France - Legislation to counter certain tax planning, optimization schemes 

November 22: The French National Assembly (<em>Assemblée nationale</em>) this week passed an amended “second package” under the Finance Bill for 2014.

This week’s action follows passage of the “first package” of the tax legislation by the National Assembly in early November 2013. Read descriptions of the tax provisions in the “first package” in TaxNewsFlash-Europe: France - Update on tax legislation; changes to original proposals

The deputies of the National Assembly passed the second package on 19 November 2013, and that bill contains measures concerning:

  • The definition of “abuse of law”
  • Tax optimization plans or schemes

These two areas are described in more detail below.

The entire legislative text will now be considered by the Senate (which can make changes).

KPMG observation

Tax professionals with Fidal* have observed that because the French government did not explicitly support the two measures concerning abuse of law and tax optimization schemes, it may be that these could be removed from the final version of the Finance Bill for 2014. It is anticipated that the French Parliament could vote final approval of the bill around 20 December 2013.

Transfer pricing provisions

The bill also includes provisions relating to transfer pricing regulations and tax audit procedures available to the tax authorities.

Read TaxNewsFlash-Transfer Pricing: France – Enhanced transfer pricing documentation, penalty provisions

Briefly stated, the main changes in these areas concern:

  • Increased penalty of 0.5% of the taxpayer’s turnover for a failure to provide the tax inspector with compliant transfer pricing documentation
  • Required inclusion in the transfer pricing documentation of information on rulings from foreign tax authorities
  • Requirement to provide the French tax authorities with cost accounts and consolidated accounts
  • Transfers of functions and risks—increased tax audits on restructuring operations and reversal of the burden of proof
  • Repeal of the rule postponing tax collection when a taxpayer applies for a mutual procedure agreement

Broadening definition of “abuse of law”

Under present law, the French tax authorities may disregard any legal arrangement which either is “artificial” and/or “seeks to benefit from a literal application of legal provisions or decisions in contradiction with the objective set forth by the author of such provisions and, thus, motivated by the sole purpose of avoiding or alleviating the tax burden of the taxpayer.”

Under the pending legislation, this definition of “abuse of law” would be extended to include acts whose main purpose (and no longer “sole” purpose) is to avoid or alleviate the taxpayer’s tax burden.

This measure would apply to tax reassessments notified on or after 1 January 2016.

KPMG observation

The legislative aim in broadening this definition—and given the absence of any objective criteria (observers noting that the term “main purpose” can be subject to questions, such as how can the importance of several objectives be quantified and compared?)—is to enhance the effectiveness of the measure, from the tax authorities’ standpoint. Tax professionals have observed that, unfortunately, it will be difficult to balance the legislative intent against the principle of legal certainty, which taxpayers generally expect.

Disclosure of tax optimization schemes

In order to increase the French tax authorities’ responsiveness to tax innovation / optimization practices, the bill passed by the National Assembly has introduced a requirement to disclose tax optimization schemes.

This disclosure requirement would apply to any person marketing, selling, developing or implementing tax optimization schemes.

The bill sets out a broad definition of “tax optimization schemes” as any combination of procedures and legal, tax, accounting or financial instruments whose main purpose is to reduce a taxpayer’s tax liability, to defer the due date or payment of tax, or to obtain a tax refund.

More detailed criteria would be subsequently provided by decree.

Significant penalties would apply for failure to file the disclosure statements, i.e., either 5% of the fees received in consideration for marketing the tax optimization scheme or 5% of the tax benefit achieved by the taxpayer.

KPMG observation

The purpose of this measure is to enable the tax authorities to identify tax optimization schemes (possibly caught by the new broadened definition of “abuse of law”) in advance, so that the relevant tax laws can then be quickly modified by Parliament.

Like the new definition for “abuse of law,” the scope of this new requirement would be quite broad and subjective; hence, there could be difficulties in its interpretation.

The interplay between this measure and the professional confidential or secrecy obligations to which lawyers are bound by law would need to be clarified. It is possible that this issue could be addressed by the Constitutional Council, if the measure is included in the final version of the legislation and if an opinion on this measure is requested.

For more information, contact a tax professional with KPMG’s French Tax Center:

Gilles Galinier-Warrain

+1 212-954-8605

Or with FIDAL Direction Internationale in Paris:

Olivier Ferrari

+33 (0)1 55 68 14 76

Patrick Seroin

+33 (0)1 55 68 15 93

* Fidal Direction Internationale is a French law firm that is independent from KPMG and its member firms.

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