France Faces €10 billion VAT shortfall: A fiscal shock for Europe’s second-largest economy.

France is grappling with a massive €10 billion shortfall in VAT revenues, throwing its 2025 budget plans into disarray. Initial projections estimated VAT income at €101.4 billion, but updated figures now point to roughly €96.5 billion, a gap that has stunned policymakers and sparked urgent investigations.

VAT is France’s single largest source of tax revenue. A deviation of this magnitude complicates efforts to reduce the public deficit.

Why did VAT revenues collapse?

Experts and government officials cite several reasons:

• Weak consumer spending
  French households have tightened their belts amid economic uncertainty, opting for savings over consumption. But how can actual VAT revenues stagnate or even decline when volumes of goods and services subject to VAT, entering into France, have increased by 1.7%? France now has a prime suspect: small parcels shipped by Shein, Temu and others.
• E-Commerce loopholes and fraud
  The explosive growth of low-value parcel imports from non-EU platforms like Shein and Temu is indeed a major culprit. These shipments flooding across Europe pose at least two tax problems. First, they are subject to massive undervaluation. Their real value is often much higher than the declared value, Secondly, these parcels are exempt from customs duties as long as they are deemed to be worth less than €150 and are intended for private individuals. However, these volumes ‘conceal a large number of commercial imports’, with quantities far exceeding personal use. However, is the huge growth in small parcels from China enough to explain the low VAT revenue relative to consumption? It would require €15 – €20 billion to slip under the radar, which seems unlikely.
• Systemic fraud and aggressive tax avoidance
  Authorities also suspect organised schemes which exploit VAT rules, alongside under-reporting and misclassification of imports. While fraud has long been a challenge, the scale of recent losses suggests structural weaknesses in enforcement.

Government response and future reforms

The government intends to act without delay.

Key proposals include:

• Ending the small-parcel exemption by 2026.

France supported the decision taken by European finance ministers to abolish the €150 exemption from customs duties on small parcels from 2026.

• Introducing a “small packages tax” to curb undervaluation.

In line with the EU commission’s proposal, Ministry of Economy and Finance also hopes that the 2€ tax on small parcels from non-EU countries under discussion in the 2026 budget will encourage fraudsters to fall into line and pay the VAT they owe.

• Mandatory e-invoicing and real-time reporting to close fraud loopholes.

France is preparing for one of its most ambitious tax reforms: the mandatory adoption of electronic invoicing (e-invoicing) and e-reporting for businesses subject to VAT. This reform is not just about digitisation – it is a cornerstone of France’s strategy to combat VAT fraud.

• Enhanced customs checks and cooperation with EU partners to tackle cross-border VAT evasion.

Customs authorities are increasing inspections of small packages, particularly from Asia-based e-commerce platforms, where undervaluation is common. France participates in coordinated inspections and audits with other EU countries, targeting sectors prone to VAT evasion such as electronics and textiles.

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