by

Patrick PHILIP

Solicitor, Doctor of Law

Mathis NGANTA

Trainee Solicitor, PhD Student – Master’s Degree in taxation and business of the Aix-Marseille University

PHILIP Law Firm

The use of exhibits obtained in exercise of the right to obtain disclosure of the documents implies informing the taxpayer of the origin and nature of the documents concerned, and the obligation to transmit these documents at the request of the taxpayer.

The irregularity in the exhibits used is opposable to the tax authorities if this irregularity has been detected by the judge, but the regular exercise of the right to obtain disclosure of the documents may hinder the control of the original illegality of the documents.

The right to obtain disclosure of the documents allows the tax authorities to request from third parties to disclose information and documents concerning taxpayers. This disclosure is in certain cases automatic and the tax authorities shall not be required to submit the obtained documents to an adversarial debate during the control procedure except in the case of a concomitant financial audit, or of a search and seizure procedure.

The judicial authority must also spontaneously disclose to the tax authorities any information it may collect, that is likely to give rise to presumption of tax fraud and any maneuver aimed at defrauding or compromising the taxation.

The exercise of the right to obtain disclosure of documents from public administrations as well as from private companies is the subject of a long-standing legal framework. Thus, violation of the provisions of Articles L 81 et seq. of the French Tax Procedure Code, relating, in particular, to persons who are subject to the obligation to disclose documents and information and to the nature of the information which may be disclosed, leads to the irregularity of the taxation procedure.

The regular exercise of the right to obtain disclosure of documents is conditioned, for the tax authorities, by a dual obligation to inform of and disclose information obtained from third parties, in compliance with the general principle of the rights of defence.

But if the tax judge rather strictly controls compliance with the obligation to inform of and to disclose elements opposed to the taxpayer during the tax procedure, the judge accepts quite widely the use of documents of illicit origin as long as they have been obtained by the regular exercise of the right to obtain disclosure of documents and that these documents have not been deemed illegal by the competent judge.

I. OBLIGATION TO INFORM OF AND TO DISCLOSE DOCUMENTS OPPOSED TO THE TAXPAYER

The tax authorities have a broad right to obtain disclosure of documents from the persons referred to in Articles L 81 and seq. of the LPF, without having to inform the taxpayer concerned of the exercise of this right.

But when they intend to use the information obtained from third parties in order to found a tax reassessment, the tax authorities are required to inform the taxpayer of the documents obtained in order to allow him to request to provide them to him under conditions consistent with respect for the rights of defence. This results in two correlative obligations, one is to inform of, the other is to disclose documents.

These obligations are now codified in Article L 76 B of the LPF, which legalized old and constant case law applicable even in the event of compulsory taxation.

A. OBLIGATION TO SPONTANEOUSLY INFORM THE TAXPAYER

Article L 76 B of the LPF imposes an obligation to inform the taxpayer of the origin and content of information and documents obtained from third parties. This obligation to inform, which applies to all the information obtained from third parties, falls under the rights of defence and to require fairness in the tax debate.

It is noted that if the taxpayer can make his request for disclosure of documents until the collection of the taxes concerned, the tax authorities should, in our opinion, inform the taxpayer at the stage of the proposed tax rectification. The will of the legislator, who legalized this guarantee under the texts concerning the notifications of tax enhancement, seems to go in this direction, and the administrative doctrine expressly provides for it.

However, the Council of State admitted, for facts prior to the codification of the obligation to inform, that it could appear in any document prior to the collection of taxes. And in the event of recourse to ”substitution de base légale” (fulfillment by the tax authorities of all their obligations determined by law with regard to a taxpayer), the obligation to inform can even be fulfilled after the tax reassessment, during the contentious procedure before the tax judge.

This solution does not comply with the letter of Article L 76 B of the Tax Procedure Code (TPC) and turns out to be contrary to the case law of the Court of Justice of the European Union (CJEU) applicable in the event of the implementation of the law of the European Union and which implies strict respect for the rights of defence from the beginning of the administrative phase of a tax procedure. The CJEU considers that a late acquaintance by the taxpayer of the documents which are opposed to him does not put him in the same situation if he had obtained these documents before the tax authorities rendered their decision, so that disclosure of documents only in the contentious phase does not allow the procedure to be regularized.

The taxpayer must be sufficiently informed of the content and origin of the opposing information to enable him to contest its scope, to discuss its origin usefully and to request its disclosure.

The distinct nature of control procedures aimed at a company and its shareholders does not prevent the tax authorities from using, in the context of a personal audit of a taxpayer, information obtained during the audit of the company’s accounts where the taxpayer is a shareholder, provided that they respect the rights and guarantees of the taxpayer, in particular the requirements to disclose documents provided for in Article L 76 B of the TPC.

The taxpayer must be informed of the origin of the items obtained even if they cannot be disclosed. A rectification proposal that does not explicitly and precisely mention the origin of the information is irregular, even though it would state precisely its content.

The information provided must relate to all the items obtained from third parties, including those which were not obtained [OR1] [OR2] from the exercise of the right to obtain disclosure of documents (e.g. information obtained during a financial audit of a third party or a contentious claim), provided that they were actually used to found a tax reassessment.

On the other hand, this does not concern information that the tax authorities necessarily hold by virtue of legal or regulatory provisions, neither information made public by virtue of a legal provision or comparative data, nor information resulting from relations between the tax authorities and the taxpayer. The tax authorities must, however, inform the taxpayer of the information provided by third party taxpayers when fulfilling their filing requirements.

This guarantee is of a substantial nature and its violation in principle entails the invalidity of the procedure and the discharge of the charges based on the information in question, even in the event of compulsory taxation procedure.

But whether under the aegis of case law before or after the adoption of Article L 76 B of the TPC, the absence of information as to the origin of the elements obtained does not characterize a substantial irregularity since the taxpayer was necessarily aware of the content of the information, and was not therefore deprived of an opportunity to usefully discuss the disputed items.

In general, procedural flaws are sanctioned in tax matters only to the extent that the taxpayer has effectively been deprived of a guarantee, according to the adage “no nullity without grievance”. However, while the tax authorities can provide proof of the absence of a grievance in the event of a breach of their duty to inform, the failure to disclose documents in principle always causes a grievance.

B. OBLIGATION TO DISCLOSE DOCUMENTS AT THE REQUEST OF THE TAXPAYER

Article L 76 B of the TPC also requires the tax authorities to disclose to the taxpayer who requests it, before the tax is collected, the information obtained from third parties on which they relied to make tax adjustments. This guarantee aims to allow the taxpayer to verify the authenticity of the items which are opposed to him, to contextualize them and to discuss, if necessary, the content and the scope.

The tax authorities are only required to disclose documents and information obtained from third parties to taxpayers who expressly request it before tax collection, and they are not required to inform them of this option.

The taxpayer’s request must target the items requested in a sufficiently precise manner. A request for the entire taxpayer’s tax file and a verification report do not fall within the scope of the obligation to disclose, and in the absence of details the tax judge is not required to verify that the file contains material obtained from third parties. It is up to the taxpayer to prove that his request for disclosure was sent before the date of tax collection, regardless of the date on which the notice of tax collection was served to him.

The obligation to disclose documents does not extend to documents which are freely accessible to the taxpayer (judgments rendered publicly, information published at the land registry office, etc.). But the tax authorities are required to make available to the taxpayer a copy of the information it has collected on the Internet, if the taxpayer indicates that he was unable to access it.

It is noted that the documents or information obtained from a partnership, within the framework of a tax audit, do not constitute for its shareholder taxed due to corrections made to these results, documents obtained from third parties on which he would found in order to request disclosure from the tax authorities in accordance with the provisions of Article L 76 B of the TPC.

However, the tax authorities are only required to disclose documents that they actually hold. When they have taken cognizance of information without taking a copy of the documents, it is then up to them to tell the taxpayer which department holds them, without being required to remind him of the right to ask for them to be disclosed. If the documents are held by another administrative department, the taxpayer has an option to request disclosure on the basis of Articles L 300-1 and seq. of the Relations Code between the public and the authorities.

Although the documents transmitted by the Public Prosecutor’s Office constitute exhibits of a judicial procedure, they do not, according to the Council of State, have the character of accessible administrative documents within the meaning of the Law of July 17, 1978. And the refusal by the judicial authority to disclose to the taxpayer documents consulted by the tax authorities and serving as a basis for taxation has no impact on the regularity of the taxation procedure.

But if the tax authorities do not produce during the judicial phase the documents which served as a ground for tax reassessments contested by the taxpayer, judges in principle pronounce the discharge of taxes imposed solely on the basis of the non-disclosed information which could not have been debated in adversary proceedings before them. However, as we have already indicated, a disclosure only at the stage of a litigation procedure does not put the taxpayer in the position where he had been able to discuss the items before the administrative decision.

In any case, the obligation to disclose documents relates only to the items actually used to found the tax reassessments.

The Council of State nevertheless retains a broad meaning of the concept of items used to found the tax reassessments. A document invoked by the tax authorities among other items, even at the stage of responding to the taxpayer’s observations, must be transmitted to the taxpayer who requests it even if it does not serve as the exclusive basis for tax reassessments. Within the scope of European Union law, the Council of State has moreover recently extended this obligation to disclose items that the tax authorities have been able to consult and which, without directly founding their decision, may be useful in order to exercise the rights of defence. It is noted that the taxpayer must be able to invoke his right to remain silent in any administrative procedure, implementing Union law and which may lead to the application of penalties having the nature of a sanction.

When the tax authorities found the corrections on several distinct reasons, the failure to transmit the information used for one of these reasons is not likely to vitiate, as a whole, the taxation procedure, as long as the tax authorities have transmitted the information concerning the reasons alone justifying the taxation. In other words, when the tax authorities have, in disregard of Article L 76 B of the TPC, not transmitted certain documents, this irregularity does not vitiate the entire procedure but only the corrections relating to these documents only.

But the principle must be full disclosure of documents obtained from third parties. The European Court of Human Rights (ECHR) admits that too selective disclosure of the items of a case is likely to infringe the right to a fair trial guaranteed by Article 6 of the European Convention for the Protection of Human Rights (CESDH), applicable in the event of a penalty having the nature of a sanction.

As the guarantee provided for by Article L 76 B of the TPC must be reconciled with Articles L 103 of the TPC and 11 of the Code of Criminal Procedure, the Council of State admits that the tax authorities conceal, on the documents disclosed, the information concerning the private life of third parties or covered by the secrecy of an investigation. However, these occultations must not hamper the legibility and understanding of the documents and the tax authorities must provide appropriate information on their nature and the reasons for their concealment. The Council of State refused to transmit a request for priority preliminary ruling on constitutionality (“QPC”) relating to the infringement of the rights of defence caused by the concealment of the information transmitted to the taxpayer on the grounds that the constitutional principle of respect for the rights of the taxpayer to defence does not apply to the administrative procedure, and that in the event of sanctions these must always be justified in accordance with Article L 80 D of the TPC.

While traditional case law considered that the clauses of confidentiality provided for by international tax treaties justified the refusal to transmit to the taxpayer documents obtained from foreign authorities, the Lyon Administrative Court of Appeal recently considered that between Member States of the European Union, these clauses, which must be interpreted in the light of the Directive of December 19, 1977, cannot prevent the disclosure of information transmitted to the taxpayers concerned.

The violation of the obligation to disclose the items obtained from third parties requested by the taxpayer before the tax collection entails the nullity of the procedure and the discharge of the taxes founded on the information in question, even in the event of automatic taxation.

Ultimately, one can see that the control over compliance with the disclosure obligation, necessary for the fairness of the tax debate, finds its limits with regard to the transmission of documents resulting from a criminal procedure and in the event of “substitution de base légale” where the transmission of documents can be hidden or late.

Contrary to what the Minister said, the information provided for by the provisions of Article L 76 B of the TPC is not sufficient to avoid these infringements of the rights of defence.

II. USE OF EXHIBITS OF ILLICIT ORIGINE

Information obtained through the exercise of the right to obtain disclosure of documents often comes from separate procedures. This is the case with the information transmitted by the judicial authority on the basis of Articles L 82 C and L 101 of the TPC. The initial obtention of these documents may have been unlawful, due to the violation of rules specific to the procedure governing their collection or more generally to the violation of the law and fundamental human rights.

 It is therefore necessary to distinguish the way the items founding the tax imposition were transmitted, either directly by a private person or by a public judicial or administrative authority, and how the procedure which led to their obtention was subjected to control by the competent judge or not. In fact, if tax judges draw the conclusions in tax matters from the control carried out by another jurisdiction, they refuse to sanction the illegality of documents obtained through the due exercise of the right to obtain disclosure of documents.

A. EFFECT OF JURISDICTIONAL DECISIONS FINDING THE ILLEGALITY OF THE EXHIBITS USED

The traditional case law of the administrative tax judge refused to draw the consequences on the tax procedure from causes of wrongfulness prior to the exercise of the right to obtain disclosure of documents, apart from cases of misuse of proceedings. Thus, it was possible to validate the use, in the context of a tax procedure, of documents obtained by exercising the right to obtain disclosure of documents when they had been stolen and concealed, and the authors of the denunciations convicted criminally for these facts.

The Council of State thus ruled that the irregularity of the criminal proceedings during which the transmitted items had been obtained had no impact on the regularity of the taxation procedure. The invalidity of the procedure pronounced by the criminal judge was deemed to have no impact on the regularity of the tax procedure, and did not prevent the tax authorities from taking advantage of the items transmitted by the judicial authority to impose the taxes as soon as they had been obtained through the regular exercise of the right to obtain disclosure of documents.

The criminal chamber of the Court of Cassation consistently considers, on the basis of Article 174 of the Code of Criminal Procedure, that evidence coming from an annulled procedure cannot constitute the basis for the prosecution of a separate procedure, so even that they would have been regularly transmitted to the tax authorities on the basis of Article L 101 of the TPC. But as long as no nullity has been pronounced judicially, the evidence transmitted by an individual, even obtained under illegal conditions, are not exhibits of the criminal procedure susceptible of annulment but simple means of proof, for which the public authorities did not intervene, which are therefore freely admissible and subject to adversarial debate by the parties.

On the contrary, the Commercial Chamber of the Court of Cassation considers that documents of unlawful origin can in no way serve as a basis for a search authorization, even though they would have been regularly transmitted to the tax authorities by the Public Prosecutor’s Office. The Plenary Assembly affirmed in a leading judgment of January 7, 2011 that Articles 6 §1 of the CESDH, 9 of the Code of Civil Procedure and the general principle of fairness of evidence make evidence obtained by an unfair process inadmissible.

This requirement of fairness and legality of information has been confirmed for the tax search procedure provided for in Article L 16 B of the TPC, implemented following the disclosure by the judicial authority of HSBC files stolen by an employee of the Bank. The Commercial Chamber of the Court of Cassation thus affirmed that “the transmission by the public prosecutor, in application of Article L 101 of the TPC, of documents stolen or diverted or presumed to be so, cannot make their detention lawful and their production by the officers of the tax authorities in support of a request for search and seizure”.

With the adoption of the 2013 law on the fight against tax fraud and major economic and financial delinquency, the legislator intended to legally secure the tax audit procedures by providing for the possibility of resorting to any mode of proof, even illicit, as soon as the information has been transmitted by the regular exercise of the right to obtain disclosure of documents.

By decision of December 4, 2013, the Constitutional Council clarified the regime applicable to the use of material of illicit origin obtained from third parties through the exercise of the right to obtain disclosure of documents.

As regards authorization of search and seizure, the Constitutional Council confirmed the protective case law of the Court of Cassation and censured, on the basis of the right to respect for private life and the inviolability of the home, the provisions authorizing the tax authorities to rely on information of illicit origin in support of a request for authorization of fiscal or customs searches.

Apart from the cases of searches, the Constitutional Council did not censure the provisions providing that the documents, exhibits or information obtained regularly in application of the right to obtain disclosure of documents or of the provisions relating to administrative assistance between States, cannot be excluded from the only reason of their origin. On the other hand, the Constitutional Council expressed an important reservation of interpretation according to which “these provisions cannot, without undermining the requirements arising from Article 16 of the Declaration of 1789, allow the tax and customs services to rely on exhibits or documents obtained by an administrative or judicial authority under conditions subsequently declared illegal by the judge”.

In the “Car Diffusion” judgment of 2015, the Council of State took up the reservation made by the Constitutional Council based on Article 16 of the Declaration of the Rights of Man and of the Citizen of 1789. This plea can usefully be invoked to challenge the taxes charged to the taxpayer within the special time limit set forth in Article L 188 C of the TPC (former article L 170 of the TPC).

One can also revert to the case law Egot of 1996, considering now that the tax authorities could not found themselves, in order to charge taxes, on items that they gathered during a search and seizure operation subsequently declared illegal whether this operation was carried out with regard to the taxpayer himself or a third party. The Paris Administrative Court of Appeal also considered, still referring to the constitutional reservation of 2013, that the irregular transmission of documents within the framework of the audit of third party’s accounts was liable to vitiate the procedure of taxation of the taxpayer to whom these documents were opposed.

In the case “HSBC files” the Criminal Chamber of the Court of Cassation held that the stolen information had been obtained within the framework of regular searches, while the Commercial Chamber, ruling on the authorization of search provided for in Article L 16 B of the LPF, considered that the judge could not rely on documents of illicit origin to issue such an authorization. Tax judges have referred to the criminal judge’s finding of the regularity of the initial search to validate the use of the stolen lists in tax matter.

Thus, the illegal nature of exhibits can influence the taxation only in cases where the competent judge has found those exhibits to be illegal.

B. EFFECT OF THE RIGHT TO OBTAIN REGULAR DISCLOSURE OD DOCUMENTS ON EXHIBITS OF ILLEGAL ORIGIN

When the disputed documents have been transmitted directly to the tax authorities by a private person, no administrative or judicial procedure precludes the competence of the tax judge with regard to the examination of the regularity of their obtention.

In addition to the binding exercise of their right to obtain disclosure of documents, the tax authorities also have the right to request information from any person, even not subject to this obligation to disclose, as long as they do not mislead this person as to the non-binding nature of their request. It is recalled here that the right to remain silent was recognized during administrative procedures implementing European Union law and likely to result in the application of sanctions.

The hearing of persons not subject to the right to obtain disclosure of documents is provided for, in particular, by Articles L 10-0 AB and L 10-0 AC of the TPC, which organize the possibility of remunerating informants (called “tax advisers”). However, the law excludes the use of unlawfully obtained items to found tax searches.

The Council of State considers that the fact that the tax authorities were in possession of information of illicit origin before the initiation of a control procedure has no impact on the regularity of a tax procedure. The Paris Administrative Court of Appeal clarified that when this information has subsequently been obtained by the administration through the regular exercise of the right to obtain disclosure of documents, prior knowledge of these items has no impact on their opposability and their probative value.

The jurisprudential principle of the independence of procedures, which generally precludes an irregularity committed in a procedure affecting the regularity of a separate taxation procedure, does not prevent the constitutional reservation from affecting appropriateness of taxation on the ground of proof.

The administrative judge also assesses the consequences of a procedural irregularity on the probative value of the information, even when the irregularity has no impact on the regularity of the taxation procedure.

But Article L 10-0 AA of the LPF now expressly provides that, apart from the cases of search and seizure procedures provided for in Articles L 16 B and L 38 of the LPF, documents, exhibits or information that the administration uses and which are regularly brought to their attention through the exercise of the right to obtain disclosure of documents vested in them, cannot be excluded on the sole ground of their origin.

But in the case where the documents have been declared null and void by the criminal court, this nullity opposes, a priori, to the fact that these documents, transmitted to the tax authorities in application of Article L 101 of the TPC, might be used in the criminal proceedings initiated for tax fraud.

It is noted that the preliminary investigation and flagrance procedures, which are non-contradictory and covered by the secrecy of the investigation, only see their legality examined by a judge when they give rise to a judicial investigation or a proceeding. In the event of a discontinuation, the investigations are not subject to any control.

After having considered, under the aegis of the old Articles L 82 C and L 101 of the TPC that these texts did not allow the transmission of evidence coming from a preliminary investigation ended by a dismissal, the Court of Cassation has, taking into account the parliamentary work amending Article L 101 of the TPC and the evolution of the rules of a criminal procedure, considered that the fact that the legislator had mentioned, among the procedures likely to give rise to transmission of criminal or correctional information only, cannot be interpreted as having to exclude the items collected within the framework of a preliminary investigation closed without continuation. This position, broadening the scope of the right to obtain disclosure of documents to the tax authorities, was then also followed by the Council of State.

These decisions are the subject of doctrinal criticism since they allow obtention and potential use of exhibits of illicit origin without the possibility of judicial review, thus depriving the litigant of any effective remedy.

However, if the tax authorities can use evidence from criminal proceedings, it is always on the condition, according to the CJEU, that the tax judge could check that the evidence from criminal proceedings has been obtained in compliance with the rules guaranteed by Union law, or that he could at least make sure of the foundation of a control already exercised by a criminal court in the context of adversarial proceedings. It is then up to him to proceed by himself to the examination of the conformity of the original procedure with EU law or to submit this question to the competent criminal court by way of a request for preliminary ruling. Otherwise, evidence from criminal proceedings should be excluded.

In a context where the tax judge tends to declare an actual infringement of the rights of defence  as a substantial error and to hold exhibits of illicit origin admissible to the maximum extent possible, he should, at least, ensure the use of new exhibits in a jurisdictional phase and to effectively monitor compliance with the rights of defence and of EU law.

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