Arsene Taxand - Transfer Pricing

French 2009 Corrected Finance Bill includes a documentation obligation with regard to transfer pricing

Introduction

After few years of hesitation the French Tax authorities have issued a specific regulation on Transfer Pricing documentation which makes mandatory for big multinational enterprises to prepare in advance and make available a relevant documentation to support their related parties’ transactions.

The obligations set forth thereof are compliant with OECD and European Forum recommendations in substance and will apply as from January 1st, 2010. The article below summarizes the content of the new legislation MNEs located in France will have to take action to comply with.

Tax news

1. Scope of the documentation obligation

Pursuant to article L.13AA of the tax procedure code, legal entities based in France and falling under the scope of the tax authorities division in charge of Large Businesses (Direction des Grandes Entreprises) would have to keep at the tax authorities disposal a documentation supporting the transfer pricing policy applied in the framework of transactions of any kind with associated companies under the meaning of article 39 of the French tax code. The legal entities concerned are those based in France and meeting one of the criteria listed in article L.13AA of the tax procedure code. The main criterion targets companies whose turnover excluding taxes or whose gross assets as mentioned on its balance sheet is higher than or equal to €400,000,000, as well as those which hold directly or indirectly more than half of the capital or the voting rights of a legal entity, organization, trust or comparable institution based in France or outside France which meets such criteria or whose majority share capital or the voting rights of which is held directly or indirectly by such companies, at the end of the fiscal year.

2. Content of the documentation

In accordance with 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 would comprise two levels of information:

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

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

• A general description of the business activity developed by the group, including the changes that occurred during the audited tax year;
• 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 associated entities, 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 audited company;
• An overall description of the group’s transfer pricing policy.

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

This specific information would include :

• A description of the business activity developed, including the changes that occurred during the audited tax year;
• 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 and a copy of the 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(s), comprising an analysis of the functions performed, assets engaged and risks borne as well as a justification of the selection and application of the selected transfer pricing method(s);
• If needed, an analysis of the selected terms of comparison (selected comparables).

Additional documentation requirements are also provided regarding the transactions of any kind with associated companies based or set up in a non-cooperative country or territory.

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).

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

Where the audited company fails to produce the required documentation or produces an incomplete documentation within the thirty-day deadline upon receipt of a formal notice from the tax authorities, it shall be liable, for each fiscal year subject to tax audit, to a penalty amounting to €10,000 or, where the corresponding amount is higher than the latter amount and depending on the seriousness of the breach, up to 5% of the amount of transferred profits.

Taxand’s Take

The new legislation has been enforced after successive attempts of the French tax authorities in the context of an increased scrutiny of cross border transactions by tax auditors.
Some MNEs may have anticipated this evolution having prepared their Transfer Pricing documentation but should then make sure their documentation set is compliant with these new rules or updating their comparables. Some others have to prepare their documentation - possibly by adapting their global documentation if available - as the penalties for non compliant documentation may be quite significant.

Your Taxand contact for further queries is:

Antoine Glaize
Partner, Head of Transfer Pricing
Arsene-Taxand
Awarded Best Transfer Pricing firm in France by International Tax Review in 2009