The Transfer Pricing Controversy 'Landscape' - France Chapter

Author:Mr Julien Monsenego
Profession:Gowling WLG
  1. What are the main sources of transfer pricing controversy (transfer pricing audits and disputes) in your jurisdiction - e.g. characterisation, choice of method, choice of comparables, comparability adjustments, related party agreements and recharacterization, operation of the transfer pricing policies? Do auditors receive instruction to focus on these areas, or are they main sources of controversy because auditors focus on them by themselves?

    There are various sources of transfer pricing controversy in France. While it is clearly hard if not impossible to quantify the usual elements of debate between the French Tax Authorities and the taxpayers, in the lack of public information in this respect, it is drawn from experience that such elements which will mainly depend on the type of audited companies:

    French-headquartered MNE: these types of companies will be under strict scrutiny regarding their intragroup outbound flows (for instance the intragroup expenses charged from related companies providing services or goods that would be expected to be provided directly by the French headquarter: financing, management, purchase, sourcing etc...), as well as their intragroup income (review of the consistency in the profitability of the various foreign subsidiaries depending on their respective location and the applicable corporate income tax rate, for instance). Any spin off of activities and/or assets out of France (starting with IP assets such as patents, trademarks, clientele etc...) will be under tight review as well to ensure an exit charge has been correctly computed. French subsidiaries of MNE:  the French Tax Authorities may challenge the choice of method for pricing certain intragroup transactions and achieve a certain level of profitability in France (for instance, they may rely on a TNMM method rather than a cost plus method). Similarly, and to achieve a similar objective, the profile of a French subsidiary may be challenged and recharacterized, for instance to consider that it bears more functions and risks than what the taxpayer initially considered (this may be an alternative to characterizing a French permanent establishment of a MNE within said French subsidiary, in situations where such evidence is complex to provide for the French Tax Authorities). French SME: for these smaller companies, most of the controversy will generally revolves around a review of all their intragroup flows, using internal comparables to discuss the appropriate level of the profit indicator which has been used. Even in a purely French intragroup situation, the French Tax Authorities may use a transfer pricing approach to price appropriately certain transactions (except if a tax consolidation is in place between the parties). On the second question, there may be non-public instructions given by the French specialized office at the International Central Tax Audit Brigade (DVNI), notably for audits targeting French MNEs. Obviously, previous tax audits and their conclusions lead most if not all of the tax auditors to check whether said positions have been complied with for the unaudited period, and if not, which elements could substantiate the changes. For smaller companies, while there are no precise instructions as such, transfer pricing has become over the years a typical area of review for local tax auditors, who can get support from the central authorities, notably when it comes to provide contradictory economic analysis or studies.  A French subsidiary of a foreign group will almost systematically be audited on these aspects, at least on...

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