Taxing authority and tax law

Tax authority: Generally referred to as the French Tax Authorities (FTA), or Direction Générale des Finances Publiques (DGFiP), or Direction Générale des Impôts (DGI)

Tax law, main technical provisions:

• French Tax Code (FTC) Articles 57 and 238A
• French Procedural Tax Code (FPTC) Articles L 10, L 13AA, L 13AB, L 13B, L 80B and L 188A
• Case law about application of the theory of Abnormal Act of Management
• Thin capitalization rules are also covered by Articles 212 and 39-1 of the FTC

Relevant regulations and rulings

Administrative doctrine pertaining mainly to Articles 57 and 238A of the FTC, and Articles L 13B and L 80B of the FPTC.

Administrative guidelines are expected to be published in relation to the application of the new documentation requirement provided by Articles L 13AA and L 13AB FPTC.

OECD guidelines treatment

The French Tax Authorities consider the French transfer pricing regulations to be consistent with the OECD Guidelines.

There is no specific French transfer pricing-related regulation pertaining to business restructuring or attribution of profits to permanent establishments, and the FTA did not comment so far the new guidelines released by the OECD (Transfer Pricing and Business Restructuring Guidelines of 22 July 2010).

Experience in business restructuring shows that tax auditors often consider that a decrease in profit is an indicator that an intangible has de facto been transferred and should be taxed. In addition, specific care should also be paid to closure costs in light of the transfer pricing profile undertaken by the group entities at hand. French tax inspectors are also paying more attention to financial transactions (e.g., loans, guarantees).

Priorities/pricing methods

The tax authorities accept the CUP, Resale Price Method, Cost Plus Method, Profit Split and TNMM; yet tax inspectors usually prefer the TNMM.

Transfer pricing penalties

Penalties specific to failure in complying with the TP documentation requirement apply in addition to fiscal penalties generally applied as a consequence of a transfer pricing reassessment. Indeed, transfer pricing reassessments from the FTA trigger an adjustment of the taxable profit for Corporate Income Tax purposes (and other taxes if depending on the case at hand).

Penalties specific to the transfer pricing documentation requirement:

Specific transfer pricing penalties are applicable in situations where the taxpayer failed to answer the tax authorities’ request for documentation, either on the basis of Article L 13B FPTC (which relates to General TP documentation requirements), or on the basis of Articles L 13AA and L 13AB FPTC (which relate to newly published Special TP documentation requirements):

• Failure in providing complete information in the framework of Article L 13B FPTC

  (i) may result in a reassessment of the company’s taxable profit based on information the tax authorities possess, and

  (ii) will result in the application of EUR 10,000 penalties for each year audited

• Failure in providing sufficient transfer pricing documentation under the framework of Articles L 13AA and L 13AB FPTC will trigger penalties amounting from €10,000 up to 5% of the transfer pricing reassessment potentially notified afterwards, depending on the “seriousness of the breach.” Such penalties are due per fiscal year audited.

Penalties generally applied as a result of a transfer pricing reassessment, regardless of compliance with TP documentation requirements:

• After a transfer pricing reassessment is made, the additional profit is usually analyzed as deemed dividends, therefore, a withholding tax on deemed distribution is usually required (when a double tax treaty applies, the withholding tax depends on the relevant tax treaty provisions.¹ In the absence of specific tax treaty, the withholding tax rate is generally 25%, and increased to 50% when the foreign entity is based in a “non-cooperative” jurisdiction).
• In case the transfer is qualified into a deemed dividend, the FTA also usually applies a 10% penalty for absence of declaration of the withholding tax. Such penalty is applied regardless of the good faith of the taxpayer.
• Late payment interests are applied in case of tax reassessments made on the ground of Article 57 of the FTC. The ordinary late payment interest rate is 0.40% per month (i.e., 4.8% per year).
• Supplementary penalties are applicable if the taxpayer committed a willful offence (40%) or acted fraudulently (80%)

In addition, the adjustment may result in a reassessment of other taxes and contributions such as business taxes and employee profit-sharing regimes.

Penalty relief

During a tax audit and before the tax authorities send the notice of reassessment, taxpayers, under the framework of Article L 62 FPTC, are allowed to correct their errors or omissions in consideration of a reduced late payment interest rate (3.36% per year) that is equal to 70% of the ordinary late payment interest rate. In this respect, taxpayers must file a complementary tax return and pay the corresponding additional taxes at the same time.

Documentation requirements

General TP documentation requirements (Article L 13B FPTC)

The FTA may require information pertaining to transfer pricing in the course of an audit (based on Articles L 13 B and L 10 FPTC). The nature of the required information, and the short deadline under which a taxpayer may have to provide it, lead to a de facto documentation requirement covering any French-based company. The following documents are usually expected:

• Business and organizational structure overview
• Functional analysis, contracts, legal and management account information
• Method selected and economic analysis (including as need be, identification of competitors and comparables, usually French when the tested party is French)
• Description of the tax regime applied to the subsidiaries of the audited French company

Special TP Documentation Requirement newly published (Articles L 13AA and L 13AB FPTC)

Pursuant to Article L 13AA FPTC, and as from fiscal years opened from 1 January 2010, companies that satisfy any of the criteria listed below, must provide upon the tax inspector’s request (hence in the context of a tax audit) their transfer pricing documentation:

• Have total net sales (before taxes), or total gross assets, equal to or greater than EUR 400 million
• Hold, directly or indirectly, at the closing date of the fiscal year, more than 50% of the capital or voting rights in a legal person having such turnover or gross assets
• Are, on the closing date of the fiscal year, more than 50% held, directly or indirectly, by such a legal person
• Are included in a group benefiting — subject to a ruling — from the worldwide tax consolidation regime, every French company being included in the regime
• Belong to a French tax consolidated group that includes at least a legal person that meets one or more of the aforementioned criteria

If the documentation is not immediately provided to the FTA, it should be delivered within 30-days from the FTA’s request. In case of absence of documentation, or if the taxpayer fails to provide an exhaustive and comprehensive documentation within 30 days of a formal notice from the FTA, a penalty up to 5% of the transfer pricing reassessment would be applied with a minimum of EUR 10,000 per fiscal year under audit. An extra deadline to complete the documentation could however be granted by the FTA, yet administrative guidelines in this regard were not yet published to date.

The contents of the transfer pricing documentation to be made available to the FTA upon tax audit are twofold:

1. General information concerning the related enterprises (economic, legal, financial background of the group):

• General description of the activity carried out, including changes that occurred during the audited period compared to previous years;
• General description of the legal and operational structures (with identification of the entities involved in controlled transactions);
• General description of the functions carried out and risks borne by the related entities to the extent that they impact the audited company
• List of the main intangible assets held in relation to the audited company
• General description of the transfer pricing policy of the group

2. Specific information pertaining to the audited company:

• General description of the activity carried out including changes that occurred during the audited period compared to previous years
• General description of the transactions carried out with related enterprises including amount and nature of the flows including royalties
• List of the cost-sharing agreements, copy of transfer pricing rulings
• Presentation of the methods used to determine the transfer prices (including an analysis of the functions, risks and assets and with an explanation on the choice of applied methods)
• Where necessary, an analysis of the comparables used (including characteristics of the goods and services, functional analysis, contract clauses, economic situation and specific strategies of the companies used as comparables)

Pursuant to Article L 13AB FPTC, all French companies involved in transactions with companies located in non-cooperative jurisdictions (as defined by the Article 238-0 A FTC) have to provide, in addition to the documentation described in article L 13AA FPTC, a complementary documentation including all documents normally required by the FTA from companies subject to Corporate Income Tax, and such requirement notably includes French-accounting-compliant balance sheet and P&L of the foreign company.

French taxpayers that do not meet the conditions set out in Articles L 13AA and L 13AB FPTC nevertheless remain bound by the General TP documentation requirements set out in Article L 13B FPTC and the general information sharing rule set out in Article L 10 FPTC.

Documentation deadlines

General TP Documentation Requirement (Article L 13B FPTC)

Upon the FTA’s request, documentation must be submitted within 60 days, though it may be possible to obtain a 30-day extension in exceptional circumstances. Exceeding such deadline will trigger penalties as mentioned previously.

Special TP Documentation Requirement newly published (Articles L 13AA and L 13AB FPTC)

Upon the FTA’s request, documentation must be submitted immediately upon first request made by the tax inspector in the course of an audit. If not, the FTA will send a formal claim for the documentation that will provide for a 30-day deadline after which penalties for documentation failure will apply as previously mentioned.

Statute of limitations on transfer pricing assessments

The statute of limitations for transfer pricing adjustments is the same as for all French corporate tax assessments: generally three years following the year for which the tax is due (it might be longer under certain circumstances e.g., permanent establishment qualifications, losses carried forward).

In cases where a mutual agreement procedure to avoid double taxation (on the ground of a tax treaty or the European Arbitration Convention) is initiated further to a tax reassessment, tax collection can be suspended during the entire mutual agreement process and is postponed until the competent authorities reach an agreement (Article L 189 A FPTC).

Return disclosures/related-party disclosures

In the event of a specific request from the tax authorities at the time of an audit (on the basis of either Articles L 13AA and L 13AB FTPC, or Article L 13B FPTC), there is an obligation to disclose the nature of the relations involving the taxpayer with related parties (i.e., the links of dependence between the French audited entity and the related parties). These legal provisions also provide for an obligation to disclose the activities of the related parties.

Audit risk/transfer pricing scrutiny

The risk of transfer pricing issues being scrutinized during a tax audit is high. The number of tax audits in transfer pricing is considerably increasing, and the FTA are becoming more extensive and accurate in their queries since they now also use economic references in addition to legal grounds.

Transfer pricing issues that receive the greatest scrutiny are:

• Business restructuring (e.g., transfer of intangibles, indemnity) or a sudden decrease into the operating margin likely to hide a change in the TP policy applied
• Product sale prices (under or over estimated prices), especially but not only, in case of losses
• Management fees
• Agents and commissionaire operations (e.g., conversion of a distributor into an agent)
• Permanent establishment
• Closure/conversion costs
• Intangibles and economic ownership (including questions about royalties)
• Benchmarking exercises

There are rather few court decisions in France going into detailed TP issues. One of the main questions relates to the burden of proof, which is usually said to be lying on the tax inspectors.

APA opportunity

Bilateral and, under certain circumstances, unilateral APAs, are available (Article L 80 B 7° of the FPTC). This section was provided by the Finance Amendment Act for 2004 and has come into force since 1 January 2005. It incorporates existing procedures as described by the French administrative guideline #4 A-8-99 dated 7 September 1999. A specific procedure also exists for certain activities (e.g., headquarter profile).

On 28 November 2006, the tax authorities released a new administrative guideline (#4 A-13-06), adding a simplified APA procedure for small and medium enterprises, and presenting an online guide pertaining to transfer pricing methods.

The process requires that, in theory, the submission has to be performed at the latest 6 months before the beginning of the first fiscal year covered. It has also to be noted that there is no roll-back possibility.

Mutual Agreement Procedures

Besides and following a tax reassessment, taxpayers can request the introduction of a mutual agreement procedure (on the ground of tax treaty or the European Arbitration Convention) in order to avoid double taxation resulting from the reassessment. On 23 February 2006, the FTA published administrative guidelines (#14 F-1-06) specifying the scope and the conditions to be met for the introduction of such procedure.

Regarding the Specific TP documentation requirements set out in Articles L 13AA and L 13AB, soon to-be-published administrative guidelines should define whether the penalties applied for documentation failure would not prevent taxpayers from being able to apply for a mutual agreement procedure.

¹ See the Dividends or the Other Income clauses.

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