France adopts transfer pricing documentation requirement

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For fiscal years beginning 1 January 2010, contemporaneous transfer pricing documentation is required for French entities whose revenue or gross assets are equal to, or exceed, €400 million (US$575 million), and for French entities affiliated with an entity whose revenue or gross assets exceed that same threshold. French financial services companies and foreign groups engaged in financial services transactions in France should be aware of the following transfer pricing changes introduced into French legislation.

Transfer pricing documentation requirement: what's new
The required documentation includes:

  • General information about the group to which the French entity belongs (e.g., description of its structure, activities, functions, assets and risks, as well as a general description of the group's transfer pricing policy)
  • Specific information about the French taxpayer (e.g., description of its activities and transactions, as well as a presentation of the applied transfer pricing method, including a functional analysis)

A balance sheet and a profit and loss account must also be provided for transactions entered into with affiliated entities established in uncooperative countries.

Consequences of non-compliance and audit response
Should a company fail to conduct its operations at arm's length, it may face significant tax consequences. In the case of an audit, a company may have to:

  • Pay additional corporate income tax.
  • Pay associated late payment fees and interest charges.
  • Contend with withholding tax issues. The French tax authorities (FTA) consider the profit that was transferred abroad by way of transfer pricing an indirect distribution of profit and, hence, subject to withholding tax.

Under current French law, there is no legal and mandatory requirement for documentation in which taxpayers must describe and justify their transfer pricing policy and implementation. However, companies must be able to support the arm's-length nature of their intercompany relationships during the course of an actual tax audit.

In the event of a tax audit, the French tax authorities are usually entitled to require information specifically pertaining to transfer pricing. This special power granted to the FTA under Article L13B of the French Procedural Tax Code requires the tax authorities to demonstrate the existence of a presumption that an indirect transfer of profit to a foreign related entity took place. In such a case, the taxpayer must respond within 60 days (the time frame may be expanded to 90 days). Should the taxpayer fail to respond within this period, or if the answer is inadequate, the taxpayer is subject to a €10,000 penalty for each fiscal year under audit, in addition to the adjustment that would be expressed by the tax authorities.

For additional news about the transfer pricing, download our March FSTP Worldwide newsletter.