Who can benefit from this right to make a tax error and under what conditions?

What are the main measures of the law on the right to make an error?

Is the notion of good faith compatible with a tax audit?

To what extent will the ESSOC law foster a better relationship between all taxpayers and the tax authorities?

A close look at a law that aims to revolutionise relations between taxpayers and the administration.

The Law for a State at the Service of a Society of Trust (loi pour un Etat au service d’une société de confiance, ESSOC Law 2018-727 of 10-8-2018) provided for the introduction of a new relationship of trust between businesses and the tax authorities, aimed at enabling certain transactions to be validated independently of any tax audit, as part of a procedure that our tax law firm can undertake on your behalf.

Tax partnership for large companies and mid-sized companies (ETI)

For large companies and mid-sized companies (entreprises de taille intermédiaire, ETI), the relationship of trust takes the form of a tax partnership (partenariat fiscal), formalised by the signing of a protocol, which enables collaboration between the participating company and a designated contact person, attached to a special department (the business partner department, service partenaire des entreprises).

In this context, the two partners examine the tax treatment of transactions presenting a risk or strategic issues. This examination leads to the issuing of advance tax rulings (rescrits) that are binding on the tax authorities.

Note: The tax partnership is intended to be long-term and to settle tax questions over time. However, either partner may terminate it at any time without justification.

Personalised tax support for SMEs

Lighter than the tax partnership, tax support (accompagnement fiscal) is aimed at SMEs (PME).

It targets in particular SMEs in a growth phase, that are innovative or that operate in sectors of strategic importance to the national economy.

A designated contact person, attached to the regional public finance directorate (direction régionale des finances publiques), examines with the requesting company the tax questions that may give rise to a request for a ruling.

Note: Companies may request this assistance on a one-off basis or on several occasions, depending on their needs.

A new regularisation desk, the Smec

A new regularisation service has been opened, the business tax compliance service (service de mise en conformité fiscale des entreprises, Smec).

This service allows businesses to bring their tax situation into compliance voluntarily in return for reduced penalties according to a scale, provided that no tax, administrative or judicial proceedings are under way.

Requests may concern all tax irregularities discovered by the new owners and acquirers of a business, certain international tax issues (activity in France constituting an undeclared permanent establishment, deduction of all or part of a loan granted by a foreign company, arrangements involving structures abroad…), certain questions relating to the taxation of executives (« Dutreil » pact, capital gains on the sale of shares, impatriate regime), as well as all transactions likely to attract the heaviest tax penalties (80% surcharge).

The conditions and practical arrangements for this service’s involvement are set out in a circular dated 28 January 2019.

Unlike the previous scheme, implemented from 2013 to 2017, which concerned undeclared assets held abroad by individuals or legal entities, the new scheme is aimed more specifically at taxpayers in the business world and is not limited to transactions with a foreign connection.

The right to make an … unintentional error

A major condition for the right to make an error to apply: the taxpayer must be acting in good faith, in other words the error must be unintentional.

What does this mean in concrete terms?

According to the text of the law, a taxpayer « having disregarded » a rule for the first time or having made « a clerical error » (erreur matérielle) cannot be penalised if they regularise their situation « on their own initiative » or following a request made by the tax authorities; the notion of clerical error is subjective and fairly technical, and the assistance of a tax lawyer is recommended in order to demonstrate it and to rule out a characterisation as a deliberate failure or even fraud.

Thus, in the case of a first error or a merely clerical error, good faith will in principle be recognised.

Exceptions to the right to make a tax error

Fraudsters and repeat offenders therefore cannot in principle benefit from this right. In these cases, the tax authorities must demonstrate that the failure was deliberate.

Finally, the right to make an error in no way constitutes a right to be late or to fail to file a return.

What exactly does the expression « in bad faith » mean?

According to the law, a person in bad faith is a taxpayer who has deliberately disregarded a rule that was applicable to them.

The main measures of the law on the right to make an error

From a tax standpoint, the introduction of the right to make an error has given rise to 3 major measures:

1) The reduction of late-payment interest: in the event of a good-faith error, late-payment interest is reduced by 50% if the taxpayer has corrected the error themselves and by 30% if the tax authorities detected the error during an audit.

As soon as they have received the tax reassessment proposal (proposition de rectification) or the request for information, clarification or justification, the taxpayer has 30 days to submit their request. In addition, the filing of the amended return must be accompanied by payment of the sums due.

2) The right to rely on prior positions (droit d’opposabilité) for businesses: it allows them, in certain cases, to rely on the conclusions of a previous audit against the tax authorities. For example, if the tax authorities audited a company in 2018 and concluded that its VAT practices were compliant, the company will be able to prove this during an audit carried out three years later by means of an « information certification ». The business can then not be subject to any tax reassessment on the points thus examined and not adjusted during the previous audit.

3) Mediation: the law highlights two forms of settling disputes with the tax authorities that do not require recourse to the courts. On the one hand, mediation enables businesses to settle any dispute with the administration amicably and, on the other hand, settlement (transaction), which offers the possibility of reaching a compromise, is now enshrined in the Code of Relations between the Public and the Administration (Code des relations entre le public et l’administration).

The right to an audit

Under the new scheme, any person or business may request to be subject to an audit by the tax authorities on one or more specific points; however, be sure to carefully consider whether such a request is advisable in your specific case, and consult a tax lawyer so that you “know where you are heading” before you embark on it.

If irregularities are discovered during the audit, the taxpayer benefits from:

• A voluntary regularisation
• A reduced rate of late-payment interest

The legalisation of the « audit ruling » procedure (rescrit contrôle)

During an accounting examination (examen de comptabilité, a tax audit of businesses) or an accounting audit (vérification de comptabilité, a tax audit of businesses) and before any tax reassessment proposal is sent, the taxpayer may ask the tax authorities in writing to take a position on an item they examined during the audit. This provision guarantees greater legal certainty for the taxpayer, since the tax authorities can then no longer make adjustments that turn out to be contrary to their initial positions.

Conclusion

The right to make a tax error mainly takes the form of a 50% reduction in the rate of late-payment interest in the event of voluntary correction of a filing error before any audit and the extension of the voluntary regularisation procedure during an audit.

As regards the introduction of new safeguards, it mainly takes the form of the creation of an « audit ruling » and the introduction of a « tax guarantee » whereby all points examined during a tax audit and not subject to adjustment will be considered, under certain well-defined conditions, as tacitly validated by the tax authorities.

Our tax law firm can assist you.