Arsene Taxand - corporate Tax management and strategy

Common rules that apply to various taxes

(Decision by the French Supreme Administrative Court (CE), April 22, 2005 No. 257254, litigation sect., Limelight Boys: see text in RJF 7/05 No. 724, and the partially contradicting opinion of the law officer (commissaire du gouvernement), Mr. P. Collin in BDCF 7/05 No. 92)

Comments

1) A taxpayer who fails to comply with his filing obligations is liable to incur two separate penalties.

When he fails to file his tax return within the allotted time periods, the amount of taxes assessed or resulting from his late filing is subject to a penalty increase of 10%, in addition to late payment interest; this penalty increase rises to 40% in the event of failure to file the tax return within thirty days of receipt of a first formal notice to do so and 80 % if filing has still not been made more than thirty days after service of a second formal notice.

When, moreover, the taxpayer's tax return shows a tax base or data to be used as a basis for issuing a tax assessment that are insufficient, inaccurate or incomplete, pursuant to Article 1729 of the French Tax Code, the amount of the taxes payable is subject to a penalty increase of 40% in the event of bad faith or 80% in the event of fraudulent maneuvers or abuse of law.

2) The question put to the Litigation Section of the Conseil d'Etat related to the penalty or penalties that should be applied when a taxpayer has filed his tax return out of time and his tax return is also inaccurate or incomplete.

The French tax authorities' commentaries considered that the penalties under Articles 1728 and 1729 of the French Tax Code were mutually exclusive such that the taxes corresponding to the late filing were to be subject to the first penalty while the tax reassessments issued with regard to this return were only liable for the second of these penalties.

However, in the Lobelle decision (CE, October 28, 2002 No. 227610: RJF 1/03 No. 66), the Conseil d'Etat adopted a different point of view, holding that, in the event that a tax return was filed more than 30 days after service of a second formal notice, the penalty increase of 80% provided for by Article 1728 of the French Tax Code applied to all the taxes due by the taxpayer, regardless of whether they resulted from the tax return itself or the reassessment of the tax bases that were included in the tax return that was filed out of time. This decision was justified by the concern not to incite a taxpayer filing his tax return over thirty days after a second formal notice without committing any fraudulent maneuvers to underdeclare in order to limit the taxable base that will be subject to penalties at the rate of 80%.

3) Accordingly, the judge had to consider two questions. The first related to whether it was possible to apply cumulatively to the same taxable base - i.e. the taxes resulting from a tax reassessment made on a tax return filed out of time - the penalty increases provided for in Articles 1728 and 1729. The second was, if such cumulative application was possible, under what terms and conditions could it take place.

Had it ruled out all possibility of cumulative application, this would then have forced the Conseil d'Etat to choose between two rather unsatisfactory solutions. The first would have consisted in abandoning the Lobelle case law and reverting to the interpretation of the texts made by the French tax administration in its commentaries. This choice, which seemed to be the one that is more in line with the literal meaning of the provisions to be applied and with the intention expressed by the lawmaker during the parliamentary works on this issue, would however have had the consequence of reopening the possibility for the taxpayer to adopt a filing strategy aimed at minimizing the amount of penalties which would be applied, a perverse effect which the Lobel decision had precisely sought to correct.

The second solution would have consisted in holding that the penalties provided for in Article 1729 did not apply in the case of late filing. However, this solution, which would have been difficult to infer from the literal meaning of the text, would have had undesirable effects symmetrical to those under the previous solution: it could have been in the interest of a taxpayer who was guilty of fraudulent maneuvers to file a tax return showing lower amounts than those actually involved within thirty days of the first formal notice to file, so that the rate of the penalty that would apply to all the taxes in the event of a tax reassessment would be limited to 10%.

The Conseil d'Etat therefore chose a less literal reading of Articles 1728 and 1729 than the French tax administration, considering that they both cover the taxes resulting from tax reassessments issued with regard to a tax return filed out of time.

4) The question then remained as to how to determine the terms and conditions of implementing this cumulative application.

To continue on from this, the Conseil d'Etat could have completely failed to provide any clarification on this point, and this would have led to the automatic application of both articles, which would have meant that a taxpayer having made a late filing and being guilty of fraud would then have incurred a penalty of up to a total of 160% on the amount of the reassessed taxes.

This prospect was undoubtedly viewed as excessive by the Supreme administrative court as it held that if the two penalties were applied concurrently, they could only be applied for up to an aggregate rate of 80%.

To justify this decrease in the maximum amount of these penalties, the Conseil d'Etat did not use a line of reasoning consisting in discarding the literal application of tax law in the name of a principle of limitation of cumulative application contained in a norm with supra-legislative value. The non bis in idem principle as enshrined by the International Covenant on Economic, Social and Cultural Rights and the European Court of Human Rights only relates to sentences imposed by the repressive courts, in the strict sense of the term, without preventing the cumulative application of two administrative sanctions. However, this principle could not be ignored in the case in point inasmuch as the two sanctions penalized two different types of reprehensible conduct.

The Supreme administrative court also did not embark on the avenue explored by the Cour de cassation (French supreme civil court) consisting in requiring the judge to adjust the amount of the tax penalties on the basis of how serious the non-compliance was as assessed in each specific case.

It merely inferred the capping of the penalties at 80% from the intention expressed by the lawmaker at the time of what is often called the "Aicardi" law of July 8, 1987 which reduced the rate of all the penalties applicable, only allowing one penalty to exist over and above this 80% limit: the penalty for opposing a tax audit.

The Conseil d'Etat has thus devised both a constructive and judge-made solution making it possible to achieve the objective of correcting the imperfections in the system of penalties, the implementation of which could incite the taxpayer to underdeclare in certain cases, while also keeping with the spirit of the 1987 reform (see critical observations by O. Fouquet Dr. fisc. 24/05 c. 481).

Action: the solution is globally unfavorable to taxpayers.

As long as the French tax administration has not revised its tax commentary (Guideline 6-05-1988: BOI 13 N-3-88, Nos. 67 and 68), and if this tax commentary proves to be more favorable to your case than case law, you may raise it "morally" with the French tax administration, by referring to secure relations between the French tax administration and taxpayers (since a tax commentary relating to tax penalties alone is not legally enforceable on the basis of Article L 80 A of the French Book of Fiscal Procedures).

In any case, we cannot see how the French tax administration will be able to avoid the system of penalties from being recast by law.


Frédéric Donnedieu de Vabres