Paying the piper

France is tightening its grip on tax evaders so don’t be tempted to break the rules, says Bill Blevins

Tax evasion is a hot topic across the world and as much so in France as in any other country. The French government is keen to clamp down on any avenues left open for evasion and thereby increase its tax revenue to decrease its fiscal deficit and to help meet growing social welfare costs too.Penalties for tax evasion are costly, which makes me wonder why people continue to hide their money from the taxman, especially when the French authorities are offering a lifeline to any offender who wants to come clean and there are legitimate arrangements available to lower tax on wealth, savings and investments. France set up a voluntary disclosure facility last year to encourage tax evaders to come forward. The scheme officially closed at the end of 2009, but in January it was announced that the deadline had been extended to allow French residents the opportunity to regularise their accounts on an ongoing basis.The precise details had yet to be determined at the time of writing but from January any taxpayer who needs to get their affairs straight with the taxman can contact the tax authorities and benefit from favourable conditions. The scheme provides guarantees that tax evaders will not be prosecuted if they repatriate the money, and there is scope for negotiating the tax payable on a case by case basis.The French authorities are investigating around 1,000 suspected tax evaders on the basis of information held on a database called Evafisc’, which holds details relating to tax evasion, and could potentially include individuals whose details were stolen by a former employee from HSBC Private Bank in Geneva. Around 4,000 investigations are carried out each year.Informants are currently exposing suspected tax evaders and there have been several incidents in the last 2 years. Germany recently agreed to pay €2.5 million for the names of just 1,500 suspected tax evaders stolen from a Swiss bank. This is unlikely to be the last of such information to come to light and at any time there could be more names presented to the French authorities.

Offshore banksIt has become increasingly difficult to hide money in offshore bank accounts. For a start, all non-French bank accounts opened, closed or used during the tax year have to be declared in France each year.Income from bank interest earned outside France can be treated in two ways. One is at the fixed rate of 18 per cent plus social charges at 12.1 per cent. This is the same as the tax treatment for French bank interest, though in France the 18 per cent is deducted at source and for external income the amount needs to be declared and the tax paid within 15 days of the end of the month in which the income arises. Alternatively the interest income can be added to other income and taxed at the scale rates of up to 40 per cent plus 12.1 per cent social charges, in which case the tax is paid with income tax due on that other income.It is possible though for the government to charge higher tax rates on non-EU income, so this possibility cannot be ruled out for the future.Banks in jurisdictions that come under the EU Savings Tax Directive have to notify the French tax authority of interest earned by French resident account holders. Some jurisdictions can deduct a withholding tax as an alternative, at the rate of 20 per cent. From 1 July 2011 the rate will be 35 per cent. These accounts have to be declared by the taxpayer to the French tax authority and the social charge (12.1 per cent) paid on top. From July 2011, this will probably be considerably more tax than you would pay if the income is declared to France, so it makes very little sense to opt for the deduction of tax at source.

Tax havensFrance has adopted its own black list’ of countries deemed unco-operative’ in tax matters, and aims to tax dividends, interest and royalties paid to entities based in these jurisdictions at 50 per cent.The sanctions were due to apply from 1 March 2010 until 1 January 2011, the date by which the list will be revised, taking into account progress made in terms of fiscal co-operation and transparency based on the Organisation for Economic Co-Operation and Development’s internationally agreed tax standard.The list of countries is reportedly: Anguilla, Belize, Brunei, Costa Rica, Dominica, Grenada, Guatemala, Cook Islands, Marshall Islands, Liberia, Montserrat, Nauru, Niue, Panama, Philippines, St- Kitts and Nevis, St-Lucia, St-Vincent and the Grenadines.The French government has already announced that French banks will close all branches in jurisdictions considered to be tax havens from March 2010.

Tax investigations and penaltiesBefore the authorities can investigate a taxpayer’s dossier, written notification of the enquiry must be sent to the taxpayer specifying the years under enquiry. The examination should last for no longer than 1 year, but may be extended in certain circumstances. Where a person has made all due returns and declarations, the enquiry window for income tax is 3 years after the year that gives rise to the tax liability. For example, for income arising in 2010 and taxable in the same year (tax return due in 2011), the enquiry window will end on 31 December 2013. In cases of fraud, the authorities can go back a further 2 years. This time limit can be extended to 6 years where there is suspicion of non-disclosure and if this involves a tax haven, the time limit is 10 years.Penalties vary considerably and depend on whether the taxpayer has acted in good faith (no deliberate omission) or not. Good faith is usually assumed and it is up to the French authorities to prove bad faith (deliberate omission).Good faith attracts late payment interest only (no penalty) of 0.40 per cent per month (4.8 per cent per annum), calculated on the amount of tax underpaid. For income tax purposes, interest is calculated from 1 July following the year in which the underpayment arose. The interest stops at the end of the month in which the notification of amendments was issued.Bad faith attracts a penalty of 40 per cent of the tax in addition to the late payment interest as above. If the taxpayer is found to have acted fraudulently, the penalty can be a further fine of up to €37,500 (�32,566) and a maximum five-year sentence (increasing to €100,000 (�86,843) and 10 years in the case of re-offence).For non-declaration of opening or closing a non-French bank account, the penalty is €1,500 (�1,302). The balance held in the account could also be deemed undisclosed taxable income by the French tax authorities. If the account is held in a country that does not allow the sharing of banking information between tax authorities, the penalty is set at €10,000 (�8,684).It is not just the French who will investigate tax discrepancies. Tax inspectors from EU countries will have help from the French government, and many countries have mutual assistance or information exchange agreements with France. It is important to make sure that your taxable affairs are in order both in the UK and France to ensure that you do not arouse suspicion.Britons often consider opening an offshore bank account when moving to France for convenience, or opt to use conventional investments to generate income, but many do not realise that they could be paying more tax doing this than if they had set up a suitable and legitimate offshore investment vehicle to minimise the amount of their French tax liability. Advice on your particular circumstances is best sought from an authorised and regulated financial adviser with experience and knowledge of both the UK and French tax systems before you leave the UK. Blevins Franks www.blevinsfranks.com

May 2010