Direct and indirect taxes: how to distinguish and classify them?

French personal, property and corporate taxation is both rich and complex. However, all taxes fall into two main categories, which already makes an important distinction. So, what are the differences between direct and indirect taxes? Here’s a guide to the official definition provided by the tax authorities, as well as a classification of national and local taxes into direct and indirect.

The difference between direct and indirect taxes: definitions

The distinction has evolved over time. Discover both the historical definition and the one used today by the French tax authorities.

Historical distinction between direct and indirect taxes in France

A long time ago, the French direct tax system was based on the taxation of individuals , homes and land. Indirect taxation was more concerned with the consumption of goods and services. Later, in the 19th century, direct taxation was aimed at taxing not a person, but an activity or taxable material. It was proportional, and thus calculated by applying a rate to the value of the taxable object.

Difference between direct and indirect taxes according to tax authorities

From now on, differentiating between direct and indirect taxation is straightforward. According to the tax authorities, it’s simply a matter of identifying who bears the burden of the tax. This is known as tax incidence. Thus, if the person liable to pay the tax, i.e. the person who pays the tax to the Treasury, is also the taxpayer, i.e. the person who bears the cost of the tax, he or she is paying a direct tax. On the other hand, if the administration collects the tax from an entity that is not responsible for it, it is an indirect tax revenue.

Direct taxation: details of the taxes concerned

All the following taxes are payable by the taxpayer, who is also the person liable for payment. For most of them, the tax authorities issue a tax roll. However, this criterion is insufficient to distinguish between direct and indirect tax revenues. Corporate income tax, for example, is the result not of a tax roll, but of an autonomous and spontaneous liquidation (i.e. calculation) by the corporate taxpayer, and yet remains classified as direct taxation.

Income tax and corporation tax: taxation of profits

Income tax (impôt sur le revenu – IR) is the annual taxation of the individual taxpayer. This applies to both personal income and income from partnerships. This category also includes corporate income tax (IS). It is the taxable company that pays the tax on each year’s business profits directly to the State.

IFI, a tax levied directly on real estate wealth

There’s also the IFI, the tax on real-estate wealth, which corresponds to tax revenues calculated for the year and based on real-estate assets. The taxpayer who owns the property is liable for this tax.

Local direct taxes

Local taxation includes a number of direct taxes. Here are the main ones listed by the tax authorities, for both individuals and companies:

• cotisation foncière des entreprises (CFE) ;
• value-added contribution (CVAE) ;
• taxe d’habitation ;
• property tax ;
• household waste collection tax (TEOM) ;
• taxe sur les surfaces commerciales (TASCOM) ;
• mining royalty ;
• etc.

Indirect national and local taxes in France

Indirect taxes are paid by various bodies that simply collect the tax and pass it on to local authorities or the State.

Value-added tax (VAT), the painless and… unequal indirect tax

This tax is paid to the State by taxable professionals, whether companies or sole traders. They collect VAT from their customers. These are the taxpayers who bear the burden of the tax. Value-added tax is often regarded as a painless and unfair form of taxation. In fact, its rate remains identical, regardless of the taxpayer’s income.

Indirect local taxation, a source of numerous taxes

As with direct local taxation, the list of indirect taxes borne by local authorities is substantial. Some taxes are compulsory. Others depend on the decision of the local authority responsible for collecting them. In practical terms, however, it is a public service that receives the payment of these taxes.

These include transfer duties, the taxe d’aménagement (TAM) or the taxe locale sur la publicité intérieure. Also included in this category, as well as the tourist tax in particular.

With this information, you’ll know the difference between direct and indirect taxes. However, French taxation remains dense and sometimes complex. Whatever the type of taxation, don’t hesitate to contact us in the event of doubt about tax reporting procedures, the applicable rate or the tax base. Fiscalead’s experts cover the entire scope of indirect taxation.

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