Arsene Taxand - Transfer Pricing
Draft bill and directive on Article L. 13 AA of the tax procedure code
April 27 2009
1. Scope of the documentation obligation:

This obligation shall be applicable to transactions performed during the financial years starting as from 1 January 2010 and shall target companies based in France and falling under the scope of the tax authorities division in charge of Large Businesses (Direction des Grandes Entreprises), namely:

  • Companies whose turnover excluding taxes or whose gross assets as mentioned on its balance sheet shall be higher than or equal to €400,000,000; or
  • Companies that shall hold directly or indirectly, at the close of the financial year, more than half of the capital or the voting rights of a corporate body or an organisation mentioned hereinabove; or
  • Companies, whose majority share capital or the voting rights of which shall be held directly or indirectly by such companies at the close of the financial year; or
  • Companies recognised under the worldwide or the consolidated profit system, and those included in the scope of consolidation; or
  • Integrated companies where at least one of the companies that make up the fiscal group meets one of the foregoing criteria.

The obligation shall target companies resident in France, irrespective of their legal form, as well as the French branches of non-resident companies.
The criteria retained shall be reviewed by the government authorities for each of the financial years mentioned in the notice of audit of accounts.
The draft directive reviewed herein shall not cover lending institutions and investment companies, considering the specific nature of their activity. The documentation obligations that are binding upon them shall be subject to a specific directive.

2. Content of the documentary obligation

In pursuance of the recommendations of the Joint Transfer pricing Forum of European Union and the arm’s length principle set out by the OECD, the content of the documentation obligation comprises two levels of information:

a) General information on the group (items covered by the “Masterfile”)

The company undergoing a tax audit is expected to provide the tax authorities with the following:

  • A general description of the business activity and the strategy developed by the group;
  • An overall description of the legal and operational organisation of the group comprising a clear identification of its key member involved in audited transactions;
  • A global review of the functions performed and the risks borne by the entities involved, insofar as they have an impact on the audited company;
  • A list of the key intangible assets held (such as patents, brand names, business names, know-how, etc…) in relation to the company audited;
  • An overall description of the group’s transfer pricing policy.

b) Specific information on the associated company undergoing a tax audit.

This specific information shall include:

  • A description of the business activity and the strategy developed within the framework of the activity;
  • A description of the operations carried out with other associated companies (comprising the nature of flows and the corresponding amounts, including royalties);
  • A list of cost sharing agreements, preliminary agreements on transfer prices and advance tax rulings covering the setting of transfer prices pertaining to the company audited;
  • A description of the selected transfer pricing method and the justification thereof;
  • If needed, a comparable analysis (based on the most recent data available on an annual basis), a functional analysis, a review of the contract clauses, economic outlooks and the specific business strategies.

3. Implementation

This is an obligation said to be contemporary. In this regard, the documentation ought to be provided to the tax authorities at the starting date of the tax audit (i.e. at the date of the first operation on the site).
The whole set of documentation must be prepared or updated during the financial year in which the transactions are performed amongst the associated companies. In this regard, it shall be agreed that the review of comparable analyses be updated on a three-year basis.

4. Sanctions incurred in case of failure of production or incomplete production of the documentation.

Where the company audited shall fail to produce the documentation required or produce an incomplete documentation within the thirty-day deadline (that may be extended following a clearly justified request from the taxpayer over an additional period not exceeding a total of two months) upon receipt of a formal notice from the audit institution, it shall be liable for a penalty equivalent to €10 000 or, where the amount concerned shall be higher than the latter amount, to 5% of the amount of profits transferred for each of the financial years covered by the accounts audit.
These sanctions shall not be considered as serious penalties and shall allow the company to continue to benefit from the European and conventional mutual agreement procedures.
The provisions of Article L. 189 A of the Tax procedure code pertaining to the suspension of the period needed for assessing taxes in case of mutual agreement procedure based on the double tax treaties or the European convention relating to the elimination of double taxation, shall not be applicable to the above-mentioned penalty. Nevertheless, where the need arises, the penalty shall be reviewed based on the corrections retained upon completion of the mutual agreement procedures or the arbitration proceedings.

Draft bill and directive on Article L. 13 AA of the tax procedure code

Arsene Taxand - Transfer Pricing



Draft bill and directive on Article L. 13 AA of the tax procedure code
1. Scope of the documentation obligation:

This obligation shall be applicable to transactions performed during the financial years starting as from 1 January 2010 and shall target companies based in France and falling under the scope of the tax authorities division in charge of Large Businesses (Direction des Grandes Entreprises), namely:

  • Companies whose turnover excluding taxes or whose gross assets as mentioned on its balance sheet shall be higher than or equal to €400,000,000; or
  • Companies that shall hold directly or indirectly, at the close of the financial year, more than half of the capital or the voting rights of a corporate body or an organisation mentioned hereinabove; or
  • Companies, whose majority share capital or the voting rights of which shall be held directly or indirectly by such companies at the close of the financial year; or
  • Companies recognised under the worldwide or the consolidated profit system, and those included in the scope of consolidation; or
  • Integrated companies where at least one of the companies that make up the fiscal group meets one of the foregoing criteria.

The obligation shall target companies resident in France, irrespective of their legal form, as well as the French branches of non-resident companies.
The criteria retained shall be reviewed by the government authorities for each of the financial years mentioned in the notice of audit of accounts.
The draft directive reviewed herein shall not cover lending institutions and investment companies, considering the specific nature of their activity. The documentation obligations that are binding upon them shall be subject to a specific directive.

2. Content of the documentary obligation

In pursuance of the recommendations of the Joint Transfer pricing Forum of European Union and the arm’s length principle set out by the OECD, the content of the documentation obligation comprises two levels of information:

a) General information on the group (items covered by the “Masterfile”)

The company undergoing a tax audit is expected to provide the tax authorities with the following:

  • A general description of the business activity and the strategy developed by the group;
  • An overall description of the legal and operational organisation of the group comprising a clear identification of its key member involved in audited transactions;
  • A global review of the functions performed and the risks borne by the entities involved, insofar as they have an impact on the audited company;
  • A list of the key intangible assets held (such as patents, brand names, business names, know-how, etc…) in relation to the company audited;
  • An overall description of the group’s transfer pricing policy.

b) Specific information on the associated company undergoing a tax audit.

This specific information shall include:

  • A description of the business activity and the strategy developed within the framework of the activity;
  • A description of the operations carried out with other associated companies (comprising the nature of flows and the corresponding amounts, including royalties);
  • A list of cost sharing agreements, preliminary agreements on transfer prices and advance tax rulings covering the setting of transfer prices pertaining to the company audited;
  • A description of the selected transfer pricing method and the justification thereof;
  • If needed, a comparable analysis (based on the most recent data available on an annual basis), a functional analysis, a review of the contract clauses, economic outlooks and the specific business strategies.

3. Implementation

This is an obligation said to be contemporary. In this regard, the documentation ought to be provided to the tax authorities at the starting date of the tax audit (i.e. at the date of the first operation on the site).
The whole set of documentation must be prepared or updated during the financial year in which the transactions are performed amongst the associated companies. In this regard, it shall be agreed that the review of comparable analyses be updated on a three-year basis.

4. Sanctions incurred in case of failure of production or incomplete production of the documentation.

Where the company audited shall fail to produce the documentation required or produce an incomplete documentation within the thirty-day deadline (that may be extended following a clearly justified request from the taxpayer over an additional period not exceeding a total of two months) upon receipt of a formal notice from the audit institution, it shall be liable for a penalty equivalent to €10 000 or, where the amount concerned shall be higher than the latter amount, to 5% of the amount of profits transferred for each of the financial years covered by the accounts audit.
These sanctions shall not be considered as serious penalties and shall allow the company to continue to benefit from the European and conventional mutual agreement procedures.
The provisions of Article L. 189 A of the Tax procedure code pertaining to the suspension of the period needed for assessing taxes in case of mutual agreement procedure based on the double tax treaties or the European convention relating to the elimination of double taxation, shall not be applicable to the above-mentioned penalty. Nevertheless, where the need arises, the penalty shall be reviewed based on the corrections retained upon completion of the mutual agreement procedures or the arbitration proceedings.

Arsene Taxand 2009 - France - Legal information