At issue was VAT and tax deduction for costs of media and advertising space that EVEREST allegedly purchased from Koukni and Concept s.r.o. and Concept s.r.o.. A tax assessment was issued to EVEREST based on (1) failure to prove the receipt of the supply of “media and advertising space” to the declared extent and (2) denial of the claimed right to deduct VAT as the tax administrator found that EVEREST knew or should have known that it had engaged in VAT fraud by participating in those arrangements. An appeal was filed by EVEREST claiming that various legal formalities had not been observed by the tax authorities i.e. the tax administrator was not competent to issue the decision at all, the decision suffers from defects which render it manifestly internally inconsistent or legally or factually unworkable; the decision is issued on the basis of another void decision issued by the tax administrator; EVEREST was not a related party in relation to Koukni and Concept for the purpose of creating illegal tax optimisation. Decision of the Regional Court The Court decided in favor of the tax authorities and dismissed the appeal of EVEREST. Excerpts (in English) “The applicant alleges each of those grounds. However, in neither case did the Court find that her plea of nullity was well-founded.” “The case-law of the Court of Justice of the EU has repeatedly dealt with VAT fraud. It shows that a situation where a taxable person claims a deduction fraudulently (or abusively) is an exception to the principle that, if the substantive and formal conditions for entitlement to a deduction are met, the taxable person is entitled to the deduction (see, for example, Case C-371/08, CJEU v. Czech Republic [2006] ECR I-1753, paragraph 1). Judgments of the Court of Justice of 21.6.2012, Mahagében and Dávid, Joined Cases C 80/11 and C 142/11, paragraph 41, or of 28.7.2016, Giuseppe Astone, C 332/15, paragraph 50). However, the mere existence of fraudulent conduct is not sufficient to deny a deduction. The right to a deduction is not affected if one of the preceding or subsequent supplies in the chain of supplies was affected by tax fraud, unless the taxable person knew or could have known this (see, for example, judgment of the Court of Justice of 6 July 2006, Axel Kittel and Recolta, Joined Cases C 439/04 and C 440/04, paragraphs 45 and 49). It is therefore necessary to examine the existence of tax evasion and, if it is established, it must be shown that the taxable person knew or should have known of the evasion in order to be denied the right to deduct the tax.” “Also irrelevant is the applicant’s contention that it did not benefit from the disputed transactions but, on the contrary, profited from them. As the Court has already explained above, the right to deduct may be denied not only in a situation where the taxable person himself has committed the evasion, but also where the taxable person knew or ought to have known that he was engaged in a transaction which is part of a VAT evasion by acquiring goods or services and, by his participation in the chain, made such transactions possible, even though he himself did not directly benefit from them. In other words, a taxable person who knew or ought to have known that his purchase was part of a VAT fraudulent transaction must be regarded as participating in that tax fraud, irrespective of whether he benefits from the subsequent sale of goods or use of services in the context of the taxable transactions which he has carried out at the exit (see, for example, the VAT Code of Conduct, the VAT Code of Conduct and the VAT Code of Conduct, the VAT Code of Conduct and the VAT Code of Conduct, the VAT Code of Conduct and the VAT Code of Conduct). Bonik, cited above, paragraph 39; Kittel and Recolta, cited above, paragraph 56; and Mahagében and Dávid, cited above, paragraph 46). Nor can the expert opinion of Prof. Ing. Hótová, which concerned only the fictitious transactions between the applicant and Ebko. Its conclusions are therefore not transferable to the transactions now under examination. Indeed, in its reply, the applicant admitted that it partly agreed with the defendant as regards the applicability of that expert opinion in that it concerned fictitious transactions, but nevertheless stressed that it did not know and could not have known of the dishonest conduct of its business partners (see paragraph 60 above). The question of the applicant’s knowledge of its involvement in the fraud has already been dealt with in detail by the Court above.” Click here for English Translation Click here for other translation ...

On 16 June 2022 McDonald’s France entered into an settlement agreement according to which it will pay €1.245 billion in back taxes and fines to the French tax authorities. The settlement agreement resulted from investigations carried out by the French tax authorities in regards to abnormally high royalties transferred from McDonald’s France to McDonald’s Luxembourg following an intra group restructuring in 2009. McDonald’s France doubled its royalty payments from 5% to 10% of restaurant turnover, and instead of paying these royalties to McDonald’s HQ in the United States, going forward they paid them to a Swiss PE of a group company in Luxembourg, which was not taxable of the amounts. During the investigations it was discovered that McDonald’s royalty fees could vary substantially from one McDonald’s branch to the next without any justification other than tax savings for the group. This conclusion was further supported by statements of the managers of the various subsidiaries as well as documentation seized which showed that the 100% increase in the royalty rate was mainly explained by a higher profitability of McDonald’s in France and a corresponding increase in taxes due. The investigations led the French tax authorities to question the overall economic substance of the IP company in Luxembourg and the contractual arrangements setup by the McDonald’s group. After being presented with the findings of the investigations and charged with tax fraud etc. McDonald’s was offered a public interest settlement agreement (CJIP) under Article 41-1-2 of the French Code of Criminal Procedure. The final settlement agreement between McDonald’s and the French authorities was announced in a press release from the Financial Public Prosecutor (English translation below). On 16 June 2022, the President of the Paris Judicial Court validated the judicial public interest agreement (CJIP) concluded on 31 May 2022 by the Financial Public Prosecutor (PRF) and the companies MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L pursuant to Article 41-1-2 of the Criminal Procedure Code. under Article 41-1-2 of the Code of Criminal Procedure. Under the terms of the CJIP, MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L, undertake to pay the French Treasury a public interest fine totalling 508,482,964 euros. Several French companies of the MC DONALD’S group have also signed a global settlement with the tax authorities, putting an end to the administrative litigation. The sum of the duties and penalties due under the overall settlement and the public interest fine provided for under the CJIP amounts to a total of EUR 1,245,624,269. Subject to the payment of the public interest fine, the validation of the CJIP extinguishes the public prosecution against the signatory companies. This agreement follows a preliminary investigation initiated by the PNF on 4 January 2016 after the filing of a complaint by the works council of MC DONALD’S OUEST PARISIEN. Opened in particular on the charge of tax fraud, the investigation had been entrusted to the Central Office for Combating Corruption and Financial and Fiscal Offences (OCLCIFF). This is the 10ᵉ CJIP signed by the national financial prosecutor’s office. The Financial Public Prosecutor Jean-François Bohnert Validated Settlement Agreement of 16 June 2022 English translation of the Validated Settelment Agreement Preliminary Settlement Agreement of 31 May 2022 with statement of facts and resulting taxes and fines English translation of the Preliminary Settlement Agreement of 31 May 2022 ...

Civil monetary penalties for tax understatement are frequently triggered by one or more of the following: an understatement of tax liability exceeding a threshold amount, negligence of the taxpayer, or wilful intent to evade tax (and also fraud, although fraud can trigger much more serious criminal penalties). Many OECD member countries impose civil monetary penalties for negligence or willful intent, while only a few countries penalise “no-fault” understatements of tax liability ...

When independent enterprises transact with each other, the conditions of their commercial and financial relations (e.g. the price of goods transferred or services provided and the conditions of the transfer or provision) ordinarily are determined by market forces. When associated enterprises transact with each other, their commercial and financial relations may not be directly affected by external market forces in the same way, although associated enterprises often seek to replicate the dynamics of market forces in their transactions with each other, as discussed in paragraph 1.5 below. Tax administrations should not automatically assume that associated enterprises have sought to manipulate their profits. There may be a genuine difficulty in accurately determining a market price in the absence of market forces or when adopting a particular commercial strategy. It is important to bear in mind that the need to make adjustments to approximate arm’s length conditions arises irrespective of any contractual obligation undertaken by the parties to pay a particular price or of any intention of the parties to minimize tax. Thus, a tax adjustment under the arm’s length principle would not affect the underlying contractual obligations for non-tax purposes between the associated enterprises, and may be appropriate even where there is no intent to minimize or avoid tax. The consideration of transfer pricing should not be confused with the consideration of problems of tax fraud or tax avoidance, even though transfer pricing policies may be used for such purposes ...

Civil monetary penalties for tax understatement are frequently triggered by one or more of the following: an understatement of tax liability exceeding a threshold amount, negligence of the taxpayer, or wilful intent to evade tax (and also fraud, although fraud can trigger much more serious criminal penalties). Many OECD member countries impose civil monetary penalties for negligence or willful intent, while only a few countries penalise “no-fault” understatements of tax liability ...