France: a bill to efficiently combat tax fraud

Due to the complexity of the French tax system, the French government introduced in November 2017 a bill facilitating the relationship between the taxpayers and the French tax authorities. This bill notably implements the right for taxpayers to rectify, sponta- neously or during a tax audit an incorrect tax return when such mistake was made in good faith with re- duced financial consequences (such rectification will result in the payment of unpaid taxes and reduced in- terest for late payment).

The Bill on the combat of fraud published on March 28, 2018 (‘‘the Bill’’) is dealing with another aspect of the restoration of such confidence. Several cases of tax fraud in recent years might have led people to con- sider that the fight against tax fraud and tax evasion was not as efficient as it should be. This Bill will be discussed by the French Parliament in the coming weeks.

Strengthening of the penalties in case of fraud

Pursuant to Article 1741 of the French tax code, an in- dividual or a company who has fraudulently escaped or tried to escape the total or partial payment of taxes, by voluntarily omitting to file a return within the deadline set by the law, or by voluntarily concealing taxable amounts or by any other fraudulent behaviors could be prosecuted for tax fraud.

At the present time, tax fraud may result in a pen- alty of up to 3 million euros and seven years of impris- onment for individuals. Companies convicted of tax fraud may be subject to a fine equal to five times the amount applicable to an individual (i.e. a maximum of 15 million euros).

The Bill introduces a significant strengthening of the repressive measures by increasing the maximum penalty for tax fraud to two times the proceeds result- ing from the fraud and could accordingly clearly exceed the 3 million euro threshold. In addition, there will be an automatic publication of the tax fraud sen- tence in a newspaper or a website whereas this publi- cation remains at the discretion of the judge at the present time and is in practice very rarely applied (less than 5 percent of the tax fraud sentence includes such publication).

Tax fraud is not the only aspect dealt in this Bill which also contains some measures regarding tax audits. The French tax authorities are subject to a duty of professional secrecy for any matters which have been discussed or discovered in the context of their activity. This means that it is not possible for the French tax authorities to publicly announce that an individual or a company has been reassessed as a result of the tax audit.

The Bill changed this principle by introducing the ‘‘name and shame’’ concept for companies only. This publication will concern taxpayers reassessed for sig- nificant reassessment for an amount exceeding at least 50,000 euros and with the existence of fraudu- lent action (i.e. the company has intentionally breached the law and tried to cover its behavior). The French tax authorities will then be able to publicly dis- close the reassessment on its website after having ob- tained the opinion of a specific commission dedicated to this purpose.

It is finally worth noting that the ‘‘name and shame’’ will not be applicable in case a company is prosecuted for tax fraud for the same facts in order for a company not to be potentially subject to similar penalties twice.

This Bill also introduced penalties for intermediar- ies (lawyers, accountant, financial advisors, etc.) who have setup schemes to avoid taxes (including social security taxes). The penalty will be equal to 50 percent of the fees received with a minimum 10,000 euro pen- alty. The schemes involved notably refer to ‘‘any pro- cess put in place in order to misinform the French tax authorities.’’ This definition seems very vague and could be subject to many interpretations.

It is interesting to note that this is not the first time the French government intends to introduce specific measures targeting advisors of schemes facilitating tax fraud. Indeed, the Finance Bill for 2014 tried to implement a reporting require- ment to of ‘‘tax optimization schemes’’ by the persons selling them, developing them or implementing them. Nonethe- less, the French Constitutional Court judged the definition im- precise and accordingly de- cided to declare this article against the French Constitu- tion. One may wonder whether the Constitutional Court will have the same opinion with this new provision.

Initiation of the criminal proceedings

At the present time, criminal prosecutions of taxpay- ers involved in a tax fraud are not automatic. Indeed, only the French tax authorities can file a tax fraud complaint. Some members of the Parliament intro- duced a Bill on March 27, 2018 to modify the law so that the public prosecutor may engage legal suit against a person without a prior complaint of the French tax authorities. The number of tax fraud com- plaints (currently around 1000 per year) could then increase dramatically. Nevertheless, it remains very uncertain that this Bill will be voted as the French president claimed that the existing monopoly granted to the French tax authorities enable to obtain more quickly from taxpayers a settlement in the context of a tax audit.

The Bill also contains the possibility to accelerate criminal proceedings with the extension of the imme- diate appearance on conviction (CRPC or ‘‘comparu- tion sur reconnaissance pre´alable de culpabilite´’’) known as ‘‘guilty plea.’’

Extension of the non-cooperative country list

France introduced in 2008 legislation targeting non- cooperative country or territory which includes coun- tries or territories which do not exchange tax information with France (the existing French list in- cludes: Botswana, Brunei, Guatemala, Marshall Is- lands, Nauru, Niue, Panama). Transactions involving entities or individuals located within these territories are subject to a detrimental tax regime.

The European Union published in December 2017 its own lit of non-cooperative country which includes countries which are not transparent or with harmful tax regimes. The Bill extends the list of non- cooperative country by incorporating such EU list. At the present time, the EU list is composed of the fol- lowing countries: Bahreı¨n, Guam, Marshall Islands, Namibia, Palau, Saint-Lucia, American Samoa, Samoa, Trinidad and Tobago.

Planning points

The political pressure on alleged tax evasion by com- panies (and in particular within the digital economy) along with the proposed changes require special at- tention from taxpayers who could be involved in disputes related to transfer pricing, the existence of a per- manent establishment or inter- national reorganizations. Indeed, the broad definition of tax fraud could be met when a company has failed to declare the existence of such establish- ment or applies an incorrect transfer pricing policy which has been highlighted by recent cases. Therefore, taxpayers should not only be aware of the tax risk but also of the criminal risk in particular in case the French tax authorities loses its right on the monopoly of the tax fraud com- plaints

Reproduced with permission from BNAI European Tax Service Monthly Digest, Bloomberg Tax, 04/30/2018. Copyright © 2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com