Transfer Pricing: Major Developments for Certain French Companies Engaging in Transactions with Related Entities

by Dechert LLP
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The following sets out a summary of recently announced major changes affecting the transfer pricing policy of certain French companies.

New Provisions of French Law

Provisions Already Adopted

Within the scope of the draft bill relating to the fight against tax fraud and serious economic and financial crime (“Draft Bill”), the French National Assembly and Senate have adopted, by way of amendment, new provisions with regard to transfer pricing1. These amendments will require large companies to provide documentation to the French tax authorities on an annual basis, to support such companies’ transfer pricing policy for transactions with related entities.

These new provisions add to those applicable since January 1, 20102, which require large companies3 to make available to the tax authorities, when a tax audit is initiated with regard to their accounting records, documentation in support of the company’s transfer pricing policy in respect of transactions of any kind carried out with related entities4, established or incorporated outside France.

The new provisions5 specify that such companies must, within a period of six months following the deadline for filing their corporate income tax return, provide the tax authorities with the following information:

General information regarding the group of related companies:

  • A general description of the business activities performed by the group, including any changes that have occurred during the past fiscal year. 
  • A list of the main intangible assets held by the group – in particular, patents, trademarks, trade names and know-how.

Specific information concerning the company:

  • A description of the business activities performed by the company, including any changes that have occurred during the past fiscal year.
  • A summary statement showing the nature and amount of transactions carried out with other related entities, where the aggregate amount per type of transaction exceeds €100,000.
  • A description of the method(s) used to determine transfer prices on an arms’ length basis, specifying the main method used and any changes that have taken place during the past fiscal year.

This provision will enter into force upon publication of the law after it has been adopted, and the law will therefore apply to fiscal years that end after such publication date.

In practice, the filing of this documentation will be required for any fiscal year ending after October 8, 2013. A company with a fiscal year ending December 31, 2013 will therefore need to submit this transfer pricing documentation to the French tax authorities no later than October 15, 2014.

The obligation to provide a summary of transactions showing the nature and amount of transactions carried out with related entities is particularly onerous, as the threshold amount of €100,000 is quite low.

Future Legal Provisions

Submission of Cost Accounting

The Senate had introduced, by way of amendment to the Draft Bill, a provision specifying that companies should make the company’s cost accounting available to the French tax authorities in order to enable such authorities to check transfer prices.

Although this amendment was not adopted on that occasion, the French Budget Minister has indicated an intent to adopt this concept and include it in a future Finance Act. However, such a provision was not included in the draft Finance Bill for 2014 published on September 25. This proposal will probably be carried over to the amended Finance Act for 2013, which will be presented at the beginning of December 2013.

Transfers of Risks or Functions

The French government has included in the draft Finance Bill for 2014 a measure to fight against tax fraud in the field of transfer pricing concerning transfers of risks or functions. Article 15 of this draft bill provides that, where a company records a decrease of at least 20% in its excédent brut d’exploitation (equivalent to EBITDA – Earnings before Interest, Taxes, Depreciation and Amortization) in respect of one of the two fiscal years following the transfer of risks or functions to a related entity (within the meaning of sub-paragraph 12 of Article 39 of the French Tax Code), such company will have the obligation to show, at the time of a tax audit, that it received fair financial compensation. Otherwise, the profits that should have been generated will be added back to the income of the company that made such transfer. The terms and conditions under which such amount will be added back to taxable income have not yet been finalized.

This new measure, which would apply to fiscal years ending after December 31, 2013, gives rise to two main issues:

  • Although the text specifies the fiscal years in respect of which the decrease in EBITDA will be assessed, there is no mention of the fiscal years in which the add-back will be made.
  • The text creates a large burden of proof for the taxpayer that has to prove that it received financial compensation equivalent to the amount which would have been agreed on by independent enterprises. This proof must be provided, in particular, by providing the French tax authorities with all information relevant to determine the income, both of the company that made the transfer and of the recipient. In this respect, it is appropriate to question the relevance of submission of this information for the recipient, which frequently carries out other business activities in addition to those transferred.
OECD Draft

The OECD6 has issued an Action Plan on Base Erosion7 and Profit Shifting. The OECD Draft would be applicable to all companies, regardless of their turnover. In this document, the OECD sets out the following objectives with regard to transfer pricing:

  • Ensure that the transfer prices calculated are in line with value creation. The aim of this objective is to prevent base erosion and profit shifting by moving intangible assets among the members of the same group.
  • Develop rules to prevent base erosion and profit shifting by the transfer of risks among members of the same group or the allocation of excessive capital to group members.
  • Develop rules to prevent base erosion and profit shifting through engaging in transactions that would not be entered into between independent enterprises.

For further information, please refer to: Dechert OnPoint: OECD Sets Out Ambitious Global Plan to Tackle Tax Fairness Issues.

Conclusion

In light of the agreed and proposed amendments, companies will have to pay particular attention to their transfer pricing policy in the coming months in order to avoid severe tax reassessments.

Footnotes

1Some provisions have already been agreed by the chambers of the French parliament, whereas others will be considered by the Senate on October 8.

2The current provisions are set forth in Article L.13 AA of the French Book of Tax Procedures (Livre des procédures fiscales).

3These entities are companies whose aggregate revenues or balance sheet net assets are at least €400 million, or that hold, or are held by, entities that meet one of these conditions (either individually or on a consolidated basis).

4Related entities are those within the meaning of Article 39-12 of the French Tax Code.

5These provisions are codified in the new Article 223 quinquies B of the French Tax Code.

6Organisation for Economic Cooperation and Development.

7Base erosion refers to a decrease in the profits on which a country can assess tax.

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