France - Response to BEPS

France - Response to BEPS

The French government has responded to anti-avoidance sentiment by proactively redefining its strategies for preventing what it considers to be aggressive tax planning. Among other recommendations is that authorities be granted access to cost accounting, and calculations related to costs, in order to determine transfer pricing. The need to show substance will be a major driver of reforms.

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French tax auditors are becoming increasingly intolerant of practices deemed to aid tax avoidance, such as restructurings that transfer a manufacturing activity outside France, breach distributor agreements, change distributor, agent or other functions, or close down sites. Any of these and similar actions raise the issue of the indemnification of the French company or of a possible transfer of goodwill. A whopping 40 percent penalty may be imposed on companies for business restructuring reassessments undertaken on the grounds that the French company was unable to ignore that the restructuring was not made inits interest.

Finally, authorities have introduced requirements to provide cost accounting and consolidated accounts in the scope of a tax audit.

While the public and the media support reform, tax professionals are less enthusiastic, expressing concern that the changes are politically driven, poorly defined and responsible for introducing uncertainty into the regime. Indeed, some measures that have gained parliamentary approval have subsequently been struck down by the constitutional court.

As part of this same trend, French companies are dealing with more stringent compliance regulations. More and more, taxpayers are being saddled with the burden of proof of compliance, obligated to spend time and energy demonstrating compliance in complex areas such as transfer pricing and international transactions.

Pre-BEPS measures

Rather than waiting for the OECD BEPS project to wrap up, France ismoving ahead with controlled foreign corporation (CFC) rules and new antiavoidance regulations. Additional BEPS actions include the following:

  • Transparency. In July 2013, the government introduced CbyC reporting for banking and mining activities. A 2013 report from the Foreign Affairs Committee called for a transparency requirement for all enterprises of a certain size, including non-listed companies.
  • Transfer pricing. The same report called for improved transfer pricing audit capabilities using CbyC reporting to provide a record of activities and results to the French tax administration. The report recommended that the administration be authorized to access all cost accounting records, along with the calculations used to determine prices and intragroup invoicing price.
  • Interest deductibility. The authorities have introduced new rules requiring the taxpayer to demonstrate that the lender is subject during the same fiscal year to income tax on the interest received, at a rate of at least 25 percent of the standard French rate (i.e. 33.33 percent x 25 = 8.33 percent). If the lender is a foreign tax resident, the theoretical income tax will be compared with the tax that would have been due in France from a French tax resident. If the lender is a transparent entity, the French borrower must be related to the shareholders of the transparent entity and the minimum taxation will be appraised at the shareholder level, subject to conditions.
  • Tax treaties. All new tax treaties entered by France include substance and anti-treaty shopping provisions.

Additionally, France signed the multilateral treaty for exchange of information in Berlin on 29 October 2014.

Learning from neighbors

To supplement ongoing BEPS discussions at the OECD, French tax officials are also looking to other jurisdictions for ideas on how best to deal with the issue. Investigators from the General Inspectorate of Finances compared tax regimes in Canada, Germany, the United States, the Netherlands and the United Kingdom to those of France and found that France was the only country in the group not to have included the arm’s length principle in its substantive law. Moreover, its enforcement tools were considered less adequate than those of its counterparts.

The authors of the report proposed adjustments to the tax code that would establish a rule whereby entities of the same group must engage in business relations equivalent to those that independent enterprises would have engaged in. This would allow the tax administration to take better advantage of its enhanced right of access to information, to establish internal rules and guidelines for the application of transfer pricing methods, and to constantly evaluate its own practices and guidelines.

The trend toward constraint

Constraint will characterize the overall impact of these measures in the short term. Companies will be forced to spend more time and resources to meet reporting obligations. Ensuring consistency among all parts of one company in all its countries of operation company will be a monumental task.

While tax managers are aware that change is coming, they can do only so much to prepare. They recognize that substance will be a key point in any reform. Room to use hybrid or stratified structures is shrinking as authorities demand that transactions demonstrate a link to the underlying business. Companies are taking a more cautious approach as they seek to realize greater tax efficiencies.

Companies are also concerned about confidentiality as CbyC reporting is rolled out, requiring broader sharing of information. The requirement raises the risk of competitors gaining access to vital information and compromising a company’s ability to operate.

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