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This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.
 The process outlined below focuses only on the full audit of books and records (see more about this subject in Full audit of books and records) which is the most frequent type of audit used by the French tax authorities to audit legal entities.
According to the amount of its sales, a business is audited by a local general audit team (Sales below Euros 1.5 millions), a inter-regional tax audit team "DIRCOFI" (Sales in the range of Euros 1.5 millions to Euros 61 millions) or the large business audit team "DVNI" (Sales higher than Euros 61 millions).
As needed, the field auditor may request the support of an Electronic Data Processing audit team. In such case the software, the hardware and the data bases used to handle the books and to compute the taxable result of the company are also audited. If the tax authorities suspect that a fraud has been committed, the field audit may be done by an investigation team belonging to the national directorate for fiscal information "DNEF" or by a research and investigation team belonging to an interregional directorates "DIRCOFI".
Before mailing the notice of tax audit, the auditor studies the taxpayer's file i.e. all the tax returns received by the local tax office and the information received from third parties (Other public services, banks etc.). In order to help the tax auditor to gain insight into the relevant data, he can rely on expert software as OSIRIS and AMIS. This first layer of investigation allows the tax auditor to select the potential tax exposures and to prepare his road map for the field audit. This audit plan must be approved by his supervisor.
As soon as the audit plan is approved, the tax auditor mails with an acknowledgement of receipt a notice of tax audit to the manager of the legal entity. The entire audit process is void if the notice of audit does not mention that the taxpayer may be assisted by a tax advisor. The notice of tax audit mentions the first day of the audit, the taxes subject to review, the name, the address and the phone number of the auditor and of his supervisor. There is also the name of the person the taxpayer may contact in case of difficulties during the audit "Interlocuteur départemental".
The audit is generally performed at the head office of the legal entity. A copy of the booklet outlining the rights and obligations of the taxpayer during a field audit must be stapled to the notice of audit. During the first few days of the field audit, the tax auditor will likely focus his attention on the business model of the company, the structure of the shareholding and the main evolution of the business over the time, the legal structure and accounting process. He will establish the agenda of the audit and list the documents and information he will need during the audit. He will also request to meet with the person who will be his daily contact in the company during the audit and propose to meet the tax advisor if any.
If needed the tax auditor may request to visit the premises of the company. Be aware that the French tax code provides that companies must keep all their legal documents, books and records during 6 years. The electronic files must be kept in electronic format during 3 years. After the 3 first years, the company has the option to continue to keep them in an electronic format or to keep a hard copy. If the company decides to keep a hard copy, it is mandatory to describe the hardware and the software used to process the data. During the second step of the audit, the tax auditor will cross check the tax returns and the books of the company. Most of the time the auditor will proceed through samples to test the books and records and to detect the potential tax exposures.
The potential tax issues are discussed with the taxpayers. The discussion between the auditor and the taxpayer is a key part of the audit process. As soon as the auditor completes his investigation, he prepares a list of all the pending tax issues. These issues are discussed with the company during the last day of the investigation in the premises of the company.
If needed or requested the supervisor of the auditor participates to this meeting. If the auditor agrees with all the explanations and/or justifications provided by the company, the manager receives a notice informing him that the audit triggered no tax assessment. If there is still pending issues, the taxpayer receives by mail with return receipt a formal notification of the issues triggering additional tax assessments. The notice explains for each issue, why the auditor disagrees with the company and mentions the amount of the tax assessment, the late interest and if applicable the penalties.
Tax authorities have recently issued guidelines on the criteria they will follow to examine the claim for reduction of late payment interest.
Among the criteria the tax authorities will examine the cost of the reassessment for the State, the taxpayer’s implication in the reassessment, how the taxpayer fulfils his tax obligations and the taxpayer’s financial situation.
The taxpayer must respond in a 30-day period. If he does not answer, he is deemed to agree with position of the auditor as explained in the notice.
The tax authorities have the right to collect the tax assessments plus late interest and penalties if any. This is during this period that the taxpayer subject to a VAT assessment, must indicate in writing, after calculating where is his best interest, if he refuses the mechanism of the "cascade".
If the taxpayer responds to the notice in the 30-day period, the tax authorities mail back a letter with acknowledgement of receipt confirming the assessments they maintain and surrendering the assessments for which the taxpayer provided satisfactory explanations. After this letter, the tax authorities have the right to collect the tax assessments plus late interest and penalties if any.
Tax authorities have recently issued guidelines on the criteria they will follow to examine the claim for reduction of late payment interest.
Among the criteria the tax authorities will examine the cost of the reassessment for the State, the taxpayer’s implication in the reassessment, how the taxpayer fulfils his tax obligations and the taxpayer’s financial situation.
When the tax authorities decide to collect the assessments, the tax auditor must prepare an audit report according to a standard format. The audit report is joined to the tax file of the company. The audit report describes all the investigations made by the tax auditor during the audit and its conclusions. This report will be automatically used during the next tax audits.
Extension of the use of private experts as of January 1st, 2007:
PRIOR RULES:
During a tax audit or litigation, French tax administration can only request the expertise from civil servants.
NEW RULES:
The French tax administration may use private experts from the private sector and use them for all purposes including the rulings (Valuation of non listed companies, MNC tax base, Intellectual property, Valuation of arts pieces etc ...)
Objectivity of tax auditors
The lack of objectivity of tax auditors during a tax audit is frequently alleged while difficult to prove.
In a recent case reviewed by the Supreme administrative Court, the manager of an audited company argued that the tax auditor and his spouse, lived near by their own house and that their relationship with them was difficult. As a consequence the manager questioned the objectivity of the tax auditor and the fairness of the audit.
The administrative supreme Court agreed and ruled that, because of the conflicting relationship, the tax audit cannot be considered as granting all the necessary guarantees of neutrality.
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