France vs. BOUTIQUE 2M, July 1988, Supreme Administrative Court, Case No 50020

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If the assessment of the abnormal nature of a management act poses a question of law, it is, as a general rule, up to the administration to establish the facts on which it bases itself to invoke this abnormal nature. However, this principle can only be applied in compliance with the legislative and regulatory provisions governing the burden of proof in tax litigation.

The determination of the burden of proof stems mainly, in the case of companies subject to corporation tax, from the nature of the accounting operations to which the management acts challenged by the administration gave rise. If the act contested by the administration has resulted, in the accounts, in an entry relating, as is the case here, to travel expenses, to charges of the nature of those referred to in Article 39 of the same Code and which are deducted from the net profit defined in Article 38 of the Code, the administration must be deemed to provide the proof which is incumbent on it if the taxpayer is not, himself, able to justify, in principle as well as in amount, the accuracy of the entry in question, even if, because of the procedure implemented, he would not have been required to provide such a justification in this respect.

When there is a disagreement between the taxpayer and the administration on questions of fact, whether it concerns the materiality of the facts themselves or the assessment that should be made of the facts, particularly with regard to the real situation of the company or the trade or industry practices to which it belongs, this disagreement may, by virtue of the provisions of Article 1649 quinquies A of the CGI included in Article L.59 of the tax procedure book, be submitted to the assessment of the departmental commission of direct taxes and turnover taxes at the taxpayer’s initiative or that of the administration.

When the latter has followed the duly expressed opinion of the commission, it is, in any case, up to the taxpayer to demonstrate, before the tax judge, the factual elements he is relying on. As the taxes were established in accordance with the opinion of the departmental commission, it is up to the company to prove the contrary, with regard to the adjustments made by the administration on the basis of Article 57 of the CGI.

Excerpt from the Judgement

Considering that, with regard to the “commissions” paid by the company “BOUTIQUE 2M” to the Swedish company “Hennes-Mauritz AB”, the administration establishes the existence of the link of dependence of the former with regard to the latter, of which it avails itself, as well as the materiality and the amount of the payments; that, however, the company “BOUTIQUE 2M” justifies, for its part, that the Swedish firm gave it effective support to develop sales in France while invoicing it for the goods on the basis of its own purchase prices plus only transport costs; that, in view of the particularly advantageous conditions that it had thus been granted in the interest of its own business, ‘BOUTIQUE 2M’ provides proof that, contrary to what the departmental tax commission considered, the payments made to ‘Hennes-Mauritz AB’ actually involved commercial considerations of at least equivalent value for it, which prevented them from being reintegrated by application of the above-mentioned provisions of Article 57 ; that, consequently, the applicant company is entitled to maintain that it is wrongly that, by the contested judgment, the administrative court rejected its request insofar as it relates to the reintegration of the said commissions….”

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France vs Boutique 2 M (H&M) Conseil d'Etat, July 27 1988 Case no 50020FR

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