New French Tax Compliance Audit Process—In Practice

What about asking the private sector to audit companies on their tax compliance? Nothing should prevent this, as it already exists in many activities for which the public authorities rely on the private sector to check security rules.

The French tax authorities (FTA) on January 13 , 2021 released a decree (Décret n° 2021-25 du 13 janvier 2021 portant création de l’examen de conformité fiscale) related to a new procedure called a “tax compliance audit” (ECF). This is a procedure designed to be performed by the private sector.

Any company will now be allowed to ask for such audit be performed by a service provider (accountant, tax lawyer). The audit is focused on 10 topics and the FTA must be informed of the results.

The ECF has many advantages for a company, since, in a case where the FTA starts an official tax audit, no penalties would be applied if the tax adjustment is linked to a topic previously validated by the service provider.

This article reviews how the new tax audit process works in practice.

ECF is a Contract

The ECF is designed to contribute to the tax compliance of companies by presuming the compliance of some topics which are validated by the service provider. Indeed, the ECF is a contract under which a service provider undertakes, at the request of a company—whatever its size or sector of activity—to give an opinion on its compliance with tax rules with respect to a list of 10 tax topics.

Given the nature of the audit to be carried out, the service provider will necessarily be a tax adviser or an accountant.

ECF and Tax Audits

The ECF is not an official tax audit and is not likely to avoid an official tax audit being carried out by the FTA. However, where a company decides to carry out an ECF, it can benefit from a kind of tax security in the event of a tax audit then being carried out by the FTA. No penalty will be applied if the FTA challenge a topic that had previously been considered compliant with tax rules by the service provider—subject of course to the good faith of the company in the information given to the service provider.

The main benefit of an ECF is therefore to provide a security to a company that a usual tax review cannot give.

Topics to be Audited by Service Provider

The audit must cover a list of 10 topics set out in an official audit path:

• compliance of the electronic accounting files with the legal standard;
• compliance of the electronic accounting files with the chart of accounts;
• holding of the certificate of conformity from the the cash-register software publisher (if any);
• compliance with record-keeping rules;
• validation of the tax regime with regard to value-added tax (VAT) and corporate income tax;
• rules for determining accrued depreciation and its tax treatment;
• rules for determining reserves and their tax treatment;
• rules for determining accrued expenses and their tax treatment;
• deductibility from the tax result of extraordinary expenses;
• VAT rules.

Work of Service Provider

To carry out the ECF, the service provider must follow the specifications set out by the FTA and, for each of the topics, an examination method similar to the work carried out by the tax audit services. The service provider is not allowed to use an examination method other than the one proposed by the FTA.

Results of Audit from Service Provider

The service provider must carry out an audit of the 10 topics and then draft a mission report. The FTA suggests a template for the mission report, which is divided into two parts:

• a summary with general conclusions and the indication, for the income tax return and VAT returns, that there is no error. The service provider must also mention whether an amended tax return has been filed at its request and whether, as regards VAT, there are irregularities that have not been amended or/and presumptions of tax fraud;
• a part relating to each of the topics audited. The service provider must indicate in particular the result of the audit, whether anomalies were found, and if so, of what kind, with an indication of their amount.

Therefore, the service provider must give its view on tax compliance for each of the 10 topics.

Consequences of Service Provider’s Report

In the mission report, the service provider must give its view on the compliance with tax rules of the 10 topics audited.

There are three options:

• the service provider can give an opinion on each of the 10 topics audited: tax security is granted on all the items that have been validated. In the case of a tax audit, no penalty will be applied if a tax adjustment is made with respect to one of the validated topics. Following the instructions from the service provider, the company may decide to amend its tax return to comply with tax rules. In such case, the topics for which an amended tax return (with the ECF box checked) is filed will be considered as validated and the company will benefit from tax security on these topics;
• the service provider cannot reach a conclusion: in this case no tax security is granted;
• the service provider cannot reach a conclusion on all the topics: no tax security is granted on the topics that are mentioned in the report as “not validated.”

Relationship Between FTA and Service Provider

The company must check a specific box on its tax return to inform the FTA that either an ECF has started (in which case an amended tax return may be filed to comply with the tax rules for some of the 10 topics audited) or is finished (in which case it means that the tax return which is filed and what may be an amended tax return has already been audited).

Subsequently, the service provider must send its mission report to the FTA on October 31 of the tax year following the one for which the ECF was carried out, or at the latest within six months of the filing of the return. In practice, the mission report is an electronic file.

The mission report must also be kept by the service provider and the taxpayer until the end of the tax statute of limitations (three years).

That transmission of the mission report to the FTA is likely to compel a company to amend its tax return in a case where the service provider would consider that a topic is not compliant with tax rules. Indeed, on looking at the mission report, which could be computer-generated, the FTA will see immediately that a topic is not validated and will expect an amended tax return. If no amended tax return is filed, the risk of a tax audit carried out by the FTA should be high.

Contract between Taxpayer and Service Provider

The company and the service provider must be bound by a contract which must specify:

• the tax year covered by the ECF;
• the rights and obligations of the taxpayer and the service provider, including a resolutory clause for non-performance of the contract;
• the list of topics of the audit path;
• the service provider’s fees.

According to the template suggested by the FTA, in the event of a tax audit with a tax adjustment relating to a topic that had been validated within the framework of the ECF, the contract must be considered as resolved for this topic. The company is then entitled to ask the service provider to reimburse its fees (for that part corresponding to the topic concerned).

The contract between the company and its service provider may also include, on certain topics only—accrued depreciation, reserves, accrued expenses—a tolerance (5%) allowing the service provider not to be reimbursed its fees in the event of a tax adjustment.

ECF and Consequences for Tax Penalties

The ECF provides a guarantee that, in the event of an audit, no penalty will be applied because of a tax adjustment with respect to a topic previously validated by the service provider.

Even if the number of topics audited is, for the time being, quite limited, the ECF makes it possible to reduce the risk of penalties being applied, which is important in the current context of the French rules on reporting tax audit cases to the public prosecutor’s office by the FTA.

Currently, according to French tax rules, where the amount of a tax adjustment is above 100,000 euros ($119,000) (in principle) and if certain penalties (40%, 80% or 100%) are applied and conditions fulfilled, the tax case must be sent by the FTA to the public prosecutor’s department. The public prosecutor may then decide to bring the case to court for tax fraud.

Going Forward

The ECF is a very innovative legal tool since, for the first time, an audit carried out by a tax lawyer or an accountant provides a real tax guarantee for companies.

In addition, since the ECF is made to prevent or to fix mistakes before a tax audit, it is very likely that the FTA will choose to carry out a tax audit on a company which has checked the ECF box in its tax return only if there are some indications that tax rules are not being followed.

That means that in practice, in the future the fact that the box related to the ECF on the tax return has been checked could influence the FTA’s decision on whether to carry out a tax audit.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Thierry Viu is an Associate with CMS Francis Lefebvre Avocats.

The author may be contacted at: thierry.viu@cms-fl.com