French Tax Authorities Face Legal Difficulties In Google Case

By Global Tax Weekly

The word substance has become integral to the base erosion and profit shifting project. But it’s also one that appears to be causing businesses and tax authorities the world over significant problems.

Of course, one of the core aims of BEPS is to prevent situations whereby taxpayers get away with double non-taxation. However, as the International Chamber of Commerce pointed out last week, the increased focus by revenue authorities on economic substance combined with a lack of clarity on the definition of the term across jurisdictions is leading to more cases of income being doubly taxed, rather than the other way around.

Facing the prospect of being wrongly taxed, taxpayers have little choice but to fight it out in the tax tribunals and appeals courts, which even in the most advanced countries is usually an expensive, time-consuming process, and risky if litigation goes the way of the tax authority. But what’s sauce for the goose is sauce for the gander, and the BEPS project appears to have given many tax authorities license to challenge the tax positions of multinationals in court on a more regular basis also.

However, similarly, this litigious attitude also comes with risk attached. For governments aren’t guaranteed to win in court, despite often spending vast sums of taxpayers’ money in pursuing tax cases. In France for example, the tax authority could be heading for defeat in a high-profile case against Google if judges accept the recent opinion of a court adviser in a case which centers on whether the company had a permanent establishment in France.

This is also further evidence of the unintended consequences unleashed by the BEPS project. And while some observers may feel satisfied that the tax tables are turning on big corporations, the danger is the effect such developments have on trade, investment, and economic growth. And it’s dangerous for governments to have things mostly their own way, which is why courts act as a vital check on power in most advanced economies.

BEPS is of course focused almost entirely on tax avoidance by multinational corporations. But this isn’t to say that the OECD hasn’t taken its eye off the ball when it comes to tax avoidance by wealthy individuals (many of whom may use corporate structures to protect their income and assets from high taxation).

Indeed, there seems to have been a renewed focus on the appropriate level of tax on the rich in recent months. Debate is raging in the United States about the Republicans’ tax proposals, and how they might cut taxes for the wealthy. Similarly, a debate was had in the lead-up to the UK general election on the level of income at which an individual is considered well off enough to pay more income tax. In case you’re interested, the Labour Party says it is GBP80,000 (USD102,000) per year. Meanwhile, the OECD has released two papers on the matter since April.

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