France
Viviane Moro
by Viviane Moro
In 2020, despite the global pandemic, the French tax authorities raised EUR 1.2 billion because of the implementation of anti-transfer pricing provisions. It is therefore crucial to take a close look at French regulations which provide a tight framework in this particular area.
As a founding member of the Organisation for Economic Co-operation and Development (OECD), France has signed up to its transfer pricing principles.
France follows the five different transfer pricing methods recommended by the OECD. A French company can choose the remuneration method that best suits the type of function performed from the three so-called "traditional" transaction-based methods: the comparable arm's length method (CUP), the resale price method, the cost plus method, and the two so-called "transaction-based" methods, based on profits – the profit-sharing method and the net margin method.
Any method used by the company is, in principle, acceptable to the tax authorities if it is justified, consistent with the duties performed and risks assumed, and if the remuneration complies with the arm's length principle.
Following the international consensus on the valuation of international transactions between affiliated companies, the OECD transfer pricing guidelines provide guidance on the implementation of the arm's length principle. According to this principle, the price charged between dependent companies must be the price that would have been charged on the market between two independent companies.
Companies exceeding certain thresholds (turnover or balance sheet totals) must provide the tax authorities with simplified documentation on transfer pricing policies within the group every year.
This obligation applies to:
Legal entities with annual turnover of EUR 50 million or more (excluding tax or gross assets);
Legal entities directly or indirectly holding (at the close of the financial year) over half of the capital or voting rights of a legal entity meeting one of the conditions mentioned in the previous point; and
Legal entities of which over half of the capital or voting rights at the close of the financial year are directly or indirectly held by a legal entity meeting one of the conditions mentioned above.
Companies that do not conduct any transactions with affiliates established abroad, and companies that conduct transactions with affiliates established abroad for an amount of less than EUR 100,000 per type of transaction, are exempt from the obligation to file this declaration.
In France, the obligation to submit country-by-country reporting (CbCR) was introduced in the 2016 Finance Act. This entailed the transposition into domestic law of the OECD recommendation on CbCR reporting, which was adopted in the European Union directive (Directive 2016/881/EU) of 25 May 2016.
Groups established in France with consolidated, annual pre-tax turnover of over EUR 750 million, that prepare consolidated accounts, and which own and control companies or branches outside France for which separate financial statements are prepared;
Groups established in France that do not prepare consolidated accounts but meet the other criteria mentioned above; and
Companies established in France which are part of a foreign group meeting the above criteria, when they have been designated by the group to file the return, or if they are unable to show that another French or foreign entity has been designated to file the return.
If a legal entity is established in France and owned by one or more legal entities located in France already required to file this declaration, or if the legal entity is established outside France and required to file a similar declaration under foreign regulations, the legal entity is exempt from filing a declaration in France.
To ensure that transfer pricing complies with the arm's length principle, it is first necessary to conduct a functional analysis of the company: its functions, the risks it bears, its role within a group, and the tangible and intangible assets it owns or uses. Only after this analysis has been completed is it possible to determine the most appropriate method for remunerating an activity, and determine the income and costs of the assets underpinning the calculation basis.
After the functional analysis, the company can determine the most appropriate method for remunerating the activity. It must then compare the price it has determined as the arm's length price with the price that would be agreed on the market between two independent companies for an identical transaction.
The methods used by the company, when supported by relevant methodological, accounting, economic and documentary evidence, are considered by the French tax authorities and enable the documentary obligation to be met.
In France, the obligation to have full transfer pricing documentation applies to "legal entities established in France" (including foreign legal entities with a permanent establishment in France) as follows:
Have annual pre-tax turnover or gross balance sheet assets of EUR 400 million or more;
Directly or indirectly hold at the close of the financial year over 50% of the capital or voting rights of a legal entity meeting one of the conditions referred to in 1);
More than 50% of the capital or voting rights at the close of the financial year are directly or indirectly held by a legal entity meeting one of the conditions referred to in 1); or
Is part of a group covered by the tax consolidation system where the group includes at least one legal entity meeting one of the conditions mentioned in 1), 2) or 3).
Transfer pricing documentation must include two files:
1) Master file
The master file contains general information on the group's global activities and transfer pricing policy. It must include 5 sections: the group's organisational structure; a description of its business area(s); information on its intangible assets; inter-company financial activities; and its financial and tax position.
2) Local file
The local file is made up of 3 sections: entities in France, controlled transactions, and financial information.
This documentation is made available to the tax authorities, and a periodic reassessment of this documentation must be performed to ensure that the transfer pricing method chosen remains the most appropriate. Also, where there are grounds for presuming an indirect transfer of profits by a company (including where the company is not under an obligation to have full documentation), the tax authorities may require the company to provide information and documents relating to the transfer pricing method.
If a company fails to produce the required documentation or only produces partial documentation, the authorities will send it formal notice to produce or complete it within 30 days.
Failure to provide a response, or merely providing, a partial response will result in a fine of no less than EUR 10,000 for each financial year audited, and, depending on the gravity of the omissions, the higher of the following two amounts: 0.5% of the amount of the transactions concerned by the documents, or additions that have not been made available to the authorities, or 5% of adjustments to net profit relating to the above transactions.
a. Advance pricing agreement
The advance pricing agreement allows French companies to secure their transfer prices by obtaining a position from the tax authorities on the transfer pricing method applied to transactions. In this case, the authorities are bound by the opinion they issue. In general, this agreement is valid for 5 years.
b. Bilateral agreement
An advance agreement procedure for transfer pricing based on the mutual agreement procedure clauses in bilateral tax treaties allows companies to obtain a formal position from the tax authorities on their pricing policy with their foreign subsidiaries.
The agreement concerns the method to be used and not the actual setting of transfer prices within the multinational group. The term of the agreement may not be less than 3 years or more than 5 years.
In the event of a tax audit bearing on the financial years covered by the agreement, the terms of the agreement cannot be challenged.
FIDAG SARL was created in 1985 and specialises in accounting, auditing, and advice to SMEs where they are engaged in international operations (particularly tax issues), social and labour law, legal problems, accounting, and the management of operations taking place in at least two different countries.
GGI member firmFIDAG SARLParis, FranceT: +33 1 42 80 20 81
Audit & Accounting, Tax, Advisory, Corporate Finance
Viviane Moro is a Chartered Accountant and Statutory Auditor with a university degree in tax management and an International Diploma in European Tax Law (DIDFE) from the University of Burgundy. Viviane is a Partner with FIDAG since 2010. Contact Viviane.
