There is an international trend to legislate for offenses which seek to attach criminal liability to corporate entities where tax evasion or the facilitation of tax evasion has occurred. This theme is explored here in relation to three jurisdictions: the U.K., France and Italy.

U.K.: New Corporate Criminal Offenses

Under the Criminal Finances Act 2017, two new corporate criminal offenses of facilitating the evasion of (i) U.K. tax and (ii) foreign tax (the “new offenses”) were enacted. The language of the new offenses closely mirrors the offense under the Bribery Act 2010, where a corporate fails to prevent bribery on its behalf, but now applies the same concept to the facilitation of tax evasion.

The new offenses are based on tax evasion by another person, not tax avoidance. Tax evasion occurs when individuals or businesses dishonestly omit, conceal or misrepresent information to reduce tax liability. Conversely, tax avoidance is not a criminal offense, but involves the exploitation of tax rules using transactions that are designed to gain a tax advantage.

Strict liability would attach to companies and partnerships (“relevant bodies”) if they fail to prevent individuals or corporates acting on their behalf (“associated persons”) from criminally facilitating tax evasion. The new offenses can be committed irrespective of a gain accruing to a relevant body.

It is a defense to the new offenses if relevant bodies can show they have “reasonable procedures” in place to prevent the facilitation of tax evasion by associated persons (the “procedures”).

Planning Points

What steps would a global corporate with a presence in the U.K. need to take?

The procedures should be developed following a risk assessment exercise to identify and address any risks relating to the facilitation of tax evasion. When assessing risk, a corporate must “sit at the desk” of its employees, agents and other associated persons and ask whether they have the motive, means and opportunity to criminally facilitate tax evasion, and if so, how this risk might be mitigated.

The procedures should be proportionate to the risk a corporate faces of its associated persons committing tax facilitation offenses.

The procedures should be developed with appropriate commitment from a corporate’s senior management, which will be expected to take responsibility for the development and implementation of prevention measures. These should also make provision for appropriate due diligence, capable of identifying the risk of criminal facilitation of tax evasion by associated persons.

Consideration should be given to including due diligence when contracting with agents, consultants and business partners, and when recruiting new staff.

The procedures should be communicated and understood throughout the corporate, through internal and external communication, including training. Training should include, for example, a corporate’s policies and procedures and an explanation of how and when to seek advice and report suspicions.

A corporate should monitor and review procedures periodically and make improvements where necessary.

France: Tax Evasion Offenses

Under French law, corporates may be held criminally liable for tax fraud, alongside their legally appointed directors or their shadow directors.

Accomplices, whether individuals or corporations (e.g. a parent company), may also be prosecuted if they facilitate or instigate the commission of the offense. Accomplices incur the same penalties as the main perpetrators of the offense.

France does not have an equivalent to the U.K.’s strict liability new offenses.

Since October 2018, in addition to a fixed maximum fine, the penalty for tax fraud includes:

  • for individuals—up to twice the amount of tax fraudulently avoided; or
  • for corporates—up to ten times the amount of tax fraudulently avoided.

The general offense of tax fraud encompasses:

  • fraudulently failing to file a tax return;
  • fraudulently filing an inaccurate tax return; or
  • using fraudulent means to avoid paying tax.

Higher penalties apply under certain circumstances such as when offshore bank accounts are used, artificial entities are interposed, or an offshore legal entity is established.

Apart from the general offense of tax fraud, there are other specific corporate tax offenses such as the use of false accounting.

In practice, although the offense of tax fraud requires intention to be proved to the criminal standard, criminal liability of legally appointed directors is presumed, since they are treated as being responsible for a corporate’s compliance with its tax and accounting obligations.

Shadow directors may escape criminal liability if they have delegated their authority in relation to tax matters to a third party in certain circumstances.

Planning Points

What steps would a global corporate with a presence in France need to take?

French law does not, strictly speaking, impose tax compliance obligations. However, it is best practice for corporates to implement tax compliance measures such as internal controls, policies and staff training.

Foreign corporates should be vigilant of French tax obligations. For example, if a foreign corporate avoids filing any French tax returns by way of having applied a regulation contained in a low tax jurisdiction, this could lead to a tax reassessment and could even result in criminal prosecution. This could be seen by the French tax authorities as a move designed solely for the purpose of avoiding tax.

Italy: Tax Evasion Offenses

A combination of criminal and administrative penalties applies when Italian tax legislation is contravened.

Criminal sanctions are typically imposed in cases of tax evasion, but can extend to other conduct not amounting to tax evasion, such as the concealment or destruction of accounting records. The most common tax evasion offenses prosecuted are:

1. failure to file a tax return;

2. filing a fraudulent tax return; and

3. filing an inaccurate tax return.

Of the above points, the most serious offense is 2., which is usually committed through the use of fake invoices (or invoices for fake transactions) and has no materiality threshold.

By contrast, points 1. and 3. are subject to certain materiality thresholds, but these low thresholds are easily met by large corporates. For example, point 1. failure to file a tax return, is almost automatically prosecuted when a tax audit results in a finding of an undisclosed permanent establishment of a foreign corporate, regardless of any fraudulent intent.

Similarly, point 3. is triggered in any case of tax evasion above the materiality thresholds. Only a subjective intention and willingness to evade tax is necessary here. For example, this offense is often prosecuted following a tax audit of a multinational group.

Although a law was introduced in 2001 which imposes direct liability of corporates for certain specific criminal offenses, this does not currently extend to tax offenses.

Currently, only individuals can be guilty of a tax offense, even if these individuals commit tax offenses in their capacity as a director or employee of a corporate. Corporates are only subject to administrative penalties for breaches of tax legislation.

Planning Points

What steps would a global corporate with a presence in Italy need to take?

Where a corporate can be held directly liable for specific criminal offenses, the effective implementation of an organizational and management model aimed at preventing crimes is a defense.

Corporates are advised to implement an appropriate tax control framework (“TCF”) to minimize the risk of breaches of tax laws within the entity. The TCF has similar features to the organizational and management model.

While this would not automatically exempt the individuals involved in the tax affairs of the corporate from criminal liability, it would certainly help to reduce the risk of tax crimes being committed.

The implementation of an effective TCF is also a necessary condition for corporates to access the cooperative compliance program of the Italian tax administration. This program, which is still in a pilot phase, is currently only open to taxpayers with an annual turnover higher than 10 billion euros (approx. $11.3 billion). However, over time this program is expected to be extended to other corporates with a lower turnover.

Joining the cooperative compliance program does not automatically exempt a corporate from liability for contravention of tax legislation, but it would reduce the administrative penalties applicable (and may help to mitigate the penalties where tax crimes have been committed by individuals involved in the tax affairs of the corporate).

Sam Dames is a Partner and Andre Anthony is an Associate with CMS UK; Olivier Kuhn is a Partner and Anne Renard is an Associate with CMS France; Mario Martinelli is a Partner with CMS Italy.

The authors may be contacted at: andre.anthony@cms-cmno.com; sam.dames@cms-cmno.com; olivier.kuhn@cms-fl.com; mario.martinelli@cms-aacs.com; and anne.renard@cms-fl.com