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Elisabeth Ashworth, Christophe Leclère and Annabelle Bailleul-Mirabaud CMS Bureau Francis Lefebvre, France
Elisabeth Ashworth is a Partner and Christophe Leclère and Annabelle Bailleul-Mirabaud are Senior Associates at CMS Bureau Francis Lefebvre, France
New measures deriving from the last Finance laws have recently taken effect in France, giving the French tax authorities new and substantially wider powers in order to fight tax fraud and evasion. Investigations on French operations of foreign groups and search for permanent establishments of foreign digital companies will be facilitated.
Since 2009, fighting against tax fraud and evasion has become a major concern for the French tax authorities. As a result, legislation against tax evasion and in favor of a reinforcement of tax audit procedures has increased significantly, particularly in the field of international tax issues: a “tax police” has been created, penalties and statute of limitations applicable in case of international tax fraud have been increased, documents on servers located abroad may be seized in case of tax raid, transfer pricing filing requirements have been introduced, etc.
At the same time, in a Base Erosion and Profit Shifting (“BEPS”) environment, the French tax authorities' practice of international tax audits has tightened, with a systematic use of exchange of information, increased application of bad faith penalties (40 percent) and the use of tax raid procedures against multinational enterprises (“MNEs”).
The French tax authorities have paid a particular attention to U.S. digital MNEs, trying to characterize permanent establishments within their French subsidiaries. The French Ministry of Budget recently reported that the GAFA had already been subject to total tax reassessments of 2.5 billion in 2015 and that ongoing audits on tax years 2013 to 2015 should lead to additional reassessments of similar amounts. He also mentioned that unlike in the U.K. and Italy, there would be no negotiation on those files.
In this context, the French Parliament recently attempted to introduce the notion of “permanent establishment” deriving from the OECD BEPS Plan Action 7 into its domestic law, in order to tax profits that a foreign company would realize in France through intermediaries.
This so-called “Google tax” provision mainly aimed at targeting global tech and digital companies. Indeed, the French tax authorities would have been able to tax, as from January 1, 2018:
However, given that this provision would only have been applicable subject to double tax treaties, its target may not have been reached in practice. This being said, the French tax authorities more than ever before tend to challenge the application of tax treaties in certain situations, which could have resulted in some uncertainty as regards the real scope of such provision.
In any case, it was ruled out by the French Constitutional Council on December 29t, 2016 . Indeed, its application could only be triggered in the course of a tax audit at the discretion of the French tax authorities, which was regarded as unconstitutional.
However, subject to the next France's presidential election in April and where the French “political will” would focus on tax policies, this measure may come back into discussion.
Besides, based on the year end Finance Bills, the French tax authorities have other tools to try to tackle foreign digital companies.
The French tax authorities are now allowed to interview third parties to obtain information on how companies operate, in relation notably to permanent establishment and transfer pricing matters. They may also compensate whistleblowers for information leading to reassessments in the same areas. These extended investigation powers are likely to increase the scrutiny on digital companies and give a clear message of a strong will to fight against fraud and optimization.
Until the Amending Finance Bill for 2016, the French tax authorities were only allowed to interview taxpayers or third parties in very limited cases.
Effective January 1, 2017, the French tax authorities are allowed to interview any person, except the taxpayer concerned, who is likely to provide them with useful information in their search of misconduct related notably to French territorialityrules, transfer pricing rules and CFC rules.
This new measure typically targets situations where a foreign company has an undisclosed permanent establishment in France. It could therefore be used against foreign digital companies which are prime targets for the French tax authorities in this respect.
Interviewees could be any person, which includes customers, suppliers, current or ex-employees, service providers, accountants, etc.
Interviews may be requested at any time, i.e. not necessarily within the framework of a tax audit, but they are subject to an advance notice of at least 8 days. The targeted interviewee is free to refuse the interview (without any sanction). If he/she accepts, he/she could request the assistance of a translator. Surprisingly, however, the provision does not refer to any possibility that the interviewee be assisted by an advisor.
Minutes of the interview must be drafted including the identity of the interviewee, questions asked and answers provided. Such minutes must, in principle, be signed by the tax agent performing the interview and by the interviewee but the latter may refuse to sign.
Within the framework of the discussions before the Senate, the government expressed that the French tax authorities were not contemplating at this stage to be provided with any documents in addition to the statements obtained through the interviews. The French tax authorities may, however, exercise their so-called right of communication, through which they could request access to documents in relation to a given taxpayer from almost all kinds of third parties (or in practice access to lists of taxpayers related to the requested third party and meeting the criteria laid down by the French tax authorities). The third-party interview could thus well be utilized in conjunction with the exercise of such right of communication.
Information collected during such interviews could be used by the French tax authorities as an additional element to obtain the authorization to perform a tax raid, or to justify reassessments within the framework of a tax audit. In the latter case, the French tax authorities will have to communicate to the taxpayer the corresponding information. This means that the process is not anonymous, which may lead current employees, suppliers and service providers of the taxpayer to refuse such kind of interviews in order to avoid jeopardizing their relationship with the taxpayer.
Mainly due to the process opacity, in 2003, the government banned an old practice of payment for information on tax fraud.
Here it comes again. Also effective January 1, 2017, and for a two-year experimental period (2017 and 2018), the French tax authorities have been granted henceforth by the Law the right to compensate any person (except if partof a public administration) who provides them with information contributing to the discovery of a misconduct related notably to French territoriality rules, transfer pricing rules and CFC rules.
Besides, the French tax authorities are allowed to use the information obtained from the whistleblowers with a view to perform a tax reassessment, even if the information was obtained by the whistleblower in an irregular way. However, the French tax authorities cannot use information obtained in a fraudulent manner for the purpose of launching a tax raid procedure. A ministerial decree shall provide further details as regards the compensation to be awarded to the whistleblowers.
In addition to these two measures which target specific misconducts, the French year end Finance Bills also include measures aimed at facilitating the fight against tax fraud from a more general perspective. Thus the judicial authorization process of tax raid procedures has been simplified for the French tax authorities. In addition, consistent with the increasing digitalization of tax audits over the last few years, a new offsite audit procedure has been introduced effective as of December 31, 2016.
The French tax authorities would, in practice, resort to this procedure in the situations where they consider that it is not necessary to perform a standard tax audit (i.e. in the premises of the company) considering the risk profile of the taxpayer, its size and the complexity of the potential tax issues. Within the framework of this procedure, the company would be required to file its accounting entries file (so-called “FEC”, Fichier des Ecritures Comptables) within 15 days after receiving the accounting examination notice. The French tax authorities would be able to question taxpayers on their accounts but also on transfer pricing issues. They could process the data included in the FEC and in other files received from the taxpayer within a legal framework that still needs to be clarified. The nature and results of the data processing leading to reassessments would be sent to the taxpayer at the latest with the reassessment notice which has to be sent within six months from the start of the audit.
Even though the guarantee of a dialogue with the tax inspector is in principle applicable as in the case of an on-site tax audit, there is a fear that the debate prior to the issuance of the reassessment notice be limited.
As a result of these various measures, foreign digital companies must be prepared for harder discussions with the French tax authorities.
Elisabeth Ashworth is a Partner and Christophe Leclère and Annabelle Bailleul-Mirabaud are Senior Associates at CMS Bureau Francis Lefebvre, France.
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