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Change in French transfer pricing regulations is expected

By disclosing a report released in March 2013 by the General Finance Inspection (“Inspection Générale des Finances”), the French Ministry of Finance announced its intention to consider amending the French transfer pricing regulation.

The General Finance Inspection (GFI) compared various transfer pricing regulations in Canada, Germany, the Netherlands, UK and the US to "fight against tax base erosion through financial and economic intercompany transactions" and came to the conclusion that France "is under-equipped compared to its partners in terms of transfer pricing control.”

The GFI provided the French Ministry of Finance with five recommendations that could be included in the Tax Bill for 2014. Taxand France reviews these changes and their impact on MNCs worldwide.

Of the five recommendations that the GFI provided, four of these recommendations are intended to facilitate the French tax authority’s audit capacities, with a fifth focusing on TP litigation. These recommendations are:

  1.  Reversing the burden of proof in certain situations. This would mean that the burden of proof would be borne by taxpayers in connection with business restructuring, intercompany transactions with companies located in low tax rate countries, or companies incurring recurring losses or showing negative net margins.
  2.  Changing how penalties are computed and applied in cases of non-compliance with transfer pricing documentation requirements. This would result in penalties being computed on the global amount of intercompany transactions the company is entering into and not on the amount of reassessments as it is currently.
  3. Granting access to the French tax authority to relevant taxpayer’s data (especially management accounting data) in a digital form. The taxpayer would be required to provide the French tax authority with an electronic copy of its management account data in order for the administration to obtain information on prices and margins applied both on transactions with affiliates and third parties.
  4.  Facilitating the application of the profit split method. The French tax authority would be more willing to accept the use of profit split method as it would improve the level of information available for the administration and facilitate the control of the tax base in France.

Lastly, the fifth recommendation advocates a removal of the suspension of reassessment collection that is granted to taxpayers when they introduce a mutual agreement procedure (MAP). The objective pursued by such a measure is clearly expressed; this is to promote further negotiations with the taxpayer and to develop transfer pricing litigation.

If the findings and recommendations of this report are included in Tax Bill 2014, this would lead to a significant change in the French regulatory transfer pricing landscape, often to the detriment of taxpayers.

These proposals are based on the assumption that transfer pricing policy of MNCs is only driven by aggressive tax planning. Those assumptions raise true concerns (eg reversing the burden of proof, access to management account data, abolition of the suspension payment collection in the frame of a MAP) and create new obligations for all MNCs without actually improving control and reducing double taxation arising from transfer pricing adjustments. Without ignoring the existing abusive practices, the majority of MNCs should not be subjected to such constraints.

On the other hand, the report remains silent on the possible solutions that the French government could implement to improve the effectiveness of the French tax authority’s control, including a "risk management" approach which is, up to now, less developed in France than in other countries.

Your Taxand contacts for further queries are:
Antoine Glaize
T. + 33 1 70 38 88 28

Vincent Desoubries
T. + 33 1 70 39 54 90

Taxand's Take

In light of the recent changes in French audit regulations regarding computerised accounting specifically, it is possible that the fourth recommendation of the report will be adopted in the Tax Bill for 2014 so that the French Tax Authorities would have access to the management account data of French taxpayers. 

However, such an approach is particularly insidious because management accounts, unlike general accounts, are not normalised and are the results from a companies’ specific management decisions. Management indicators may target some data (for example, some gross margin levels) giving rise to misleading extrapolations or comparisons by Tax Administration (for example, recalculation of net margin levels).

This measure could even increase control operations and catalyse foreseeable disputes.

Providing such measures would impact significantly the defense strategy of a tax audit procedure. MNCs should undertake a review of their management account system and define a tax and technical strategy to ensure the consistency between IT data and accounting & tax treatment.

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