During a tax audit it is often possible to enter into negotiations with the French tax authorities (FTA) and try to reach an agreement. Indeed, in some complex tax cases where there is no certainty on the tax regime which must be applied, an agreement may be advantageous for both the FTA and the taxpayer, since it is a way to quickly close a case and avoid any litigation before a court, which can be lengthy and uncertain.
There are two different negotiation tools which may be used with the FTA: the “tax transaction,” which is provided for by law; and the “global settlement,” which results from an administrative process. These tools are regularly used by the FTA and taxpayers (companies and individuals) particularly in international tax cases where the financial stakes may be high.
Conclusion of a “Tax Transaction” Between Taxpayer and FTA
Definition of a Tax Transaction
A tax transaction is a contract between the FTA and the taxpayer according to which:
- the FTA agree to reduce the amount of the tax penalties that have been applied;
- the taxpayer commits to pay the principal with remaining penalties and not to challenge the tax adjustment before a court.
A tax transaction aims at reducing the amount of penalties or even default interest. A tax transaction can never consist in a reduction in the amount of the principal owed by the taxpayer as a result of the tax audit. If the taxpayer faces financial difficulties that do not allow it to pay the principal, it may always ask for a rebate, but this constitutes another kind of request (ex gratia) and not a transaction.
What Kind of Tax Adjustments Can Give Rise to a Tax Transaction?
In principle, a tax transaction may be concluded on any kind of tax adjustment.
However, the FTA is not likely to agree on a tax transaction with respect to tax adjustments that are particularly serious (delaying tactics, drug trafficking, etc.) or where there is no doubt that the tax adjustment will be confirmed by a court.
How to Conclude a Tax Transaction
The conclusion of a tax transaction requires several requirements to be satisfied:
- The taxpayer must make a formal request proposing a tax transaction to the FTA.
Such a request must provide for the taxpayer to pay the tax adjustment claimed and not to bring the case to the court, subject to the FTA agreeing to apply the tax penalties at a discounted rate or reducing the tax fines.
In practice, before such a request, there is an informal exchange between the taxpayer and the FTA, in order to agree (i) on the possibility of entering into a transaction, and (ii) on the nature and the amount of the penalties for which a reduction may be granted. In some tax cases, the FTA may also propose that the taxpayer asks for a tax transaction.
However, it must be pointed out that there is no legal right for a taxpayer to conclude a transaction with the FTA, who may always decline the proposal.
- Tax audit units have a limited authority to conclude a tax transaction.
Tax audit units have limited authority to conclude a transaction, and they cannot reduce the amount of penalties beyond 200,000 euros ($234,000). Above this amount, the request for a transaction falls exclusively within the scope of competence of the Budget Minister, based on the opinion of an administrative committee (comité du contentieux fiscal et douanier).
However, the above threshold does not change the fact that the taxpayer must first apply for a transaction to the tax audit unit in charge of the audit.
At What Stage May a Tax Transaction be Concluded?
A tax transaction may be concluded in the same way with the FTA:
- at the end of the tax audit procedure, prior to the issuance of a tax collection notice; or
- after the issuance of a tax collection notice, as long as a final court decision has not yet been made.
However, it is always easier to conclude a transaction with the tax audit unit during the tax audit procedure, rather than a few years later when the case has already been challenged before a court. Indeed, depending on the case law and the tax audit policy, which may have changed, the FTA may then decline the proposal of a tax transaction, whereas during a tax audit procedure the FTA prefer to collect the amount of the tax adjustment quickly without any litigation.
Pros and Cons of a Tax Transaction
For the FTA
The conclusion of a transaction is a quick way to end a tax audit procedure without the risk of litigation, and this is always very attractive for the FTA. In addition, the tax transaction is explicitly ruled by law, which offers a clear and secure framework for the FTA.
Further, since 2018, the FTA have been allowed to conclude a transaction with respect to tax adjustments where a charge of tax fraud is likely to be filed by the FTA or a report to the public prosecutor’s department is likely to be made. This is a new possibility for the FTA to definitively close the tax procedure and let the prosecutor decide whether the taxpayer must be pursued for tax fraud.
The conclusion of a transaction therefore offers many advantages for the FTA and no inconvenience.
For the Taxpayer
For the taxpayer, the main advantage of a transaction is to reduce the financial consequences of the tax adjustment, as the FTA will accept a reduction in the amount of penalties.
However, a transaction may have several disadvantages:
- it prevents the taxpayer from bringing the case to court;
- the conclusion of a transaction has no effect on the FTA’s obligation to report to the prosecutor certain tax audits where high penalties have been applied. Indeed, the law explicitly provides that the FTA is compelled to report to the public prosecutor’s department tax audits where, under certain circumstances, high penalties (100%, 80%, 40%) have been applied and where the amount of the tax adjustment is above 100,000 euros in principal. This report to the public prosecutor occurs even if the penalties have been discounted as part of a tax transaction.
A taxpayer may then be pursued for tax fraud by the public prosecutor even if a tax transaction has been previously concluded with the FTA. The public prosecutor is of course not compelled to prosecute for tax fraud and may also agree to enter into a penal transaction. The fact that the taxpayer has concluded an administrative transaction with the FTA to reduce the amount of penalties can have a positive influence on the prosecutor’s decision.
In any event, the stakes are high, and, when considering a tax transaction with the FTA taxpayers must carefully weigh the pros and cons of such an agreement, for the present and the future.
Conclusion of a “Global Settlement” Between Taxpayer and FTA
In certain cases, at the end of the tax audit procedure the FTA may agree to enter into a kind of comprehensive agreement with the taxpayer, also called a “global settlement,” in order to reduce the amount of the tax adjustment (principal and penalties).
Unlike a tax transaction, a global settlement:
- is not ruled by law or any administrative guidelines;
- enables the FTA to reduce the amount of the principal to be paid by the taxpayer.
What Kind of Tax Adjustments can Give Rise to a Global Settlement?
A global settlement is intended to be applied to complex situations when the tax adjustments are expected to be challenged by the taxpayer and cannot be established with certainty by the FTA, leaving the FTA room for maneuver in the application of tax law.
A global settlement may therefore apply in the following cases:
- valuation of intra-group transactions (margin rate of a subsidiary, sale price of an asset, etc.);
- complex financial transactions;
- uncertainty on the tax regime which could be applied (e.g., no administrative guidelines, no case law).
How to Conclude a Global Settlement with the FTA
Insofar as there is no legal rule relating to the global settlement, there are no specific rules for concluding one.
However, in practice, the conclusion of a global settlement requires that:
- the FTA consider that there is uncertainty on the validity of the tax adjustment;
- the taxpayer agrees that its own position could be challenged before a court and that the FTA could maintain a tax adjustment;
- the taxpayer and the FTA want to find an intermediate solution somewhere between the FTA’s initial position and a full waiver of the tax adjustments and penalties;
- the taxpayer undertakes to pay the tax adjustments and not to bring the case before a court.
There is both a technical and psychological dimension to reaching a global settlement of a tax case. On the one hand, the taxpayer must convince the FTA that their position is weak and could be successfully challenged before a court; and on the other hand, the FTA and the taxpayer must be ready to listen to each other.
In addition, a global settlement is not a mere deal regarding the amount of the tax adjustments and penalties, as it must be backed by strong tax analysis.
Thus, in practice, to reach a global settlement, the taxpayer must provide the FTA with a tax analysis that helps the FTA in justifying the change they could make in the tax adjustment under the global settlement.
When both the FTA and the taxpayer agree on a tax analysis, the conclusion of a global settlement can take place at any time, during the tax audit procedure, or even later when the case is challenged before a court.
Pros and Cons of a Global Settlement
For the FTA
Like the tax transaction, a global settlement is a way to quickly close a tax audit procedure.
However, a global settlement may present some risks, as the FTA have no guarantee that the taxpayer will observe the commitments it made, whereas the amount of the tax adjustment (principal and penalties) will have been reduced.
In order to avoid that risk, the FTA may propose that the taxpayer conclude in parallel:
- a global settlement on the principal; and
- a tax transaction providing for discounted penalties subject the taxpayer accepting the principal (for the amount resulting from the global settlement).
There is therefore no possibility for the taxpayer to challenge the global settlement before a court: however, when the related conditions are fulfilled, the FTA may still be compelled to send the case to the public prosecutor, which is exactly what the taxpayers wish to avoid. This is why, in practice, the combination of a transaction and a global settlement is not often used.
For the Taxpayer
The global settlement has many advantages:
- it is a smart solution to close the tax audit procedure;
- as it is not a legal tax transaction, it may avoid the reporting of the case to the public prosecutor’s department (except in the above case of a correlated tax transaction).
Further, the commitments made by the taxpayer have no real significance, as, unlike in the tax transaction, there is no rule preventing the taxpayer from challenging the global settlement before a court. However, to maintain a positive relationship with the FTA, it is highly recommended to avoid concluding a global settlement and subsequently challenging the FTA’s position before a court.
French tax audits may risk ripple effects regarding not only the financial consequences but also the risk of being reported to the public prosecutor for tax fraud.
Negotiation tools exist and may enable taxpayers to reduce these risks.
Thierry Viu is an Associate with CMS Francis Lefebvre Avocats.
The author may be contacted at: email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.