Restaurants Reducing Taxes in France

by Susan Davis on 30/04/09 at 9:27 am

Just as the number of French unemployed workers rose 2.7 percent to 2.45 million, the highest in three years, France was taking an unusual step and cutting its value added tax (VAT) on restaurant items.  The office of President Nicolas Sarkozy announced that beginning July 1, the VAT rate will go down from 19.6 percent to 5.5 percent.

The value added tax is an indirect tax on the domestic consumption of goods and services levied at each stage in the production and distribution chain, from raw materials to the final sale, based on the value (price) added at each stage. (Minimum VAT taxes are governed by European Union agreements and can only be changed with the approval of all finance ministers.)

In exchange for the drop in rates, restaurant and café owners have agreed to reduce menu prices for seven basic items, including luncheon meals, mineral water, dessert and coffee.  They have also promised to hire 40,000 workers over the next two years, to help improve restaurant service.

“The reduction in VAT is going to let France … conserve and improve its culinary reputation,” Economy Minister Christine Lagarde told reporters.

The hope is that by lowering the tax and adjusting menu prices, diners will start returning to one of their favorite pastimes – eating out.  Due to severe economic conditions, the number of patrons frequenting eating establishments has been steadily declining for months, and restaurants have lost a third of their clientele since the beginning of the year.

Unfortunately (for diners), the tax adjustment doesn’t cover wine, which accounts for a fifth of all French restaurant sales.

There is mixed reaction to the tax reduction.  Although a number of proprietors are gearing up to make changes to their menus, many French diners feel the move is too little, too late, especially since the reduction in VAT has been discussed for more than seven years, starting with a re-election campaign promise by Sarkozy’s predecessor, Jacques Chirac.   Although Chirac won, he was unable to make good on his promise.  France has had one of the highest VAT rates in the E.U., keeping costs high for locals and tourists alike.

Gérard Jourdain, of Les Fontaines Saint Honoré, a Paris bistro, said that in anticipation of this change, he made price cuts of about 10 percent last month.   However, small cafés and fast food restaurants feel that reducing their already low prices will be catastrophic to their bottom line, while some of the four-star establishments claim that being forced to lower menus prices would suggest that they were overcharging in the first place.  (It’s the L’Oreal “because I’m worth it” theory).

Having said that, many restaurants, including the top establishments, have already introduced meal specials to counter the financial slump and Alain Ducasse, the multi-Michelin-starred super chef, has been offering his signature black truffles at cost price.

An informal poll of diners after Tuesday’s announcement showed that not all expected an increase in demand for restaurant seating because of lower taxes.  Some felt that it might persuade families to dine out more often on weekends, or encourage some diners to order fancier dishes, extra courses, or try something new and different.  Others took the opportunity to complain about the deteriorating French cuisine scene.  “What is sadly noticeable about restaurants in France is that … there has been a steady decline in standards and service combined with an inexorable rise in prices for an increasingly mediocre product,” commented one British tourist.

Only time will tell if this is enough to drive diners back to the bistros.

One thing is certain, however.  If you’re planning a trip to France, often considered the gastronomical wonder of the world, you’ll be happy to know that your food bill will be considerably lower as of July 1.