ECF: what you need to know about the evolution of tax audits

The Examen de Conformité Fiscale (ECF) comes into effect for the closure of 2020 accounts. It allows companies to have a third-party examiner verify certain points of compliance at the fiscal and accounting levels, in order to obtain a certificate with an express mention, aimed at limiting the occurrence of accounting audits. Breakdown of this system by Vital Saint-Marc, partner at RSM.

Why Did the Tax Administration Implement the ECF?

To explain the origin of the ECF, we must go back to 2003, when the tax administration changed its approach to tax audits, moving from issuing tax adjustments to proposing rectifications. Then, over the next decade, the administration continually sought to improve its relationship with taxpayers.

Next came Emmanuel Macron, who proposed, during his presidential campaign, the "right to make mistakes." The Essoc Law[1], enacted in August 2018, validated this notion of the right to make mistakes, which was not written into law but had already existed in the tax administration's practices. This legislative measure was supplemented in March 2019 by a plan for a "New Relationship of Trust Between Businesses and the Tax Administration," creating a Tax Partnership for mid-market and large companies, fiscal support for SMEs, voluntary compliance, international support, voluntary compliance requests, and tax guarantees. The administration positioned itself as a fiscal facilitator for the majority of businesses, wishing to practically play an advisory role while retaining its mission to combat tax fraud.

The Pacte Law of spring 2019 allowed the administration to take this idea further by delegating the task of evaluating the quality of alignment between accounting and tax matters to a third party, in order to avoid accounting audits that were without significant tax implications, focus on exceptional taxation, and pursue fraudsters… Initially planned to be carried out exclusively by statutory auditors, the ECF was extended by the Decree of January 13, 2021, to other professions, such as accountants, whose competence in analyzing accounting and tax considerations is recognized.

What Does This New System Entail?

With the ECF, the administration officially delegates to independent and competent third parties the analysis of compliance points listed in the decree of January 13, 2021, which it considers too time-consuming and without significant fiscal stakes. In other words, the administration seeks to increase the efficiency of its audit planning by not wasting time on virtuous companies. The ECF would thus complement the MRV system (Mission Requêtes et Valorisation), an algorithm for planning audits. However, the administration retains control over the verification of exceptional taxation, such as tax credits.

For the ECF, ten compliance points are set. Three concern electronic systems: the accounting entries file (reading the file and complying with accounting obligations) and the certification of any cash register software used. Then, five points focus on fiscal and accounting obligations: depreciation, provisions, and payable expenses, exceptional charges, and VAT liability. Finally, two points concern internal control procedures: the relevance of the document retention system over time and the adequacy of tax regimes to the company's activity.

It is important to clarify that the ECF is not a tax audit. It is not an audit because, in a tax inspection, the legislator grants the administration the power to assess adjustments. While this power is regulated by the judge, it is still a power.

The third-party examiner of the ECF does not have this power. However, they do have obligations. First, the obligation of independence, to avoid being both judge and party. Second, the obligation of knowledge, to understand the positions taken by the company in light of the law, the processes in place, the practices, or case law, and, where appropriate, what it should have been. Lastly, the obligation to document to justify, over time, the soundness of the positions taken.

What Are the Benefits for Companies?

The ECF is a process initiated by the company. It significantly reduces the risk of tax audits. It is also a certification with express mention; meaning that, in the case of an audit, the points contested by the administration, which were validated during the ECF, will not incur any penalties or late payment interest.

How Should a Company That Wants an ECF Proceed?

It must notify the tax administration by checking the "ECF" box on the tax return and indicating the name of the third-party examiner it has designated. The ECF will be carried out between the date of filing the tax return and, at the latest, October 31 for companies that close their accounts with the calendar year (within six months of filing the tax return for others). For 2020 and 2021, the report provided by the third-party examiner will be submitted to the tax administration through the messaging system of the tax portal.

[1] Essoc Law: State at the service of a trusted society