CAA Lyon, 5th ch. 21/12/2023; n°21LY02821; Sumitomo
Chemicals Europe
THE FACTS
Following an audit of the accounts of Sumitomo Chemicals Europe (SCAE), the tax authorities considered that the intra-group transactions in which the company was involved did not comply with the arm's length principle. The advantages thus granted were classically qualified as "deemed distributed income", which, in view of the applicable tax treaties, gives rise to a withholding tax. Insofar as the company obviously failed to declare this withholding tax, the existence of which only came to light following the rectification, the penalty provided for in article 1728 of the CGI.
THE RULE
As a reminder, when the tax authorities make an adjustment under Article 57 of the CGI, they consider that an indirect profit transfer has taken place, which must then be treated in the same way as dividend distributions. A withholding tax is then levied, in addition to corporate income tax, the rate of which is calculated by reference to the tax treaty applicable to the case in question. This is a collateral consequence of transfer pricing rectifications, which has been validated on numerous occasions by the tax judge, and which we will not discuss here.
The penalty referred to in article 1728 of the CGI penalizes failure to file within the prescribed time limit a declaration or document indicating the elements to be retained for the assessment or liquidation of tax. This penalty, expressed as a percentage of the amount of duty payable by the taxpayer or resulting from the late filing of the return or deed, is equal to 10% in the absence of formal notice, which is the case following an adjustment highlighting income deemed to have been distributed.
THE JUDGES' POSITION
In 2021, the Lyon TAA ruled in recital 20 that "By merely pointing out the non-voluntary nature of this omission and its right to make a mistake, the applicant company is not contesting the validity of the penalties imposed on it on the basis of the aforementioned provisions". In many cases, however, the taxpayer is not claiming good faith or the right to make a mistake, nor is he asking for the penalties to be reduced, which the tax judge has always refused to do. On the contrary, it is a question of the relevance of an automatic penalty, linked to an offence whose existence and quantum the taxpayer cannot know prior to the rectifications.
The CAA persists, however, and considers that "the aforementioned provisions proportion the increase to the taxpayer's actions by providing that its amount is set as a percentage of the duties evaded. Moreover, it is clear from the provisions of article 1728 that the rates of increase applied vary according to whether the failure to declare within the time limit was noted without formal notice to the interested party or after one or two unsuccessful formal notices, so that the law itself has thus ensured, to a certain extent, the modulation of penalties according to the seriousness of the penalized behaviors. It follows that the argument based on the automatic nature of the application of a 10% surcharge can only be rejected".
OUR ANALYSIS
A PENALTY IMPOSSIBLE TO PREDICT IN PRINCIPLE...
Insofar as the penalty under article 1728 of the CGI is applied automatically, in a situation where the taxpayer is unable to comply with it, it exceeds in our view the objective that this article is supposed to pursue, and therefore creates an error in the assessment of the legal basis.
It seems to us that the tax merits of an automatic penalty should be reconsidered, since it sanctions behavior that is not only involuntary on the part of the taxpayer, but above all unavoidable, given that the taxpayer can be unaware of either the existence or the amount of the withholding tax to be declared.
In fact, this penalty affects the withholding tax, which is itself a collateral consequence of a main corporate tax adjustment, and whose existence and quantum are only known at the end of the
audit procedure:
On the temporal aspect on the one hand: this withholding tax arising from the indirect transfer of profit can logically only be known to the taxpayer at the end of the tax audit, i.e. after the administration has considered that an indirect transfer of profit has taken place. It is therefore materially impossible for the taxpayer to produce the withholding tax within the time allotted to him, since the event giving rise to the withholding tax is then unknown to him. In the case in point, the French tax authorities brought to light the existence of the withholding tax in its proposed rectification of August 4, 2014, i.e. for the 2010 tax year, 44 months after the deemed taxable event; and 32 months after the taxable event for the 2011 tax year. In order to comply with article 1728 of the CGI, the taxpayer should theoretically have declared the transfer of profits before the fifteenth day following the month of the transfer, i.e. before January 15, 2011 for 2010 and before January 15, 2012 for 2011.
NOR IN ITS QUANTUM!
Secondly, in terms of quantum: the penalty is expressed as a percentage of the withholding tax, itself calculated by reference to transfer pricing adjustments.
More precisely, this withholding tax is applied to the basic adjustment made under article 57 of the CGI, which is then qualified as deemed distributed income. However, transfer pricing is a subjective discipline, the limits of which are not clearly defined. Whether we are talking about transactions falling within the scope of transfer pricing, or the calibration of deemed profit transfers, the taxpayer cannot rationally know in advance the exact amount of an indirect profit transfer, and hence the theoretical amount of withholding tax he should have declared.
BENCHMARKS FOR ALL?
Finally, we would like to remind you that tax penalties, which are synonymous with sanctions, are intended to punish the taxpayer's behavior. This is the very essence of the difference with interest on arrears, which is intended to compensate for financial loss. The case law of the Conseil d'Etat is clear on this point, underlining a contrario the intrinsic link between tax penalties and the taxpayer's behavior. However, in our case, the taxpayer's behavior can in no way be voluntary, nor can it be modifiable or anticipated. In this respect, we believe that article 1728 of the CGI cannot be applied in such cases, as its provisions should be limited to cases where the taxpayer is aware of the obligations incumbent upon him.
Maintaining the sanctions of article 1728 would mean removing their status as tax penalties, and turning them into real taxes. In effect, these penalties would be dissociated from conduct, which constitutes the intrinsic element for falling within the scope of tax penalties, but would in reality automatically apply a rate (in this case 10%) to a base (the deemed transfer of profit), just like a tax.
