Reproduced with permission from Transfer Pricing Forum,07 TPTPFU 82, 12/22/16. Copyright R 2016 by The Bureauof National Affairs, Inc. (800-372-1033) http://www.bna.com

DECEMBER 2016

TransferPricing ForumTransfer Pricing for the International Practitioner

FranceJulien MonsenegoGowling WLG LLP, France

1. What are the main sources of transfer pricingcontroversy (transfer pricing audits and disputes)in your jurisdiction – e.g., characterization, choiceof method, choice of comparables, comparabilityadjustments, related party agreements andre-characterization, operation of the transferpricing policies? Do auditors receive instruction tofocus on these areas, or are they main sources ofcontroversy because auditors focus on them bythemselves?

There are various sources of transfer pricing

controversy in France. While it is difficult to

quantify the usual elements of dispute be-

tween the French Tax Authorities (FTA) and taxpayers

due to the lack of public information on companies’

tax matters, experience has shown that elements are

usually dependent on the type of company being au-

dited:

s French-headquartered Multinational Entities

(MNEs) - 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 headquarters, such as, financing, man-

agement, purchase, sourcing etc.), as well as their

intragroup income (review of the consistency in the

profitability of the various foreign subsidiaries de-

pending on their respective location and the appli-

cable corporate income tax rate). Any spin-off of

activities and/or assets out of France (particularly IP

assets such as patents, trademarks, clientele etc.)

will be under tight review as well, to ensure an exit

charge has been correctly computed.

s French subsidiaries of MNEs - the French Tax Au-

thorities 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 Transactional Net Margin

Method (TNMM) rather than a cost plus method).

Also, to achieve a similar objective, the profile of a

French subsidiary may be challenged and re-

characterized, to determine whether it bears more

functions and risks than what the taxpayer initially

considered (this may be an alternative to character-

izing a French permanent establishment of a MNE

within said French subsidiary, in complex situa-

tions).

s French Small and Medium-sized Enterprises

(SME) - for these smaller companies, most of the

controversy will generally revolve around a review

of all their intragroup flows, using internal compa-

rables to discuss the appropriate level of the profit

indicator that was used. Even in a purely French in-

tragroup situation, the French Tax Authorities may

use a transfer pricing approach to price appropri-

ately certain transactions (except if a tax consolida-

tion 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. Previous

tax audits and their conclusions are used by most, if

not all, of the tax auditors to determine whether stated

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 cen-

tral authorities, especially in obtaining contradictory

economic analyses or studies. A French subsidiary of

a foreign group will almost systematically be audited

on these aspects, at least on the contractual side and

more likely on the economic / transfer pricing docu-

mentation side.

2. Do transfer pricing controversies arise more

often in certain businesses or industries than

in others; and if so, do you see this as being

related to the industry’s treatment of the main

sources you outlined above, or for some other

reason?

Traditionally, IP-rich industries have been at the fore-

front of the transfer pricing controversy, notably the

Pharma / Life Sciences industry. Other industries such

as consumer electronics have been under scrutiny

from the French Tax Authorities for decades as well.

The importance of IP valuation and licenses in and

out of related companies can easily explain why these

industries are the focus of attention in the first place.

30 12/16 Copyright R 2016 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760

More recently, and unsurprisingly, given the media

coverage, the ‘‘GAFA’’1 companies and their satellite

entities have been on the radar of the French and the

OECD’s countries tax Authorities. A few weeks ago,

the Budget State Secretary Christian Eckert men-

tioned that the GAFA MNEs have been re-assessed by

2.5 billion euros, including penalties, and that audits

for the FYs 2013 to 2015 on these companies were on-

going.2

Same applies to the e-commerce / ‘‘Uber-like’’ – par-

ticipative business model. As mentioned above, trans-

fer pricing can be seen as an alternative to the

characterization of a permanent establishment in

France, or even of the application of the French CFC

rules, as it enables the French Tax Authorities to repa-

triate / locate what was initially non-French income in

France.

3. Are any recent or proposed changes in nationalstatute, case law or guidance (perhaps as areaction to the BEPS project) generating orexpected to generate new transfer pricingcontroversy?

While the BEPS project has generated a lot of atten-

tion and raised the awareness of the tax authorities on

certain of the key concerns targeted by said project,

there has been limited legislation issued in France on

these matters to date. This is mostly due to the fact

that the current French legal arsenal is already able to

challenge most of the unjustified situations listed in

the BEPS project, notably the abuse of law or the ab-

normal act of management concepts.

On the case law front, it is too soon to estimate the

impact of BEPS, and generally, transfer pricing case

law has remained rather limited over the years, nota-

bly given the development of alternative procedures to

achieve resolutions (Mutual Agreement Procedure

(‘‘MAP’’, arbitration) in controversy or to avoid said

controversy (Advance Pricing Agreements (’’APAs‘‘)).

That being said, with the introduction of a contem-

poraneous TP documentation requirement in France

six years ago (article L 13 AA of the French Tax Proce-

dure Code), the French Tax Authorities now have

access to much more information than in the past.

This now creates opportunities for the authorities to

raise questions on specific transfer pricing points (no-

tably when the documentation shows a structural

change or a sharp evolution in the profit / loss position

of the company), or even to start a full tax audit. The

same can be said regarding the new requirement

under article 223 quinquies B of the French Tax Code

requiring the filing of an annual TP form (No 2257-

SD) since 2014.

Also, France is among the first countries of the

OECD to have implemented a mandatory country-by-

country reporting norm in its own domestic legisla-

tion. This provision (article 223 quinquies C of the

French Tax Code) provides for some specific measures

which will be effective from fiscal years that begin on

or after January 1, 2016. Again, this disclosure of in-

formation will in itself generate questions, audits and

possible controversies even beyond France, as it is

currently planned to have such information made

public, which would enable the tax authorities from

other countries to access certain data to justify re-

assessments of non-French subsidiaries of a French

parent company (making this information public is

severely challenged and contested by the representa-

tives of the French companies as we write this article).

Finally, now that the electronic accounting files (so-

called ‘‘FEC’’) have to be remitted to the tax inspector

at the start of a tax audit, the French tax inspectors

have another tool to extract data and possibly chal-

lenge transfer pricing positions.

N.B. French Parliament members have introduced a

so-called ‘‘Google Tax’’ provision in the Draft Tax Bill for

2017, with a view of supplying an alternative weapon to

permanent establishment, in order to allocate and tax

profits deriving from e-commerce. However, this draft

provision could potentially infringe the content of tax

treaties signed by France, and may not be included in

the final version of the Bill.

4. What do you see as the best ways of avoidingcontroversy – e.g., doing more thorough functionalanalysis, benchmarking, making comparabilityadjustments, ensuring that there are detailedtransfer pricing agreements or otherdocumentation, or formal or informal agreementwith the tax administration?

Obviously, the more developed a transfer pricing is,

the better, when it comes to avoiding controversy. This

means having the most quantitative and qualitative

data when the market enables to do so, and refresh

this data at least every three years, or even more fre-

quently if any restructuring creates a notable change

in the group. In addition, applying true-ups to trans-

fer prices at year-end allows generally having the most

precise measure of the effects of a transfer pricing

policy and rapidly identifying any issues or inconsis-

tencies when they arise, rather than waiting an entire

financial year to discover them.

Taking advantage of strong IT systems to support

analytical data in a consistent way within an interna-

tional group is also a key component when it comes to

defending a transfer pricing position and extracting

relevant information in the course of a tax audit. This

will enable the French taxpayer to make any adjust-

ments in-house rather than having the tax inspector

make his own adjustments, which could lead to severe

divergences that may be hard to reconcile in a tax

audit situation.

Finally, it is important to align the legal documenta-

tion and agreements with the operational facts and

principles set-out from an economic perspective. This

means amending in a timely manner the documenta-

tion upon any significant changes, and avoid stating

within the body of the agreements fixed amounts or

percentages or even certain principles of remunera-

tion but rather using appendixes which can be

amended from time to time. Indeed, French Tax Au-

thorities may rely on agreements which are still in

force and have not been updated to require a certain

1 ‘‘GAFA’’ is an acronym used to describe US Tech com-

panies. It puts together the first letters of the four biggest

tech giants – Google, Apple, Facebook, and Amazon.2 Le Monde article: http://www.lemonde.fr/economie/

article/2016/11/24/le-fisc-francais-reclamerait-400-

millions-d-euros-a-apple_5037144_3234.html

12/16 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 31

level of remuneration as provided by said agreements,

even if the situation may have changed in the mean-

time.

When it comes to relationships and ‘‘agreements’’

with the French Tax Authorities in relation with a

transfer pricing position or policy, there is hardly any

‘‘informal’’ agreement to be made, except if the tax-

payer agrees to a certain position in the course of a tax

audit and decides to apply it consistently post-audit.

The usual formal agreement will be in the form of an

APA, but this is still a procedure rarely seen in prac-

tice, and the practice of issuing tax ruling for transfer

pricing purposes is even rarer in France. That being

said, alternative procedures are currently being tested

by the Central Authorities, such as the ‘‘confidence re-

lationship’’ (‘‘relation de confiance’’). Under this rather

informal procedure, a taxpayer may share all or parts

of its transfer pricing policy and agree to certain posi-

tions with the French Tax Authorities, but this re-

mains experimental at this stage.

5. What are the options for achieving a successfuloutcome of controversy – e.g., settlement throughnegotiation, alternative dispute resolution,litigation, invoking MAP at an early stage, APAwith a roll-back? In your jurisdiction, what are thepractical advantages or drawbacks from any ofthese?

In practice, there are some categories of cases

whereby a possible settlement or, on the contrary, a

high likelihood of tax litigation exists.

Settlement on transfer pricing cases will certainly

be worth pursuing if certain aspects of the cases have

been commonly agreed upon with the Authorities

(e.g. nature of the flows, functional analysis, use of a

particular transfer pricing method, etc.). Cases in

which the subject involves a profit or mark-up level

can typically lead to pre-litigation arrangements with

the French Tax Authorities. In certain cases, these ar-

rangements can turn into ‘‘rulings’’ or more formal

Advance Pricing Agreements for future years, under

which the company will commit to applying consis-

tently the arrangement if the operations remain sub-

stantially the same. The key point in these situations

is ensuring these positions are consistent with the

global transfer pricing approach and the Master File,

so that if the audited company is a subsidiary of a

non-French group, the French transfer pricing posi-

tion remains consistent with the position in similar

situations of other foreign related companies, and

also consistent with the Master File of the foreign

parent company. The same can be said of settlements

by French parent companies - such taxpayers need to

anticipate whether a settled position for French pur-

poses will not generate a corresponding tax exposure

at the level of some of their foreign subsidiaries.

On the contrary, if, from the start, there is a dispute

on the nature or importance of the intra-group activ-

ity (e.g. full-fledged manufacturer versus toll manu-

facturer) or even the existence of a tax liability (e.g.,

existence of a French permanent establishment),

there will be little room for discussion and the case

will likely be brought to tax court with few or even no

possibility of settlement with the French Tax Authori-

ties. However, one needs to keep in mind that even

though the case law in transfer pricing has increas-

ingly developed over the past 10 years or so, it remains

a territory the judges are not necessarily familiar with,

and this generates more uncertainty regarding the

outcome of a transfer pricing litigation.

Also, French taxpayers can attempt to resolve issues

in relation to the application of double tax treaties

signed by France under a Mutual Agreement Proce-

dure (MAP) or an arbitration procedure, the latter

being only applicable to transfer pricing issues. MAP

is a specific procedure in order to solve double taxa-

tion issues where the competent authorities of each

state are invited to reach an agreement. It is not a ju-

risdictional procedure and competent authorities

have no other obligation than to provide best efforts

towards the elimination of the double taxation. There-

fore it is possible that the MAP would not eliminate

the legal or economic double taxation. MAP can be

carried out on the basis of the applicable tax treaty.

France has signed more than 110 double tax treaties

containing a provision for MAP. Moreover, an alterna-

tive to a MAP under a double tax treaty is the Euro-

pean Union Convention on the elimination of double

taxation in connection with the adjustment of profits

of associated enterprises 90/436/EEC dated July 23rd,

1990 (the Convention).

Finally, APA procedures are available as well and de-

scribed under section 6 below.

6. How can greater certainty be achieved aboutthe future treatment of transfer pricingarrangements – e.g., APAs, improving thedocumentation, changing the policies, improvingthe ways the policies are operated?

The APA procedure is intended to eliminate the risk of

double taxation by establishing an agreement be-

tween two Contracting States. A taxpayer shall initiate

the procedure by contacting the office in charge of ne-

gotiating arrangements and the application must be

filed six months before the start of the first fiscal year

covered by the arrangement.

If the FTA and the foreign counterpart reach an

agreement, the APA is binding on the FTA unless facts

and circumstances disclosed by the taxpayer do not

match reality or commitments taken are not complied

with. The duration of the APA cannot be shorter than

3 years and may not exceed 5 years. However, the tax-

payer can ask for its renewal, this request should be

received by the FTA at least 6 months prior to the ex-

piration date of the APA. Besides bilateral and multi-

lateral APAs, unilateral APAs could be granted to the

taxpayer if, for example, the bilateral tax treaty

doesn’t provide for MAP or if despite the MAP pro-

vided in the bilateral tax treaty, the foreign competent

authority refuses to conclude an APA. While the APA

is per se a procedure allowing a greater certainty, it re-

mains rather exceptional in practice and limited to the

larger companies given its complexity, duration of ne-

gotiation and involved costs.

In this respect, the main elements to achieve a

greater certainty and reliability when it comes to a

transfer pricing policy remain the various items listed

under question 4 above, namely having the most

quantitative and qualitative documentation possible,

32 12/16 Copyright R 2016 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760

updated regularly, supported by a strong and analyti-

cal IT system and consistent with the legal arrange-

ments in place.Julien Monsenego is a Partner in Tax Law at Gowling WLG in

Paris.

He may be contacted at:

Julien.monsenego@gowlingwlg.com

https://gowlingwlg.com/en/global

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