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New TP Documentation Obligation Impacts MNCs Doing Business in France
The Corrected French Finance Bill (dated 30 December 2009) introduced a new obligation for large companies to document their transfer pricing policy starting January 2010. French companies with a turnover or gross assets exceeding 400 MEUR (or whose direct or indirect ascendants or descendants' turnover or gross assets exceed such threshold) must keep at the tax authorities' disposal documentation supporting their related parties' transactions.
Even if the law introducing the new regulation specifies the general outline of the obligation, it quickly raised several issues such as the extent to which the new regulation would apply to permanent establishments of foreign companies or the conditions of application of the penalty for lack of documentation.
Taxand's Global Transfer Pricing Service Line Leader assesses the French Tax Authorities' Instruction 4 A-10-10 commenting on the new documentation obligation signed in December 2010 that provides clarifications on these issues.
The French Tax Authorities' Instruction on 23 December 2010 4 A-10-10 specifies the scope of the obligation as follows:
1) Permanent Establishments (PEs)
The Instruction specifies to what extent permanent establishments of foreign companies in France fall within the scope of the documentation obligation
- The first criterion (companies with a turnover or gross assets exceeding 400 MEUR) is met where the threshold is reached either by the French PE on its own or by its foreign parent
- The second criteria (companies whose direct or indirect descendants' turnover or gross assets exceed 400 MEUR) is met if the threshold is reached at the level of the French PE
- The third criteria (companies whose direct or indirect ascendants' turnover or gross assets exceed 400 MEUR) is met if the threshold is reached at the level of the foreign company.
2) Terms and Conditions of Applications to Penalties
The Instruction specifies that the application of the maximum penalty is limited to the cases of complete absence of documentation or incompleteness that deprives the documentation of any relevance.
Besides, a mere disagreement between the taxpayer and the tax authorities on the appropriateness of the selected transfer pricing method shall not justify the application of the penalty for lack of documentation.
3) Link with the EU Arbitration Convention and Mutual Agreement Procedures.
The Instruction specifies that the penalty for lack of documentation is not considered a serious penalty and does not prevent the company from benefiting from the EU Arbitration Convention and Mutual Agreement Procedures.
However, the suspension of the period needed for assessing taxes as provided for in Article L189A of the French Tax Procedure Code is not extended to the penalty for lack of documentation but this penalty will be reduced proportionally depending on the outcome of the EU and conventional mutual agreement procedures.
4) Specific Rules Applying to Credit Institutions and Investment Firms
These specific rules mainly relate to the content of the Country File. The Instruction states that the description of intragroup transactions as well as the description of the selected transfer pricing method(s) may be provided by types of transactions or by product or business lines, depending on the credit institution or investment firm's particular structure and organisation.
If the final version of the Instruction did not include fundamental changes as compared to the last draft, it has the virtue of clarifying several aspects of the new regulation. However, some questions raised by adoption of the regulation remain pending, in particular those concerning the need to document transactions between a French company and its permanent establishment abroad.
The timing of the publication of this Instruction shows the tax authorities' intention that the provisions of these regulations should be effectively implemented by companies at the time they file their corporate income tax return for the tax year 2010.
Multinationals carrying out business in France should pay particular attention to these provisions. As specified in the Instruction, companies that fall outside the scope of the documentation obligation remain subject to the provisions of article L. 13B of the French Tax Procedure Code which provides that if, during a tax audit, the FTA has sufficient reason to presume that a company has shifted profits out of France, it may request for more detailed information concerning the transfer price and how such price was calculated.
In practice, French subsidiaries falling under the scope of the regulation should carefully review their existing set of documentation in particular making sure they exhaustively cover their transactions with affiliates, in particular with respect to financial and intangible transactions and customising it to French requirements. They should consider taking profit over the coming months before the French tax authorities launch their audit and prepare the appropriate documentation.
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