France Tries to use PE Rules to Make MNEs pay a ‘Fair Share of Tax’

September 2017

The French permanent establishment rules are the country’s biggest hurdle in taxing Google, Amazon, Facebook and Apple (GAFA) in the way it wants. But it is determined to use these rules to make such digital companies pay what it believes to be their ‘fair share of tax’.

Permanent establishment (PE) matters have been raised again after the French tax authority issued a €600 million ($715 million) tax bill to Microsoft for unpaid taxes, according to an article in L’Express. This is the second largest amount the tax agency is seeking from a technology giant after the €1.1 billion in back taxes it demanded from Google.

The French newspaper said that the tax agency believes Microsoft owes tax for the sale of internet advertising, which was billed from Ireland to its French customers.

Microsoft’s structure means that the French entity only acts as a commercial agent in the company’s services, and the sales are actually completed and billed by Microsoft Ireland. This allows the company to enjoy Ireland’s low corporate tax rate of 12.5%, much lower than France’s current rate of 33.3%.

A Microsoft spokesperson told International Tax Review that it complies with tax laws in all the jurisdictions in which it operates. They did not comment on the French tax bill, and the French tax authority did not respond to ITR’s questions on the latest tax demand.

However, Sonia Bonnabry, partner at LEXCOM, said that if Microsoft actually acted as an agent for the Irish company, then it did not get away from paying a 'fair share of tax’. "Indeed, the agent status implies in most cases limited functions bearing limited risks and implying limited margin," she said.

Neither Microsoft, nor the tax agency, has confirmed whether Microsoft’s tax bill relates to its transfer pricing (TP) practices or how the company has used the French PE rules or France-Ireland double tax treaty to minimise its tax liability or not pay a fair share of tax, but the circumstances appear to be similar to those in the recent Google case.

A political and tax crossroad

Multinational corporations in France have been accused in the past of not paying their 'fair share of tax’. French Finance Minister Bruno Le Maire and Gérald Darmanin, the minister of public action and accounts, said in a joint press statement on August 7 that fair tax payments by large digital companies based on where their profits are realised is now a major issue, which concerns France and all of its partners.

Mathieu Selva-Roudon, counsel at LPA-CGR avocats in Paris, said that the taxation of digital companies is at the crossroads of tax technicity and politics. "It is clear that French politics are, today, 'crying’ that digital companies do not pay 'enough’ taxes in France, whereas they had years to elaborate a new frame for taxation of this 'new business’ and nothing was done," said Selva-Roudon.

"From a purely technical standpoint, when a taxpayer is facing tax rules which are not practicable nor adapted to its situation ('traditional’ PE and TP rules), he adapts and makes stands to find a suitable way to manage his tax situation. Usually, among the many ways available to him, he tends to choose the less expensive," Selva-Roudon continued. "The split of functions between group entities is also a common characteristic of those schemes, where PE and TP issues are innate tax issues and coexist."

Redefining PE laws for fairer tax payments

French laws define a PE as a fixed place of business that must also consist of human resources and the necessary equipment to carry out the business activities, but this definition does not apply for the digital economy. The legislative definition in France and most other countries is old and not adapted for this sector, creating a loophole that can be easily exploited.

Bonnabry said that the French tax legislation in its current form cannot really tackle this kind of issue.

In recent years, the French government has tried to introduce new rules to address this. Last year, it introduced the so-called 'Google tax’ that allowed the French tax administration to tax in France foreign companies doing business in France (services or delivery of goods) through French entities even in cases where the tax authority is not in a position to prove that this entity qualifies as a PE. As a result, the burden of proof that there is no PE was transferred to the taxpayer. However, the French Constitutional Council (Conseil Constitutionnel) ruled that this law was unconstitutional and gave too much power to the tax authority.

But this has not stopped the government from targeting digital companies in paying their fair share of tax. The French finance minister said various legal tools will be made available to the tax agency for tax auditing, while Le Maire will push for tax harmonisation at the EU level, and pursue the OECD to address the notion of a digital tax presence.

Bonnabry said that despite the French Constitutional Council’s ruling and the tax authority's loss in the Google case, the French tax agency is determined "to ground the reassessments on the PE qualification".

Selva-Roudon added that the tax authority already has many weapons to perform their reassessments such as the "10-year statute of limitation, the 80% penalty, a myriad of additional taxes which arise after a PE is deemed in France and which may be subject to 180% cumulative penalties".

However, Selva-Roudon said the Google case is "among the decisions that show PE issues are never obvious and remain questionable, despite the significant energy (time and means) French authorities spent in auditing Google".

"The FTA not only fights GAFA schemes, but proves to be increasingly aggressive and shows little flexibility on many other cases, notably at the international level. This could lead, in the coming years, to interesting decisions from the French fiscal judge," Selva-Roudon said.

Bonnabry suggested that these efforts could also be a way to remind to the European community that the applicable tax rules shall be urgently reformed in a common and efficient way, while also discouraging digital companies to structure their business in the same was as Google, Apple, Facebook or Amazon.

In the meantime, the OECD’S BEPS project aims to address this issue through Action 7, which intends to modify the PE definition and other actions that aim to revise the taxation of intangibles, as well as introduce the automatic exchange of tax information. Although Selva-Roudon believes the BEPS project is a direct answer to addressing the PE issues that France is facing, the process will take a considerable amount of time.

"It took time for the OECD countries to launch the process, but now that it is running, one might say things go on quite swiftly," Selva-Roudon said. "However, it takes a lot of time before new rules actually come into force: it is not only a question of signing the right convention or the good application decree which will make new rules applicable, it is also how the fiscal judge will interpret those new rules. For instance, the new definition of PE in the BEPS plan (dependant agent, PE exclusions) will feed tax news for many years as fiscal judges will regularly rule."

Until such time that the BEPS actions are transposed into domestic law, or French lawmakers find an alternative suitable solution to amending their PE rules, it seems that digital companies will maintain the upper hand by being able to use legal tax advantages that these 'old’ tax systems offer, but it appears as though this will not stop France from chasing Google, Amazon, Facebook and Apple for more tax.

The above article was published on on 5 September 2017 and has been republished with the approval of the Publisher.