TLDR: The cascade deduction is a French tax mechanism that, in the event of an audit, allows the offsetting of additional simple tax amounts resulting from a correction against the taxable bases of other taxes that are also being audited, following a specific order. Its purpose is to restore the taxpayer to the position they would have been in without the infringement. It applies only to simple tax amounts and within the framework of a tax audit.
Definition and general principle
The cascade deduction is a mechanism provided for in Article L77 of the French Tax Procedures Code (LPF). It allows audited taxpayers to deduct additional simple tax amounts resulting from a correction of the taxable bases of other taxes that are also being audited. The offsetting follows the order in which these tax amounts would have affected the bases if the declarations had been correctly filed.
This mechanism aims to neutralise the cascade effects of tax corrections, avoiding double taxation or an excessive burden on the taxpayer.
Scope of application
The cascade deduction applies exclusively to:
- simple tax amounts (excluding penalties or surcharges);
- within the framework of a tax audit (accounting audit, accounting review, ex officio assessment or ex officio taxation);
- when the additional taxes have been determined following an effective audit of the accounting records.
It does not apply to VAT refunds relating to self-assessment operations, as in these cases VAT does not constitute a cost for the company.
Specific conditions
For distributions (e.g. dividends), the application of the cascade for the calculation of the withholding tax and the income tax (or corporate tax) due by the beneficiaries is subject to:
- the payment into the company’s funds of the amount of taxes on turnover, the recalled corporate tax, and, where applicable, the withholding tax;
- an explicit request from the taxpayer in cases of correction arising from desk-based work (documentary review).
Effects on taxation
The application of the cascade results in:
- a reduction in the bases of additional taxes compared to the amounts initially notified, without requiring new correction proposals;
- a reduction in proportional penalties, the calculation bases of which are adjusted accordingly.
Limits and exclusions
- Evasion-related VAT cannot be considered as a liability in the balance sheet of the closing financial statements, as it is not assessed in the absence of a declaration, spontaneous payment or collection by the State.
- In the case of separate audits, the deduction of additional turnover taxes is only permitted if the audit of these taxes was completed before the audit of income taxes.
Special cases
The cascade can also apply:
- in the event of correction of declarations resulting from desk-based work (documentary review), subject to payment and a request from the taxpayer;
- for receivables acquired as of 31 December 2008, tax reliefs follow the common law rules for the allocation of income.