“Proof of conformity”—that is, evidence that businesses are complying with value added tax (VAT) collection and reporting rules—has been requested by French tax inspectors during recent tax audits. The French tax authorities are still considering 2018 to be a “test year” for the new anti-fraud legislation regarding the tax conformity of software and cash desk systems. With initial findings and reports from the first months of 2018 now being available, the tax authorities have refined their position on the matter.
To address tax fraud in France, the Finance Bill of 29 December 2015 introduced an obligation for the tax conformity of software and cash desk systems. The French tax authorities subsequently issued or updated a list of “frequently asked questions” (FAQs) as guidance to refine their position and interpretation of the measures. The FAQs were issued or updated in August 2016 and again in July 2017.
The French tax authorities also with regard to the application of Article 286 3° bis of the French tax law and Article L 80 O of the French control procedure rules considered comments from companies, software vendors, and other interested parties, and considered the level of diligence undertaken by companies seeking to reach conformity by a certain date to mitigate potential penalties or sanctions.
Following the Finance Bill of 30 December 2017 and renewed comments by stakeholders, the French tax authorities updated their guidelines on 4 July 2018 to address the scope of these rules and their content.
The new guidelines (July 2018) add certain clarifications with respect to:
With these clarifications, there are some open issues. For example, concerning intermediation by a credit institution, the difference in wording could point towards potential regulatory differences between France and other EU countries (credit institutions versus banking institutions).
Moreover, the new guidelines mention EU Member States engaged in administrative collaboration with regards to tax. Does this include countries outside of the EU also actively engaged in this type of collaboration? Or would the French tax authorities simply refuse to exempt companies using a bank that is located outside of the EU?
Even if the role of an IT integrator has been clarified in the case of a complex chain of participants (§315), the French guidelines now impose a new obligation to obtain a certification of services delivered by an accredited body. Clarification about this additional requirement is pending.
Given that the French tax authority has been using an “unannounced” audit procedure to verify proof of conformity, compliance with tax conformity of software and cash desk systems would need to be viewed as a key element of future tax audits in France and tax compliance for companies.
Possible penalty assessments (while limited in the short term) may need to take into account the risk that such could eventually lead to a tax audit with a special focus on IT compliance and, therefore, possibly to greater sanctions in the long run. According to Article 1729, c) of the French tax law, in addition to the taxes levied on the unreported revenue, the user of a fraudulent software or system could be subject to penalty in an amount equal to up to 80%.
Also under Article 1770 undecies of the French tax law, an editor, designer or distributor of a “fraudulent” software or IT system would be subject to a penalty equal to 15% of the turnover generated by such software or cash desk systems. The editor and the user further may be subject to criminal penalties related to the conception and use of fraudulent software or systems, and/or to the preparation and production of a forged proof of conformity.
The new guidelines aim to bring clarity to certain concepts with regard to the tax conformity of software and cash desk systems, but the guidelines present some unanswered questions. Given that the test year of 2018 is not over, other possible amendments could be expected. And even though 2018 is a test year, there is nothing preventing the French tax authorities from continuing to apply penalties or sanctions—even if the taxpayers show good faith and that they have taken diligent steps toward tax conformity.
For more information, contact a tax professional with Fidal* in France:
Laurent Chetcuti | + 33 (0) 1 55 68 14 47 | email@example.com
François Warcollier | + 33 (0) 1 55 68 15 06 | firstname.lastname@example.org
* Fidal is a French law firm that is independent from KPMG and its member firms.
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