk tolerance. Some people cannot live without a significant amount of adrenalin generated from risky situations, and some avoid risk at almost all costs. The vast majority of us fall somewhere in between.

To go back to my comparison, some of us drive on the highway with the cruise control set at the speed limit to avoid temptation or the moment of inattention that leads to speeding. Others systematically speed and their goal is to do so without getting caught.

I respect apartment owners who believe they run a good business and see no point in changing anything, considering how easy it seems to be to get off the hook if caught. For them, the right time to change is if this ever happens. They can handle risk and believe they can make the right decision very rapidly.

I also respect owners who immediately took the drastic decisions needed to comply with the law. Their peace of mind, especially as they live so far from Paris, is worth a lot to them, and it would cause them anguish to think of the possibility of getting a letter from City Hall. These are people who eliminate every risk they can in life.

It is never easy to admit this, but very few people have the capacity to always abide by the law because it is the right thing to do. The truth is that people become law abiding when the chances of getting caught and paying the consequences are so high that breaking the law is not worth it.

Currently I know of only one place in France where just about everybody obeys the speed limit: on the Parisian beltway, the périphérique. Why? Because of the high number of speed cameras that automatically record speeding cars. There are so many of them installed that it is nearly impossible to speed in the intervals. This approach is very efficient at handling a high volume of traffic in such a way that speeders run an almost 100% risk of getting caught.

No matter how much I may seem to have strayed from the initial topic of short-term rental in Paris, I believe that the issues are the same: in both cases, it is about evaluating the chances of getting caught – which in the case of short-term rental means facing a fine of 25,000 euros or $33,000, a lot more than even the heftiest speeding ticket.

 

Best regards,

 

Jean TaquetJean

 

Q & A

FRENCH INCOME TAX IS PAID AS A FAMILY UNIT

QUESTION
A few years ago, I followed my husband for his assignment in Paris. Shortly after we arrived our marriage started to deteriorate, to the point that he recently went to his latest mission in South-East Asia as a single man, but we have done nothing in court. So our four children and I are stuck in France right now, but since I am an EU citizen, immigration is not an issue. Lately he has threatened me to inform the French tax office that we lied to them on our last declaration, since we signed jointly but we were no longer living together. The fact is that he wants to continue to benefit from the substantial family tax reduction France has instead of paying American income tax, which is what he should be doing. He has been telling me that I would owe a lot of money to the French government and I would face perjury charges for last year's declaration. I am very scared of that and I do not want to continue to lie to the French government. What can I do?

ANSWER
International tax issues require a specialist. The question "What can I do?" is too broad for me to answer in the way you are hoping. That said, there are a couple of very basic issues I would like to address so that you have a better understanding of what he is threatening and what the consequences would be if he carried through on his threat.

1 – Regarding income tax,
France taxes the household, not the individual. This means that income tax is calculated by first adding the income of all members of the family living together. Then it is divided by a ratio linked to the size of the family. In your case the "N" ratio for a family of six members would be 5 and the "N" ratio for a single mother with four children would be 4. The income is divided by this ratio to find out the tax bracket. Then the same ratio is used to calculate the tax credit related to family size.

To make a complicated and long story short, I would like to illustrate your situation with an annual taxable income in France of 250,000 euros, both for the family and for your husband as a bachelor. Those figures will show you how unrealistic his threat is. For the calculation I used the data valid for the 2009 income tax, payable in 2010.

Family scenario
First you divide the taxable income of 250,000 euros by 5, which equals 50,000. Then you identify the related tax bracket, using the formula for a result that is between 26,030€ and 69,783€: (250,000 x 0.30) – (5,484.13€ x 5). The result is 47,579 euros.

Single scenario
First you divide the taxable income by 1: 250,000€. For results exceeding 69,783€ the tax is figured with the following formula (250,000 x 0.40) – (12,462.43€ x 1). The result is 87,538 euros.

This means he would be paying a lot more tax money if he were to report that he is no longer with you and therefore declaring as a single person. As this would nearly double his tax bill, it seems likely that he would never do it and so you should not be afraid of his threat. This also explains why he prefers paying his income tax in France instead of the USA, regardless of how futile this attempt might be under the Franco-American tax treaty. This is exactly where the help of an expert specialized in such matters is needed.

Also, I do not know how much you earn and hence what your tax burden would be, if anything. So, just to give complete information, here are the two lower brackets where your income might put you:

If the result does not exceed 5,875€, the tax is 0.

If the result is between 5,875€ and 11,720€, the tax is (taxable income x 0.055) – (323.13€ x N).

If the result is between 11,720€ and 26,030€ the tax is (taxable income x 0,14) – (1 319,33€ x N)

With an N ratio of 4, I am sure your tax burden will be very light, if you pay anything at all.

 

2 – The perjury issue
I know the word sounds threatening, and in the USA it is not taken lightly. So I understand that you are even more scared of it because you are living in a foreign country.

However, given the specifics of your situation, should either your husband or you come forward to the tax inspector, lying on the declaration forms might not carry much in the way of consequences. The main one would be recalculating the tax you owe. Good faith in this type of situation would work a lot in your favor, and you should not face a criminal case or jail sentence for this. As for the financial consequences of the new calculation, I believe that it would be very much in your favor.

I will not dispute the fact that in general the tax ratio in France is high, much higher than in the USA. It happens that on average, however, the income tax burden for private individuals is about the same in France and the USA, with singles paying more taxes in France and families with several children more in the USA.

 

 

 

AUTO-ENTREPRENEUR AND GETTING THE RELATED IMMIGRATION STATUS

QUESTION
Over a year ago I signed on for the new status of auto-entrepreneur. Even though I was already self-employed, I wanted to benefit from the preferential tax treatment. As an American in France, I need to renew my carte de séjour every year. Since I have not changed the nature of my activity (as an English teacher), I thought there would be no problem. Was I wrong! My carte de séjour expired over six months ago and I have a meeting at the préfecture at the end of the month in the office handling the business carte de séjour, and the documents required are all for that kind of card. I cannot comply with their demands. Last time I was there, they kept saying that auto-entrepreneur is a business status and I will lose my residency if I do not comply. How is this situation possible?

ANSWER
I am not sure I can explain how the préfecture ended up making such an erroneous interpretation of the law. Nor can I figure out why your past status was not taken into consideration when it was time for renewal. But I can tell you there is a reason for tightening the requirements for issuing a professional (profession libérale) carte de séjour, which explains at least the initial reaction, if not the change of office and the kind of documents you are being asked to show.

Auto-entrepreneur has been such a popular status that a lot of people are taking advantage of it, some of them for the right reasons, but others as a sometimes desperate attempt to get out of a failing situation. I have mentioned in a previous issue that the majority of new businesses created this way have involved unemployed people who are running out of ideas as well as money and are desperate to get a new job. As long as these people do not hold a carte de séjour, I tend to look at their endeavor favorably, since I have an American way of looking at this. Taking initiative and moving forward when unemployed is always a good thing, and for sure a better thing to do than waiting, hoping for something to happen.

Once there is a carte de séjour issue, however, I become a lot more skeptical, because aside from the difficulties of running any type of business in France, the préfecture will insist that the new business become successful quickly to be a good enough reason to grant the right to stay and work in France. The préfecture, which is always very suspicious by nature, looks at the huge increase in the number of requests as a systematic attempt to defraud the system unless proved otherwise.

Now, how do you prove that you have created a legitimate business that is going to be successful? Using the legal definition of proof, that is just plain impossible: there is no way to guarantee that something like this will happen, no matter how certain it appears.

Here is the advice I give people signing up for this status. It is related to the creation of a business. I would like to go through it since some of these tips may be pertinent to you.

1 – Check to see if there is a better immigration status you can either keep or obtain. I am thinking of employee status and student status, in particular.

2 – Write down a pretty decent business plan for the next two years or so. The préfecture does not require it for profession libérale status but it sure helps you in managing your business and it shows a professional approach, which could impress the authorities.

3 – Focus even more on the cash flow issue. One of the best features of auto-entrepreneur status is that, just like in the USA, the taxes you pay are based on the actual performance of your business. Still, even having to pay a small increment for three months (if you choose to pay quarterly) can be a significant burden if it is not properly planned for. Even more important is that the monthly payment is defined by a schedule valid for ten months. Such a rigid setup might not be a good solution. The French system has been pushing for people to accept this regime of fixed monthly payments for just about everything, including taxes and social charges. This is only possible if your business plan is excellent and you have full control over your cash flow.

4 – Keep careful enough track of your income that you can see well in advance when you will go over the limit of 32,000€ in sales for a given calendar year. This is essential, since the tax office backtracks to January 1 of that year to calculate your tax burden, TVA included, regardless of when during the year you exceed the limit. If your billing exceeds 20,000€ in the first half, for instance, you might be better off switching to another fiscal status then, at least as far as your personal accounting is concerned, since will be obvious by then that you will exceed the limit before the end of the year. If possible, you might want to change your fiscal status officially, as well, since that would resolve several potential problems linked to what would then be tax cheating if you declare too late.

Now, my explanation of your situation, which is purely based on the impression I get from what you describe, is that the first civil servant to handle your request saw you as a cheater who was taking advantage of a preferential tax status that this person thought you did not deserve. Such a decision could also have been triggered if you committed some transgression in the past, in the eyes of the préfecture; even if you got away with it at the time, a record of it would stay in your file, and could cause the decision to apply the law in the strictest way possible. Since auto-entrepreneur covers all the three possible types of self-employment status and the other two (merchant and craftsman) are dealt with by another office, you were sent to this office under with the assumption that there was a good chance that you belonged there. YES, this is 100% bad faith, but once you alienate a civil servant in France, you get punished, with very little recourse for the most part. How can a civil servant be blamed for applying the law? There is no obligation to use common sense or to apply the preferential treatment that North Americans often get.

My guess is that you will not lose the right to live and work in France. Very likely, you will be issued three-month temporary cards, called récépissés de demande de carte de séjour, until you decide to give up auto-entrepreneur status and ask for a change to the standard professional self-employed status, or until they are convinced that you are running a legitimate business and that you are a law-abiding professional, or until you give up entirely and, being totally disgusted, move back to the USA.

The lesson from this very unpleasant incident is that one should always know what is happening. This is especially important to find out if there is a hidden agenda with the préfecture.

YES, you can get your rights back if you file a court case – knowing that the first hearing will occur about two years later and the procedure itself can be pretty long, which means putting your life in France on hold for several years. The alternative is to bend in the direction the préfecture wants you to go. The reality is that it is not as bad as it first sounds. In this case, the préfecture is right to be suspicious of all the requests for immigration status based on auto-entrepreneur status. If you cannot convince the préfecture that your request is legitimate, then move on to the next step. Since that is probably all that is required for you to get back in good standing, I consider it not to be much of an imposition. Now, if you choose to wave your American passport and state that you have rights and that the American Constitution grants you freedom of choice as long as the law permits it, then you might not be suited for living in France – but that is a different topic.