Arsene Taxand - VAT & indirect taxes

French reform of VAT deduction conditions by Alain Recoules

The decree of April 16, 2007 (n° 2007-566), whose provisions come into force on January 1, 2008, change the VAT deduction conditions mentioned in appendix II to the General Tax Code.

The provisions of appendix II to the General Tax Code were practically rewritten on a trite law basis but the change is important nevertheless.

The new text, which does not question the mechanism through which taxpayers are entitled to a deduction, as mentioned in article 271, I of the General Tax Code (right to deduct VAT charged on the price of a taxable operation) but considerably changes the current approach to the right to a deduction, giving preference to an approach that is based more on economic operations.

This will inevitably impact the output VAT management process at the level of companies and some of them will have to modify their information systems.

1. Modifications …

First of all, it is noticeable that the decree of April 16, 2007, fully rewrites articles 205 to 242 of appendix II which presently governs the right to deduct VAT. The number of articles has been considerably reduced (the new system is described in articles 205 to 210) and reflects a desire for simplification of the rules so that they are easier to understand and apply.

But this simplification is not just formal: basically, it also corresponds to a new, rationalized approach to economic operations and not simply the status of the taxpayer (taxpayer who is partial or not) and the type of goods (fixed assets or other goods and services).

In this respect, two others points should be noted:

 First of all, the new rules confirm French Suprem Administrative Court case law of 1979, Socofrein, (application of the allocation rule to tangible assets) thus acknowledging that the allocation rule takes precedence over that of proportional deduction for goods and services, as for tangible assets.

 The new approach leads to the introduction of new concepts for determination of the amount of tax deductible: VAT will be deductible in proportion to its deduction coefficient which will be equal to the result of the inclusion, taxation and admission coefficients.

2. … which will impact output VAT management

A reform of VAT rules which is based on a functional approach to the conditions of deduction rights should not lead to a great change in the amount which companies are entitled to recover.

However, it will force them, and especially those which have the status of partial taxpayer, to adopt a new approach to the management and determination of their deduction rights. For example, application of the allocation rule in the case where, traditionally, the authorities excluded it, management of a "VAT off-balance sheet" which should become increasingly important and acknowledgement of the precedence of the allocation rule which is liable to provoke more VAT adjustments at the level of fixed assets ("annual" adjustments and "overall" adjustments).

Finally, by the time the new provisions come into force (January 1, 2008), for some companies this will also imply a revision of their information systems (in particular SAP and Oracle) and training for the departments which supply these systems (purchasing management, sales management, accounts management and tax management).

We have already set up a VAT/ERP hot line for our clients in order to help them with this reconfiguration effort: erpcontact@taxand.com For further information/questions, you can also contact us at the following address: alain.recoules@arsene-taxand.com.