Thursday 02/04/2020

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Micro-entrepreneur: the French example

Head of Macro Research

The renewal of our economy is made possible through creativity and innovation. This is not without significance. How we trade has been thoroughly shaken with the advent of the digital era. New decentralized ecosystems bring the providers of goods and services and their potential buyers or users in direct contact with each other. Anyone can offer ever more freely and according to his own agenda offer skills in a market that is no longer a "labor market", but one that is more and more focused on projects.

Perfect competition
Such a professional environment looks a lot like the prediction of the French-Swiss economist Léon Walras (1834-1910). He argued that an economy aims for balance in a context of perfect competition. Like the stock markets, according to his theory, the market is an exchange where the prices are determined by scanning (trial and error method). Or rather through successive iterations. The market place resembles a huge sales hall, animated by the auctioneer who assigns price tags to the goods and services. The balance comes about as soon as the production factors (particularly labor and capital) will be auctioned on the basis of their marginal value. In the eyes of Walras not the absolute amount of work is important but its marginal utility. Globalization is changing the world little by little into a kind of giant eBay, which is what Walras imagined it would be like. He envisioned the world as a huge market with its own resources for self-regulation.

Flexible working
But why quote Walras in a tax OpEd? Because the tax and social joints of our system should be able to move much more smoothly. I'm not talking about the "mini-jobs" that resulted in teeth grinding in the Di Rupo government, but the concept of micro-entrepreneur which was introduced in France in 2014. It involves a specific statute that caters to the needs of flexibility (I should say malleability) that characterizes this new economy. That statute is contrary to the tax methods that are applicable in the sharing economy; the same ones that have been outlined in the budget conclave beginning of April. So we speak about an alternative to the current status of self employed person.

What does that mean exactly? A micro-entrepreneur is a person who establishes an individual company to pursue an activity as their main or secondary activity. This may either be a liberal profession as a commercial or artisanal activity. Anyone can use this regime: job seekers, students, employees, civil servants, professionals, retirees. All of them can quite easily start an activity and combine it with a salary or pension. However, it is not compatible to be active at the same time as micro-entrepreneurs and run a business while being self-employed.

If the turnover is less than about 82,000 euros for a commercial or about 33,000 per year for a service activity, the profit is calculated on the basis of the turnover (at a rate ranging from 1% to 2.2% of turnover by type of activity) and not on the basis of the taxable income which would result from accounting. The tax must be paid monthly or quarterly. The book keeping therefore becomes much less cumbersome.

An innovative initiative
Of course this also implies that the costs are not deductible. The services rendered are also exempt from VAT. So the same goes for micro entrepreneurs. From an administrative and accounting point of view, the VAT exemption facilitates  management considerably. The amount paid by the micro-entrepreneur in social contributions, corresponds to a percentage of the turnover and is situated between 13.3 and 22.9%. The contributions thus depend on the income, which is a huge difference compared to the Kafkaesque Belgian system. They are final and cover the whole of the social obligations: invalidity and death, retirement, family contributions, etc. A micro-entrepreneur enjoys the same social protection as an independent. If we combine the tax on turnover and social charges, then we end up with a tax ranging from 14% to 25% of sales.

The new French system of taxes and social contributions is probably not infallible. And also not free from criticism. But it is at least innovative in a professional world that is losing its structure. And which, to a large extent, no longer opts for a collective approach. The statute of micro-entrepreneur is in my opinion an interesting fact. It might not be a bad idea for our Minister of Finance to study it a bit more closely.