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Expected changes to French transfer pricing regulations
The French government is particularly inclined to wait for the final OECD recommendations further to the BEPS Action Plan expected for next year. As a result, the main regulation changes currently being discussed by parliament attempt to provide more explicit guidelines to both the field tax auditors and taxpayers in the framework of transfer pricing audits. Taxand France discusses the key amendments to TP regulations featured in the 2015 Finance Bill.
Reinforcement of the penalty applied for failure to prepare transfer pricing (TP) documentation
The French Tax Code currently provides that if a taxpayer, in the scope of the TP documentation requirements, does not produce documentation or produces an incomplete report within 30 days (following the receipt of the request addressed by the French tax authorities, or within a regularly extended period), the company is liable to pay a fine per fiscal year under tax audit. The amount of this fine can be between EUR 10,000 and 5% of the reassessment, based on the seriousness of the breach.
The 2015 Finance Bill plans to reinforce the sanction applied in the case of a corporation that fails to produce the TP documentation. In this respect, lack of or a partial response to the request addressed by the French tax authorities to provide or complete the TP documentation will be sanctioned by a fine between 0.5% of the total amount of intercompany transactions and 5% of the profit shifted abroad. The minimum amount of the fine remains EUR 10,000.
The new penalty regime will be applicable to tax audit procedures starting in 2015.
Elimination of the secondary adjustment’s financial impact outside a mutual agreement procedure (MAP)
In the case of a transfer pricing reassessment, the French tax authorities draw further consequences from this primary adjustment by considering the amounts reassessed as ‘deemed distributed income’. This deemed distributed income is subject to the domestic withholding tax provision at the rate of 30% or to the relevant tax treaty rate.
The 2015 Finance Bill intends to create a procedure which will allow the elimination of the secondary adjustment’s financial impact. This new procedure requires that the following cumulative conditions are met:
- The request of the taxpayer must be sent before the tax collection of the withholding tax
- The company must accept the tax reassessment qualified as ‘deemed distributed income’ and the corresponding penalties
- The ‘disinvested’ amounts must be paid back to the French company within 60 days following the request
- The beneficiary of the deemed distributed income must not be established in a non-cooperative jurisdiction
This new provision simply ratifies an informal practice of the French tax authorities.
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Multinationals should be prepared for the reinforcement of the sanctions applied in case of failure to prepare the correct TP documentation. It is expected that the French tax authorities will strengthen their requirements concerning the material content of TP documentation and, if needed, apply more frequent penalties. To tackle this risk, multinationals should be vigilant and ensure the compliance of their TP documentation with the French regulations. Multinationals should also take into account the new domestic alternative to remit in France, specifically the foreign reassessed income to eliminate the secondary adjustment’s financial impact when the chance of success of a mutual agreement procedure is low.
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