Although there can be many steps, or administrative decisions, before a tax is assessed, taxpayers are generally barred from initiating any action until a tax is assessed. Only few exceptions enable an actual or potential taxpayer to start an action before a tax deed has been issued.i Petitions for judicial review of administrative guidelines
Taxpayers, and certain taxpayers' associations, may file petitions for a judicial review of administrative guidelines that may be declared illegal on any point where they give an interpretation of the tax law that differs from the decision of an administrative judge on the relevant point. Such procedures have been used, successfully at times, to shortcut the lengthy administrative and judicial process of a tax controversy. Some of these petitions may be the basis for the administrative court to refer a preliminary question either to the Constitutional Council on certain matters where a legislative provision is challenged against any fundamental human rights enshrined in the French Constitution, or the European Court of Justice (ECJ) where a question of EU law is involved.
The challenge to the 3 per cent corporation tax surcharge on amounts distributed by French companies from 2012 onwards provided a recent example. Petitions were filed by certain taxpayers and by the French Association of Large Businesses, before the Council of State in the spring of 2016. Both categories of petitioners claimed the administrative guidelines were illegal because they commented upon a piece of legislation that was against the principle of equal rights on certain points and contrary to the EU Parent–Subsidiary Directive on other points. The Council of State decided in June 2016 to refer the equal treatment point to the French Constitutional Council, and the EU Directive points to the ECJ. The Constitutional Council found the law to be discriminatory and unconstitutional in a ruling of September 2016. The law was amended at year-end to extend the benefit of an exemption for intra-group dividends to domestic, European and most third-country corporate relationships. The EU case was decided by the ECJ in May 2017 after which the French Council of State further referred the case to the French Constitutional Council, which finally decided in October 2017 that the 3 per cent surcharge on dividends was entirely unconstitutional. A similar result was reached in Belgium with respect to the 'fairness tax' that was introduced in 2013 and was inspired by the French surcharge. The cost to the French government totalled approximately €10 billion and required an extraordinary surcharge to partly finance it.
Similar procedures are based upon the same lines; others are less radical or have narrower scopes and lower chances of success.
Petitions for judicial review could also be introduced with respect to individual decisions, such as an unsatisfactory ruling, notified to a taxpayer. The French tax courts have been excessively restrictive upon the admission of such petitions on the ground that, except in very special circumstances, the decision was not separable from the taxation procedure.ii Pre-audit search warrants
Prior to a tax audit, the tax authorities may apply to a civil judge for a warrant to search premises and attach documents that could be used as evidence that a business is carried out in France and should be taxable in France. Approximately 200 searches are performed on that basis each year. Many undisclosed permanent establishments of foreign entities are being the purpose of such warrants. As a result of a 2008 ruling by the European Court of Human Rights (ECHR) in Ravon, French law was amended to the effect of allowing the potential taxpayer and the tenant of the searched premises to immediately appeal from the warrant to the president of the court of appeals and challenge the basis for the authorities' suspicions. They may also challenge the validity of the search on grounds of breach of confidentiality. Such appeals and challenges are commonly introduced shortly after the searches have been made and before the tax assessments are established. They seldom succeed in court. However, challenging the warrant may often be useful as it enables the potential taxpayer to access the documents supplied by the French tax investigators in their application for the warrant and bring forward certain points of defence to be considered, if not by the court, by the French tax authorities at a later stage.
After the search, the French tax authorities may use the collected documents against the potential taxpayer only after carrying out a full audit of its accounts with the assistance of a counsel and a discussion in person. The French tax authorities simultaneously send a request for omitted tax returns. Although the non-resident entity may claim it has no taxable presence in France, where it maintains no corporate accounts and consider that it has no tax return to file in France, it is generally advisable to cooperate with the French tax authorities.
Under French tax law, any audited business must supply its accounts and supporting documents for inspection, in their original digital format where applicable. Where cross-border transactions occur with related parties, the audited entity must also make its transfer pricing policy available to the French tax auditors. As a result, the French tax auditors would expect, and generally require, to review such documents, failing which they are entitled to formally record that they were not presented and to draw certain conclusions.
A non-resident entity that considers that it has no taxable presence in France presumably would not have separate accounts, or a transfer pricing policy, with respect to its operations in France, especially where these operations are carried out by a French subsidiary or other related entity. As a matter of law, there is no requirement for a foreign entity to have separate accounts for its French operations, even where carried out through a permanent establishment. Business entities established outside France and doing business in France from abroad accordingly are entitled to indicate that they did not maintain separate accounts but should be prepared to provide the relevant documents to French tax auditors. The accounting documents could be their full set of accounts in their original digital format and any relevant transfer pricing policy.
Depending upon the circumstances, these documents may support the position that the entity had no, or a limited, presence in France, with no or limited tax consequences. This may be true especially where the deemed permanent establishment in France can be seen as merely supplying support functions to the head office and principal activities abroad. In such a situation, no value added tax (VAT) would apply, especially within the European Union, and the corporate income tax implications would not substantially differ from a transfer pricing adjustment, if any.
In anticipation of such possible outcomes, the potential taxpayer may defer to the request of the French tax authorities and file the corresponding tax returns within 30 days of the request to do so. In these tax returns, the foreign entity may indicate why there was no reportable VAT transaction in France or how the transfer pricing policy would result in no or limited taxable income attributable to the hypothetical French permanent establishment. If a reassessment occurs, the entity may claim treaty benefits where applicable and access the mutual agreement procedure.
This scenario implies that, at some stage, the investigated taxpayer makes the decision to either challenge the existence of the permanent establishment, including before the court, or to negotiate with the French tax authorities, concede the establishment and mitigate the French tax consequences.
As a means to press the non-resident entity for such admission, the French tax authorities may take the position that the permanent establishment was not only undisclosed but hidden or concealed. Such an ugly characterisation would result in an extended period of limitation (10 years instead of three or four) and the risk of a severe penalty (80 per cent instead of 10 per cent). Depending upon the circumstances, and the country of origin of the taxpayer, defences may be available either on both grounds or in relation to the penalty only.iii Tax claims and challenges
French tax disputes commence when a tax is assessed or paid and the taxpayer either challenges the administrative reassessment or claims for a tax refund.
Under French tax procedure, the first step for challenging a tax assessment or for claiming a tax refund is a petition to the head of the relevant tax department whatever tax is involved and even where the tax was assessed according to the taxpayer's return. Around 3 million petitions are filed, and decided upon, each year, mainly with respect to income taxes assessed by the authorities on individuals or to local taxes. Businesses file approximately 50 to 56,000 such petitions on corporation tax and a similar number on VAT.
The petition must be filed, before any referral to any court, to the head of the tax office that has jurisdiction over the relevant tax. It must:
- specify the tax that is being challenged;
- provide a summary of the facts, pleas and arguments;
- be signed by the taxpayer or an authorised agent; and
- be accompanied by a copy of the Treasury claim concerned (assessment notice, collection notice or withholding document, in the case of withholding taxes).
Generally, the claim must be filed by 31 December of the second year following that of the assessment, collection notice or payment. An extension applies after a tax audit.
Submitting a claim does not exempt the taxpayer from the obligation to pay the taxes and penalties imposed. However, the taxpayer may request that payment be suspended. Suspension of payment is granted in exchange for the provision of guarantees (e.g., mortgage or pledge up to the amount of the principal taxes; penalties need not to be secured). The suspension remains until a lower court decision on the dispute is issued.
If the lower court rules in favour of the tax authorities, the suspended tax and penalties become payable, and the taxpayer would be liable to pay a 5 or 10 per cent surcharge plus interest on the arrears. The rate of interest was 0.4 per cent per month or 4.8 per cent per annum up to 31 December 2017 and has been reduced to 0.2 per cent per month or 2.4 per cent per annum since 1 January 2018. Conversely, if the court finds for the taxpayer who has already paid the taxes claimed, the taxpayer is entitled to interest on arrears at the same rates. Considering the prevailing market rates, it has been and still could be financially advantageous for taxpayers to pay and not to apply for suspension.
The authorities must decide on a claim within six months. Failing a formal decision after six months or if the claim is totally or partially rejected, in writing or implicitly, the taxpayer is entitled to bring an action before the administrative or civil courts, depending on the case.