How to survive a French tax dispute
France’s recently elected Socialist government has already announced new tax policies aimed at large companies, with changes to anti-abuse and controlled foreign company rules likely to lead to more tax authority challenges next year.
International Tax Review speaks with three of France’s leading tax lawyers – Sonia Bonnabry of LeXcom, Nicolas Jacquot of Arsene Taxand and Philippe Derouin of Skadden, Arps, Slate, Meagher & Flom – to find out how to survive the disputes which will inevitably arise.
International Tax Review (ITR): What advice would you give to taxpayers about reducing the risk of a dispute with the French tax authorities?
Sonia Bonnabry (SB)(pictured below):
Identify where tax risk areas could be in an annual tax review by a tax lawyer. The idea is to have enough time to envisage a strategy in case of a tax audit, gathering supporting documentation for instance. This can also lead to discussions with the statutory auditors on how the risks shall be translated into the accounts such as specific mentions in the financial statements;
Submit the potential subjects to the proper committee to ensure the tax or the financial department agrees with the tax position taken in case of an audit. A position will sound more relevant if the tax authorities understand it is a position deliberately adopted.
Identify a person in-house dedicated to the matter who will be able to handle the subject and manage the relationship with the tax inspector.
Launch lobbying actions to facilitate the discussion with the tax authorities together with other actors in the same market on tax subjects to obtain a minimum safety on how the French revenue could react in a specific situation.
On a case by case approach, French taxpayers may also request rulings from the French revenue. However, this process is still limited to specific issues and should be claimed before the implementation of a project.
Nicolas Jacquot (NJ): As French legislation is in constant evolution, it is necessary to follow up the tax legislation, administrative ruling and case law, and to periodically review the procedures adopted and structures in place in light of those changes.
It is also important to take into account the tax implications of the daily running of the business, where tax people should be involved in the various projects. When tax people are not involved or are involved too late, there may be undesired tax consequences that could lead to difficult tax disputes.
As tax disputes are becoming more fact related, it is also necessary to prepare and keep at every relevant stage of an operation or transaction documents which will mitigate the risk of tax disputes.
Philippe Derouin (PD): Two hot topics in corporate tax over the last three or four years are the challenge of certain artificial financial schemes, especially under the abuse of law doctrine, and the administrative search for undisclosed permanent establishments in France.
On the first point, taxpayers should favour robust structures to the detriment of sophistication and ensure that interposed entities have real substance. On the second, large companies and multinationals should check whether their actual operations – or their marketing presentation or outside appearance – correspond to the allocation of functions under their transfer pricing policy.
Recent and past initiatives of the French tax authorities in the investment fund industry or the e-commerce sector, such as search raids with investment fund managers or advisers and the recent raid with Microsoft France, were based upon alleged or actual discrepancies in this respect.
ITR: What is the first step a company should take when it becomes involved in a dispute with the French tax authorities?
SB: Taxpayers should assign one person in the company to the tax audit process and ideally one person dedicated per technical issue, for instance VAT, corporate income tax etcetera.
The idea is to create a team able to respond quickly and efficiently to the questions raised. Indeed, a tax inspector knows that a question raised could become an issue if the taxpayer is not able to answer promptly.
Define a reporting process together with the in-house tax team and the tax lawyer. Sharing points of view can avoid mistakes in the approach or in the strategy and ensures the French revenue will have at least one contact available all along.
Involve the tax lawyer as soon as possible even in a back-up process. If the tax audit cannot be solved with the French revenue and the case is brought before the court, the tax lawyer would be in a better position to defend the taxpayer if he is involved from the beginning of the procedure.
ITR: How should a company organise its tax dispute team when involved in a dispute?
NJ (left): Everyone has to be assigned a role. Subject to each situation, in-house people should warrant access to relevant internal information and documents without delay, to give enough time for those documents to be analysed by the team before being handed over to tax authorities.
It may sometimes prove difficult as there may have been turnover of people. Tax professionals may be in charge of providing technical analyses and of assuring good relationship with tax authorities in such a tense time. Tax professionals should also understand the facts and the businesses.
It is also important to work in full transparency within the team and to file all relevant information and formalise the relevant discussions, especially as regards the preparation of a defence line and the reason for the adopted strategy to be preferred.
PD: Companies should ensure any relevant information flows to the tax dispute team. Where possible, this may imply cooperation of the tax advisers with the tax dispute team. Where both teams express different views on the tactics or the litigation strategy, companies should not overrate the risk of backfire since the French courts and authorities accept that a tax controversy implies litigation and challenging positions.
The tax authorities may extend the scope of their audit but would not retaliate on an unrelated matter.
ITR: Are you seeing any trends in the types of cases the French tax authorities are taking up and the cases where they are being successful against taxpayers in the courts?
SB: One trend I can highlight is the application of fines which are increasingly severe. Whereas the late payment interest of 0.4% per month indemnifies the French revenue for the timing gap, and the 5% or 10% fines repair the failure from taxpayers of good faith, the 40% fine for deliberate failure and the 80% fine for tax fraud should, in principle, be applicable only under exceptional circumstances to be demonstrated by the French revenue.
Practically, we often see the French tax authorities applying the 40% fine based on the argument that the bad faith is qualified due to the amount at stake for instance or just because the taxpayer has not clearly identified the issue in its accounts. This fine often becomes afterwards an element of the negotiation: the taxpayer shall accept the reassessment in exchange for the waiver of the fine which could be a good deal for the French authorities. This trend goes with the hardening of the anti-evasion rules in France which was highlighted in the 2011 Annual Report of the DGFIP.
NJ: French tax authorities monitor transfer pricing issues very closely and, generally speaking, international transactions. The use of losses or deficits or the issue of substance are also areas where French tax authorities may challenge taxpayers. Some anti-abuse rules have been modified recently – the CFC rule and deduction of interest – which could give rise to other tax disputes in the near future.
ITR: What do you think taxpayers can expect from the French tax authorities in the future?
PD (right): The French tax authorities have made no secret of their policies and it can be expected that they will pursue them.
Namely: gather any information by almost all means; challenge artificial or merely sophisticated transactions and structures; diversify criminal prosecutions including against first-time offenders and established persons and entities.
NJ: Companies should be aware that transfer pricing and tax fraud are two areas which will be high on the agenda in the next couple of years.