The use of website data by tax authorities in the fight against fraud and evasion is now allowed in France, and search engines will soon be able to scan social networks and online sales websites to trigger tax and customs inquiries. Thierry Viu of CMS Francis Lefebvre Avocats looks at the process and the rules which apply to it.
In the finance bill for 2020, the French tax and customs authorities have been allowed, on an experimental basis, to use information from social networks and online sales websites to trigger tax and customs inquiries. The implementing rules have now been published.
This article looks at the scope of this new process, how it will work in practice, and what kind of data will be processed.
As in many countries, the French tax authorities (FTA) and the French customs authorities (FCA) have been working for several years on new ways to collect and explore data to better detect fraud.
In 2019, a new step was taken as both the FTA and the FCA have been allowed, initially on an experimental basis, to collect data from social networks and online sales websites to look for tax or customs offenses.
Official guidelines have been released and both the FTA and the FCA may start collecting data from websites.
New Ways to Manage Data
Data Mining and Artificial Intelligence
How to manage the massive flow of data?
In most states around the world, tax returns are now filled electronically and fed into internal databases. Much data (bank accounts, rulings, country-by-country reports, etc.) is also automatically exchanged by states.
Therefore, all tax and customs authorities are faced with the same difficulty: how to develop tools for exploiting the data they receive?
In France, the FTA and FCA have chosen to increase the use of data mining and artificial intelligence to improve the detection of potential breaches and offenses by relying on predictive analysis based on a taxpayer’s behavior modeling algorithms.
The means implemented by France
The French government’s goal is to increase the share of tax audits targeted by artificial intelligence to 50% in 2021. To achieve this goal, both the FTA and the FCA have created a department and developed an information processing tool which is fed by tax internal databases.
Need to Find New Sources of Information
The limits of using internal databases
The FTA have developed tools using their internal databases, which are fed with all the tax returns filed in France and information received from other states through automatic exchanges (bank accounts, etc.)
Even if it represents billions of data that can be useful in the fight against fraud, there are some limits insofar as only the data contained in tax or customs returns may be used. If there is no tax or custom return and no bank account, there is no data.
Indeed, some tax or customs offenses are quite simple and cannot be detected if no return is filed.
- a garage owner carries out repairs to a vehicle. No invoice is issued, and payment is made in cash. Nothing is declared in the mechanic’s tax return
- a watch seller based in Australia makes sales in France directly from his website. The watches are then sent by post and no custom return is filed. No value-added tax (VAT) is then declared and paid in France.
Even if these cases are very simple, they are almost undetectable with an algorithm which would only work with data from tax and custom returns. The most difficult tax or custom fraud to detect for authorities is always the one for which no return has been filed.
The value of searching for external data
By exploiting data that does not appear in tax returns, tax authorities will be able to enrich the quality of their analysis work considerably. With the development of online social networks and sales websites, much information is available and could be used to develop algorithms to search for tax and custom offences.
Example: a tool manufacturer sells goods in France directly from its website. This information, if collected by software, could easily be cross-checked with tax and customs data.
Collection of Data from Social Networks and Websites
The FTA and FTCA are now allowed to collect data directly from social networks and websites.
Looking for Tax and Customs Offenses
Information is collected for the purposes of inquiring into certain tax or customs offenses, which are listed exhaustively by law:
- running an undeclared professional activity;
- lack of income tax returns by taxpayers who are in fact tax resident in France and not abroad;
- unauthorized manufacture, holding, transport or sale of tobacco or alcohol, the fraudulent sale of precious metals (gold, etc.), and fund transfers linked to customs offenses.
Information that may be collected on social networks but that is clearly unrelated to these offenses must be deleted.
Which Websites are in Scope?
All websites that allow people to get in touch with each other to sell a good or a service or to share a content, a good or a service, are in the scope of the legal authorization given to the FTA and FCA to collect data.
In practice, all online social networks (Facebook, Twitter, Instagram, YouTube, TikTok…) as well as all online sales sites (eBay, Amazon…) are in the scope of this new tool.
What Information is Collected?
All information that is deliberately made public by users can be collected: video, photographs, documents, etc. The public nature of the information means that it should not be necessary to register on the site or to enter a password to access it. Therefore, information that is exchanged in a private Facebook group to which access is restricted to members cannot be collected.
Consequently, the nature of the information that can be collected depends directly on the privacy settings chosen by the users of the online social networks.
As far as online sales sites are concerned, all information concerning the sellers can be collected.
Example: a sports coach indicates on his Instagram account that he offers sports lessons. However, this sports coach does not declare any professional income. The information posted on the Instagram account may therefore constitute an indication of a tax offense.
Guarantees to Protect Privacy
Given the sensitivity of the information and the potential infringement of privacy, several safeguards are provided.
Rules Governing Collection of Information
As a matter of principle, only the tax and customs authorities are allowed to collect, process and store information. However, for designing the data processing tools, the authorities may use subcontractors.
Rules Related to Data Storage
There are three possible situations:
- information collected which is clearly unrelated to tax or customs offenses must be destroyed after five days;
- if the processing of the data reveals indications of a tax or customs offense, data may be stored for one year. If the data is then used in a tax or customs procedure, the authorities may keep it until the tax or custom procedure is finished;
- in all other cases, data may be kept for 30 days.
In practice, this means that initial processing must be carried out within five days. This processing must make it possible to exclude information that has no link with tax offenses (e.g. announcement of a family event). For the other data, the authorities have 30 days to check whether there are indications of a tax or customs offense. If there are indications of such an offense, data may be kept for one year before being destroyed.
What is not Allowed?
- The use of facial recognition systems to help identify individuals in videos or photos is forbidden.
- The authorities must not create false identities to collect information. To collect data from websites, the authorities are only allowed to use application programming interfaces (APIs) that are made available by social networks and online retailers or web scraping tools, which require the creation of a developer or user account.
- Comments filed by users of online sales about a seller or comments in online social networks must not be collected. Indeed, the French official authority for personal data protection (CNIL) has stated that this data was not considered as information obviously made public.
An Experimental System in Two Stages
Three-Year Experimental Stage
The legal authorization to collect information from social networks and online sales websites is planned for a period of three years. An evaluation report will then have to be sent to the French parliament and to the CNIL to assess the usefulness of this system.
Learning Stage and Operational Stage
Two stages are scheduled—a learning stage and an operational stage:
The learning step
The learning step is to design collection and analysis tools, to identify people with accounts on social networks or online sales websites, to identify geographical locations based on photos or videos, etc.
To design these tools, the FTA and FCA will use a sample of data of around 100 companies and a dozen individuals. This data will be used to design clues to identify hidden activities in France and false tax residences abroad.
As far as the FCA is concerned, the data sample will be made up of information from internet pages related to tobacco.
The goal of this learning stage is not to trigger tax or customs inquiries, but only to design tools for processing the information collected.
It is only at the end of this stage that it will be possible to determine the data that will then be used to look for tax or customs offenses.
The operational step
The data collected on social networks and online sales sites will then be processed with algorithms that will use the fraud indications designed during the learning stage.
The use of website data in the fight against tax fraud has come into force in France. Soon, search engines will be able to scan websites for indications of fraud.
By Thierry Viu, August 6, 2021, published on Bloomberg