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 and by increasing tax transparency. Among other recommendations, authorities would 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.
French tax auditors are 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. Such 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 in its 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 tax uncertainty. Indeed, some measures that gained parliamentary approval were later struck down by the constitutional court.
As part of this trend, French companies are dealing with more stringent compliance regulations. More and more, taxpayers are being saddled with the burden of proof of compliance and obliged to spend time and energy demonstrating their compliance in complex areas such as transfer pricing and international transactions.
Unilateral BEPS actions to date
France has implemented several measures to address BEPS issues — sometimes before the publication of BEPS final reports. These measures deal with hybrid instruments, CFCs, interest deductibility, thin capitalization rules, treaty abuse, PEs and transfer pricing documentation, among others.
- Hybrid instruments: A limitation on the deductibility of interest on intragroup financing was introduced for financial years (FY) ending on or after 25 September 2013. The deduction of interest is allowed only if the lender is subject to ‘sufficient taxation’ equal to at least 25 percent of French CIT during the same fiscal year (i.e. 8.33 or 8.6percent, depending on the CIT surcharges). This restriction applies between related entities when the payer is established in France, regardless of where the payee is located.
If the lender is a foreign tax resident, the level of sufficient taxation is determined by comparing the effective tax rate applied to the interest received by the foreign lender and the reference French CIT rate that would have applied if the lender were a French tax resident.
In addition, profit distributions received by a parent company that were deductible from the subsidiary’s taxable income are excluded from the benefit of the participation exemption regime.
- Controlled foreign company rules: Profits made by CFCs that are established in low-tax countries (where the corporate tax charge is more than 50 percent lower than the French corporate tax) and whose parent company is subject to French CIT are subject to CIT at the French parent company’s level. This rule applies to foreign subsidiaries when the French parent company ownsdirectly or indirectly more than 50 percent of its share capital (this threshold is reduced to 5 percent if more than 50 percent of the CFC is held by companies located inFrance or by companies that control or are controlled by companies located in France). The corporate tax paid by the CFC in its jurisdiction can be offset against the French corporate tax due by the parent company (if the corporate tax is similar to the French corporate tax).
- Interest deductibility: In addition to the anti-hybrid rule mentioned above, French tax law imposes thin capitalization rules, as well as a general limitation of the tax deductibility of net financing expenses and other specific rules limiting the deduction of interest (i.e. the Carrez and Charasse amendments).
- Tax treaties: All new tax treaties entered into by France include substance and anti-treaty shopping provisions. On 7 June 2017, France signed the Multilateral Instrument to amend its tax treaties in line with the OECD BEPS principles. In this context, the principal purpose test rule has been adopted by France.
- Permanent establishment: The new tax treaty between France and Colombia includes a new definition of PE that aggregates the period of presence of related companies to determine whether the PE threshold is reached. This treaty also introduces the notion of PE for services.
Following the signing of the Multilateral Instrument and the option chosen by France, similar modifications to existing tax treaties are expected. France has notably adopted the new definition of PE as recommended in BEPS Action 7 as well as Option B for specific activities, the anti-fragmentation rule and the contract splitting rules.
- Transfer pricing: Since 2010, the preparation of transfer pricing documentation (master file and local file) has been mandatory for all companies that have revenues or balance sheet assets exceeding EUR400 million or that belong to a group in which one of the companiesn exceeds these thresholds. In the event of a tax audit, this documentation must be made available to a tax inspector within 30 days of a request to provide it.
Since 2013, abridged transfer pricing documentation has been required to be filed each year with the tax authorities within 6 months of filing the annual CIT return. For FYs ending as from 31 December 2016, the requirement to file abridged transfer pricing documentation is applicable to companies that have revenues or balance sheet assets exceeding EUR50 million (instead of EUR400 million) or that belong to a group in which one of the companies exceeds these thresholds.
The CbyC reporting requirement was introduced under French tax law as of 1 January 2016 for companies whose consolidated turnover exceeds EUR750 million. France signed the Multilateral Convention for the exchange of information regarding CbyC reporting on 27 January 2016. The requirement is applicable to FYs starting as from 1 January 2016.
In keeping with the spirit of the BEPS project, the French Finance Bill for 2016 implemented a new anti-avoidance rule (transposing the GAAR included in EU Directive no. 2015/121of 27 January 2015), with effect as of 1 January 2016. Under this rule, the parent-subsidiary regime is not applicable to a ‘non-genuine’ scheme that was set up only or mainly for tax purposes and produces advantages contrary to the regime’s purpose.
The French tax authorities may use pre-existing abuse-oflaw procedures under French tax law to counteract sham transactions and situations where a transaction is solely tax-motivated and the parties have obtained the tax benefit by literally applying the rules while disregarding their spirit. This procedure may be used to tackle hybrid mismatch arrangements.
Beneficial ownership register
France has implemented the Fourth Anti-Money Laundering Directive by introducing a Central Register of Beneficial Ownership to hold information on beneficial ownership for corporate and other legal entities incorporated in France. As of 1 April 2017, the register is accessible to tax authorities without any restriction, as the directive requires. The register is partially accessible to the public (i.e. to persons or organizations demonstrating a valid interest related to the combat against money laundering, terrorist financing, etc.).
Learning from neighbours
To supplement ongoing BEPS discussions at the OECD, French tax officials are looking to other jurisdictions for ideas on how best to deal with the issue. Investigators from the General Inspectorate of Finances comparedtax 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 require entities of the same group to 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, establish internal rules and guidelines for the application of transfer pricing methods, and continuously evaluate its own practices and guidelines.
The trend towards 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. The task of ensuring consistency among all parts of one company in all its countries of operation will be monumental.
While tax managers are aware that change is coming, they can only do so much to prepare. They recognize that substance will be a key point in any reform. Room to use hybrid or stratified structures has shrunk 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 requiring broader sharing of information was introduced in France as of 1 January 2016. The requirements raise the risk of competitors gaining access to vital information and compromising a company’s ability to operate.
In addition, investigations by the French tax authorities through taxpayers’ information technology systems are increasing.
Control of the French Constitutional Court
The French Constitutional Court has recently censored several laws aiming at fighting tax avoidance on the basis that they are contrary to the freedom to create and invest (liberté d’entreprendre), which is protected by the French constitution.
For example, the Constitutional Court censored the requirement for tax and legal counsel to disclose tax optimization arrangements as provided for by the Finance Law 2014. Similarly, the court censored the application of a penalty to persons involved in the elaboration of tax arrangements that constitute an abuse of law, as provided for by Finance Law 2015.
More recently, the Constitutional Court censored the initiative to introduce public CbyC reporting in France.