France: The Transfer Pricing Controversy "Landscape" - France Chapter

1. What are the main sources of transfer pricing controversy (transfer pricing audits and disputes) in your jurisdiction - e.g. characterisation, choice of method, choice of comparables, comparability adjustments, related party agreements and recharacterization, operation of the transfer pricing policies? Do auditors receive instruction to focus on these areas, or are they main sources of controversy because auditors focus on them by themselves?

There are various sources of transfer pricing controversy in France. While it is clearly hard if not impossible to quantify the usual elements of debate between the French Tax Authorities and the taxpayers, in the lack of public information in this respect, it is drawn from experience that such elements which will mainly depend on the type of audited companies:

  • French-headquartered MNE: these types of companies will be under strict scrutiny regarding their intragroup outbound flows (for instance the intragroup expenses charged from related companies providing services or goods that would be expected to be provided directly by the French headquarter: financing, management, purchase, sourcing etc...), as well as their intragroup income (review of the consistency in the profitability of the various foreign subsidiaries depending on their respective location and the applicable corporate income tax rate, for instance). Any spin off of activities and/or assets out of France (starting with IP assets such as patents, trademarks, clientele etc...) will be under tight review as well to ensure an exit charge has been correctly computed.
  • French subsidiaries of MNE:  the French Tax Authorities may challenge the choice of method for pricing certain intragroup transactions and achieve a certain level of profitability in France (for instance, they may rely on a TNMM method rather than a cost plus method). Similarly, and to achieve a similar objective, the profile of a French subsidiary may be challenged and recharacterized, for instance to consider that it bears more functions and risks than what the taxpayer initially considered (this may be an alternative to characterizing a French permanent establishment of a MNE within said French subsidiary, in situations where such evidence is complex to provide for the French Tax Authorities).
  • French SME: for these smaller companies, most of the controversy will generally revolves around a review of all their intragroup flows, using internal comparables to discuss the appropriate level of the profit indicator which has been used. Even in a purely French intragroup situation, the French Tax Authorities may use a transfer pricing approach to price appropriately certain transactions (except if a tax consolidation is in place between the parties).

On the second question, there may be non-public instructions given by the French specialized office at the International Central Tax Audit Brigade (DVNI), notably for audits targeting French MNEs. Obviously, previous tax audits and their conclusions lead most if not all of the tax auditors to check whether said positions have been complied with for the unaudited period, and if not, which elements could substantiate the changes. For smaller companies, while there are no precise instructions as such, transfer pricing has become over the years a typical area of review for local tax auditors, who can get support from the central authorities, notably when it comes to provide contradictory economic analysis or studies.  A French subsidiary of a foreign group will almost systematically be audited on these aspects, at least on the contractual side and more likely on the economic / transfer pricing documentation side.

2. Do transfer pricing controversies arise more often in certain businesses or industries than in others; and if so, do you see this as being related to the industry's treatment of the main sources you outlined above, or for some other reason?

Traditionally, IP-rich industries have been at the forefront of the transfer pricing controversy, notably the Pharma / Life Sciences industry. Other industries such as consumer electronics have been under scrutiny from the French Tax Authorities for decades as well. The importance of IP valuation and licenses in and out of related companies can easily explain why these industries focused the attention in the first place.

More recently and unsurprisingly given the media coverage, the "GAFA" companies and their satellites entities have been on the radar of the French and the OECD's countries tax Authorities. A few weeks ago, the Budget State Secretary Christian Eckert mentioned that the GFA MNEs have been reassessed by 2.5 billion euros, including penalties, and that audits for the FYs 2013 to 2015 on these companies were on-going.

Same applies to the e-commerce / "Uber-like" - participative business model. As mentioned above, transfer pricing can be seen as an alternative to the characterization of a permanent establishment in France, or even at the application of the French CFC rules, as it enables the French Tax Authorities to repatriate / locate what was initially non-French income in France.

3. Are any recent or proposed changes in national statute, case law or guidance (perhaps as a reaction to the BEPS project) generating or expected to generate new transfer pricing controversy?

While the BEPS project has generated a lot of attention and raised the awareness of the Tax Authorities on certain of the key concerns targeted by said project, there has been limited legislation issued in France on these matters to date. This is notably due to the fact that the current French legal arsenal is already able to challenge most of the unjustified situations listed in the BEPS project, notably the abuse of law or the abnormal act of management concepts.

On the case law front, it is way too soon to estimate the impact of BEPS and more generally, transfer pricing case law has remained rather limited over the years, notably given the development of alternative procedures to achieve resolutions (Mutual Agreement Procedure ("MAP", arbitration) in controversy or to avoid said controversy (Advance Pricing Agreements ("APAs")).

That being said, with the introduction of a contemporaneous TP documentation requirement in France six years ago (article L 13 AA of the French Tax Procedure Code), the French Tax Authorities have now access to much more information than in the past, which can allow to raise questions on specific transfer pricing points (notably when the documentation shows a structural change or a sharp evolution in the profit / loss position of the company), or even to start a full tax audit. Same can be said from the new requirement under article 223 quinquies B of the French Tax Code requiring the filing of an annual TP form (No 2257-SD) since 2014.

Also, France is among the first countries of the OECD to have implemented a mandatory country-by-country reporting ("CBCR") norm in its own domestic legislation. This provision (article 223 quinquies C of the French Tax Code) provides for some specific measures which will be effective from fiscal years that begin on or after January 1, 2016. Again, this disclosure of information will in itself generate questions, audits and possibly controversies, even beyond France as it is currently planned to have such information made public, which would enable the tax authorities from other countries to access certain data to justify certain reassessments of non-French subsidiaries of a French parent company (reason why this publicity is severely challenged and contested by the representatives of the French companies as we write this article).

Finally, now that the electronic accounting files (so-called "FEC") have to be remitted to the tax inspector at the start of a tax audit, the French tax inspectors have another tool to extract data and possibly challenge transfer pricing positions.

N.B.: French Parliament members have introduced a so-called "Google Tax" in the Draft Tax Bill for 2017, with a view of supplying an alternative weapon to permanent establishment, in order to allocate and tax profits deriving from e-commerce. However, this draft provision could severely be infringing the content of tax treaties signed by France and may not be included in the final version of the Bill.

4. Which are do you see as the best ways of avoiding controversy - e.g. doing more thorough functional analysis, benchmarking, making comparability adjustments, ensuring that there are detailed transfer pricing agreements or other documentation, or formal or informal agreement with the tax administration?

Obviously, the more developed a transfer pricing is, the better, when it comes to avoid controversy. This means having the most quantitative and qualitative data when the market enables to do so, and refresh this data at least every three years, or even quicker if any restructuring creates a notable change in the group. In addition, applying true-ups to transfer prices at year-end allows generally having the most precise measure of the effects of a transfer pricing policy and rapidly identifying any issues or inconsistencies when they arise, rather than waiting an entire FY to discover them. 

Benefiting from strong IT systems to support analytical data in a consistent way within an international group is also a key component when it comes to defend a transfer pricing position and extract relevant information in the course of a tax audit. This will notably enable the French tax payer to make any operation in-house rather than letting the tax inspector operating his own adjustments, which can lead to severe divergences which can then be hard to reconcile in a tax audit context.

Finally, it is key to align the legal documentation and agreements with the principles set-out from an economical perspective. This means amending asap this documentation upon any significant changes, avoid stating within the body of the agreements fixed amounts or percentages or even certain principles of remuneration but rather using appendixes which can be amended from time to time. Indeed, French Tax Authorities may rely on agreements which are still in force and have not been updated to require a certain level of remuneration as provided by said agreements, even if the situation may have been changed in the meantime.

When it comes to relationships and "agreements" with the French Tax Authorities in relation with a transfer pricing position or policy, there is hardly any "informal" agreement to be made, except if the taxpayer agrees to a certain position in the course of a tax audit and decide to apply it consistently post-audit. The usual formal agreement will consist in an APA, but this is still a procedure rarely seen in practice, and the practice of issuing tax ruling for transfer pricing purposes is even rarer in France. That being said, alternative procedures are currently tested by the Central Authorities, such as the "confidence relationship" ("relation de confiance"). Under this rather informal procedure, a taxpayer may share all or parts of its transfer pricing policy and agree to certain positions with the French Tax Authorities, but this remains experimental at this stage.

5. What are the options for achieving a successful outcome of controversy - e.g. settlement through negotiation, alternative dispute resolution, litigation, invoking MAP at an early stage, APA with a roll-back? In your jurisdiction, what are the practical advantages or drawbacks from any of these?

In practice, there are some typologies of cases whereby a possible settlement or, on the contrary, a high likelihood of tax litigation exists.

Settlement on transfer pricing cases will certainly be worth pursuing if certain aspects of the cases have been commonly agreed with the Authorities (e.g. nature of the flows, functional analysis, use of a certain transfer pricing methods...). Cases whereby a discussion occurs on a profit or mark-up level can typically lead to pre-litigation arrangements with the French Tax Authorities. In certain cases, these arrangements can turn into "rulings" or more formal Advance Pricing Agreements for future years, under which the company will commit to apply consistently the arrangement if the operations remains substantially the same. The key point in these situations is ensuring these positions are consistent with the global transfer pricing approach and the masterfile, so that if the audited company is a subsidiary of a non-French group, the French transfer pricing position remains consistent with the position in similar situations of other foreign related companies, and also consistent with the master file of the foreign parent company. The same can be said of settlements by French parent companies: such taxpayers need to anticipate whether a settled position for French purposes will not generate a corresponding tax exposure at the level of some of their foreign subsidiaries.

On the contrary, if, from the start, there is a dispute on the nature or importance of the intra-group activities (e.g. full-fledged manufacturer versus toll manufacturer) or even the existence of a tax liability (e.g. existence of a French permanent establishment), there will be little room for discussion and the case will likely be brought to tax court with few or even no possibility to settle with the French Tax Authorities. However, one needs to keep in mind that even though the case-law in the transfer pricing has been more and more developed for the past 10 years or so, it remains a territory the judges is not necessarily familiar with, which generates more uncertainty regarding the outcome of a transfer pricing litigation.

Also, French taxpayers can attempt to solve issues in relation to the application of double tax treaties signed by France under a Mutual Agreement Procedure (MAP) or an arbitration procedure, the latter being only applicable to transfer pricing issues.  MAP is a specific procedure in order to solve double taxation issues where the competent authorities of each state are invited to reach an agreement. It is not a jurisdictional procedure and competent authorities has no other obligation that to provide best endeavor for the elimination of the double taxation. Therefore it is possible that the MAP does not eliminate the legal or economic double taxation.  MAP can be carried out on the ground of the applicable tax treaty. France has signed more than 110 double tax treaties containing a provision for MAP. Moreover, an alternative to a MAP under a double tax treaty is the European Union Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises 90/436/ECC dated July 23rd, 1990 (the Convention).  

Finally, APA procedures are available as well and described under section 6 below.

6. How can greater certainty be achieved about the future treatment of transfer pricing arrangements - e.g. APAs, improving the documentation, changing the policies, improving the ways the policies are operated?

The APA procedure is intended to eliminate the risk of double taxation by establishing an agreement between two Contracting States. A taxpayer shall initiate the procedure by contacting the office in charge of negotiating arrangements and the application must be filed six months before the start of the first fiscal year covered by the arrangement.

If the FTA and the foreign counterpart reach an agreement, the APA is binding on the FTA unless facts and circumstances disclosed by the taxpayer do not match reality or commitments taken are not complied with. The duration of the APA cannot be shorter than 3 years and may not exceed 5 years. However, the taxpayer can ask for its renewal, this request should be received by the FTA at least 6 months prior to the expiration date of the APA. Besides bilateral and multilateral APAs, unilateral APAs could be granted to the taxpayer if, for example, the bilateral tax treaty doesn't provide for MAP or if despite the MAP provided in the bilateral tax treaty, the foreign competent authority refuses to conclude an APA. While the APA is per se a procedure allowing a greater certainty, it remains rather exceptional in practice and limited to the larger companies given its complexity, duration of negotiation and involved costs.

In this respect, the main elements to achieve a greater certainty and reliability when it comes to a transfer pricing policy remain the various items listed under section 4 above, namely having the most quantitative and qualitative documentation possible, updated regularly, supported by a strong and analytical IT system and consistent with the legal arrangements in place.

Reproduced with permission from Transfer Pricing Forum, 07 TPTPFU 82, 12/22/16. Copyright R 2016 by The Bureau of National Affairs, Inc. (800-372-1033)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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