The McDonald’s group recently reached an agreement (convention judiciaire d’intérêt public, or CJIP) with the French judicial authorities to end criminal proceedings for tax fraud. These proceedings were initiated following complaints from both employee representatives (the joint consultative committee) and the French tax authorities (FTA). The complaints were linked to the transfer pricing policy between several McDonald’s entities, some of which were located in France.
McDonald’s isn’t the first multinational enterprise to conclude an agreement with the French judicial authorities to avoid the risk of a criminal tax fraud conviction. Several others, such as Alphabet Inc.'s Google and JP Morgan Chase & Co., for example, have already done so.
The FTA issued a press release describing all the details of the CJIP and stating that the case is the result of enhanced cooperation among judicial authorities in the fight against tax fraud.
The CJIP raises two important questions. First, what was the nature of the cooperation between the FTA and the public prosecutor’s office? And second, will such a collaboration have any effect on the taxpayer’s right to a defense?
The Cooperation Between the FTA and the Public Prosecutor
The McDonald’s case took place in several stages which illustrate the cooperation between the FTA and the judicial authorities.
Tax audit focused on the transfer pricing policy
The FTA audited some French companies of the McDonald’s group and considered that, following business restructuring operations, the 10% rate applied to the turnover and related to the royalties paid to other companies in the group, located in Switzerland, Luxembourg and the United States, for licenses of intangible assets did not comply with a market rate. The tax investigations also revealed that these royalties were not actually taxed abroad.
Tax fraud complaints by the joint consultative committee and the FTA
The joint consultative committee filed a complaint alleging tax fraud in 2014 and 2015 and the FTA filed one in 2016. In France, tax fraud is a criminal offense for which taxpayers may be sued in court.
It must be emphasized that a tax audit is a separate procedure from a judicial investigation. The public prosecutor may pursue tax fraud cases even if no complaint has been filed by the FTA. In such a case, the prosecutor may open an investigation related to tax fraud money laundering on the grounds that money concealed from tax authorities ought to be reintroduced into the economy. Such an offense is similar to tax fraud. The prosecutor may also allege tax fraud following a complaint from the FTA.
Since October 2018, the public prosecutor’s office must be informed of tax audit cases when the principal amount of tax reassessment exceeds 100,000 euros ($101,940) and where high penalties (40%, 80%, 100%) have been applied under certain conditions. In such circumstances, the public prosecutor may then decide to bring the case to court for tax fraud, even where there has been no prior complaint by the FTA.
The prosecutor’s decision about whether or not to bring a criminal case, and any final decision of a criminal court, has no influence of the amount of the tax reassessment. Of course, a tax reassessment may always be challenged, but such a claim won’t be heard by a criminal court. Tax adjustments are administrative decisions which may only be appealed to a tax judge.
Exchange of information between the FTA and prosecutor’s office
The FTA may exchange information with the public prosecutor’s office. Indeed, in the framework of a judicial investigation, the office may get all the information it needs from the FTA.
In the McDonald’s case, it is very likely that the prosecutor asked the FTA for information. Moreover, the tax authorities’ complaint of tax fraud contained all the information needed by the prosecutor, such as the amount of the tax reassessment, a description of the fraud scheme, and the clues gathered in support of the finding that the taxpayers were fully aware of the tax offense.
In October 2018, a full waiver of tax secrecy between the FTA and the public prosecutor was introduced, thus considerably strengthening the exchange of information between the prosecutor’s office and the FTA. The FTA may at any time exchange information with the prosecutor’s office, including audit cases for which no complaint has yet been filed, even at the very beginning of the audit.
Agreements between McDonald’s, the FTA, and the judicial authorities
On May 30, 2022, an agreement was reached with the FTA on the tax adjustments and the amount of tax penalties. Following this agreement, the total amount of the tax reassessments and penalties for 2009 to 2020 was 609 million euros.
It is indeed possible to reach an agreement with the FTA. This can be a global settlement (règlement d’ensemble) which covers the tax reassessment or a tax settlement (transaction fiscal), which is a legal contract, that deals exclusively with penalties.
In the McDonald’s case, even if neither the FTA’s press release, nor the CJIP, are clear about what type of settlement was concluded, it is likely that there was both a global settlement and a tax settlement. Indeed, it turns out that the amount of the tax penalties was normally 375 million euros. However, based on the computation of the penalties described in the agreement, it appears that the FTA would have reduced this amount.
That is not surprising because, in practice, the FTA often chooses to enter into a settlement to reduce penalties. In return, the taxpayers must drop their right to challenge the reassessment before a court, which is a secure way for the FTA to end a tax case.
It is therefore usual that there is both a global settlement on the amount of the tax reassessment and a tax settlement to reduce penalties.
On May 31, 2022, the CJIP was agreed. The CJIP is an agreement under the terms of which a legal person agrees to pay a criminal fine. In return, the criminal proceedings are dropped.
The conclusion of such an agreement has one advantage: it is not a judgment and does not entail a conviction for tax fraud. A CJIP must always be approved by the president of the criminal court. In practice, the French CJIP is similar to the US deferred prosecution agreement (DPA) procedure.
The McDonald’s group agreed to conclude a CJIP and pay a criminal fine of 508 million euros, the maximum fine that could be applied. The judicial authorities considered that there were aggravating factors and decided to apply the maximum fine. It must be noted that the CJIP’s conclusion came one day after the conclusion of the FTA agreement.
In practice, the conclusion of a CJIP is not a legal right and the public prosecutor is never bound to propose such an agreement as long as the tax reassessments are still under challenge. That is why, in most cases, where no agreement has been reached between the taxpayer and the FTA, the prosecutor will disagree with a CJIP proposal.
In conclusion, McDonald’s agreed to pay tax adjustments and penalties of 609 million euros and a criminal fine of 508 million euros within the framework of a CJIP. Thus, to settle the tax case with the tax administration and the judicial authorities, McDonald’s agreed to pay more than 1.1 billion euros, around twice the principal amount of the tax adjustments and penalties.
Downside of the Enhanced Relationship Between the FTA and the Judicial Authorities
According to the FTA’s press release, the coordinated actions of the judicial authority and the FTA have made it possible to end the dispute over the French tax activity of the McDonald’s group. These actions are the result of an enhanced cooperation in the fight against tax fraud.
It is also stated that the case’s conclusion illustrates the effectiveness of the CJIP which, when combined with a tax agreement, ensures the payment of taxes and penalties. Therefore, the judicial authorities and the FTA are working in a coordinated way and, for the FTA, this cooperation is a way to collect taxes and penalties quickly since, under the tax agreement, taxpayers have to pay immediately.
One can say that the FTA have a very pragmatic approach to their cooperation with the judicial authorities: it is not only about fighting tax fraud but also about collecting taxes and penalties.
According to the last tax audit figures for 2021:
- The FTA has sent 1,217 tax audit cases automatically (without a prior complaint) to the public prosecutor;
- The FTA has filed 286 complaints of tax fraud; and
- More than 2,500 complaints of fraud related to financial subsidies have been filed.
Without taking into account the Covid crisis period, these figures, which are quite similar to those for 2019, confirm that there is full cooperation between the FTA and the public prosecutor’s office. The relationship between the FTA and the judicial authorities is not theoretical and must be considered at the very beginning of a tax audit.
From a policy point of view, one can understand that it’s better when the FTA and the judicial authorities fight tax fraud together. But there may be a downside:
- In the course of a tax audit, taxpayers are now much more likely to look for a global settlement with the FTA as no high penalties would be applied, even if it might normally be possible to challenge the tax adjustment proposed by the FTA;
- Taxpayers may no longer be willing to go before a criminal court, even if they have good arguments, and consequently, in practice, most of them will prefer reaching a CJIP and paying a criminal fine to avoid any risk of criminal conviction.
Therefore, in France, the improvement of the legal mechanisms of the fight against tax fraud may lead to taxpayers dropping their legal rights of defense. No general conclusion may be made, but it is certain that the government’s obvious interest in fighting tax fraud must not result in the withdrawal of any right of defense for taxpayers.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Thierry Viu is Counsel at CMS Francis Lefebvre Avocats.
The author may be contacted at: firstname.lastname@example.org