The obligation for French taxpayers to provide a reliable audit trail is currently in the spotlight, and verifying the related documentation is now a checkpoint in tax audits, along with an examination of the accounting entry file and transfer pricing documentation.
The French tax authorities (FTA) now systematically request reliable audit trail documentation at the beginning of all audits.
From 1 January 2013, companies issuing invoices under French tax regulations are free to use any format they wish.
However, this freedom comes with a price: the most commonly used formats (notably paper and PDF files sent by email) should now be secured through a documented reliable audit trail.
This obligation took effect on 1 January 2013; however, the administrative guidelines were not published until late October 2013, and the FTA granted companies an adaptation period until 1 January 2014.
Seeing the whole picture
The reliable audit trail and associated business controls should enable the FTA to observe the life cycle of a transaction, from beginning to end, to verify that no fraud has been committed and that the transaction has complied with laws and regulations.
Similar to internal controls, the audit trail should make it possible to reconstitute, in chronological order, the entire invoicing process, from its origin (e.g., order) to its end (e.g., payment of transaction and archiving of the invoice).
The aim of the obligation
Companies must document their purchases and sales and connect each step in the process.
A description of business controls implemented for these audit trails should be formalized in written documentation, available to the FTA on request.
During their regular audits, authorities systematically request documentation of the reliable audit trail from the taxpayer.
If a company fails to provide this documentation within a reasonable time, and the FTA officially reports this failure, the company will be issued a record-of-default notice.
This record of default1 brings a tax assessment and significant penalties — up to 100% of the reassessed amount.
Because the reliable audit trail is a means of verifying the reality of the taxpayer’s operations, the lack of one could trigger the following penalties:
- For purchase invoices: a challenge of the deductibility of the French input value-added tax (VAT) (20% standard rate)
- For sales invoices: a challenge of the reality of the sales invoice, leading to a tax penalty of 50% of the amount that has been or should have been invoiced (limited to 5% if the taxpayer can demonstrate the invoices were recorded in the company accounts). A challenge of the potential VAT exemption is also possible.
Considering the potential financial impact of noncompliance, particularly VAT deductibility, and the time needed to prepare reliable audit trail documentation, taxpayers should anticipate and meet this obligation before any audit.