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Form and substance in transfer pricing: what's the right balance?

Posted on June 25, 2021January 22, 2024 by admin1708

Successive confinements and the boredom they seem to have generated in some households have led to the emergence of challenges, sometimes implausible, often absurd, widely relayed by social networks. Among these is the "Nana Challenge", which involves performing a sort of jig by hopping alternately on both feet to counter the opposite movements of one's partner. While it's safe to assume that this gesticulation will soon be consigned to the pantheon of useless dances, as soon as bodies have been decontaminated and spirits restored, the tax authorities seem determined to continue dancing on two feet, and in a number of tax cases, both form and substance have taken precedence.

This is the case when, under an intra-group transaction, the contract signed mentions a remuneration that does not reflect the actual behavior of the related parties. For example, the agreement may include a remuneration expressed as a percentage (based on sales or costs), the quantum of which clearly does not reflect arm's length standards that contemporary economic analyses would have highlighted. Depending on the direction of payment (whether the French taxpayer is the creditor or the debtor of the transaction), the French Treasury may be harmed, or on the contrary, it may benefit.

A contract out of step with the arm's length principle

To illustrate this situation, let's take the example of an administrative services provider located in France and providing services to a related party established abroad. An old contract between them mentions a remuneration defined according to the cost-plus method as described by the OECD guidelines, designed to cover a cost base increased by a 15% margin. To make matters even more comical, it should be pointed out that the contract is clearly the result of a sometimes approximate translation of a version existing elsewhere in the Group (doubtless between two other entities abroad) and dates from the early 2000s, i.e. before the modern concepts developed by the OECD in terms of transfer pricing; the documentation and reporting obligations as they are practiced today; and the work of the European Joint Forum. Aware of the work carried out by these bodies, and motivated by a desire to do the right thing, the parties decided to apply a margin of 5% rather than 15%, on the grounds that the services rendered fell into the category of " low value-added intra-group services ".

Indeed, since 2010, the European Joint Forum has been suggesting that an arm's length measure for such services could be " between 3% and 10%, with a median of 5% ^1. More than a decade later, the OECD followed suit, considering that " To determine the arm's length pricing of low value-added intra-group services, the member of the multinational group providing such services should apply a profit margin to all costs deferred in the cost pool. The same margin must be used for all low-value-added services, regardless of the categories concerned. The margin retained by the taxpayer should not be less than 2% nor more than 5% of the cost concerned "².

The matter might seem to be settled, and the parties, backed by the work of prolific international bodies, might naively think that they have achieved fis- cial serenity. But as surely as the road to hell is paved with good intentions, this attitude can, depending on the circumstances, be overturned by the tax authorities during an accounting audit.

Let's take an initial example. If the service provider is a French taxpayer, the tax authorities will be tempted to rely on the cardinal concepts of contract law. It would then be in a position to argue that these " take the place of law to those who have made them "³. On this occasion, the tax authorities would certainly be entitled to claim the differential between the margin actually applied (5%) and that stated in the contract (15%), in addition of course to applying a withholding tax on income deemed to have been distributed; penalties for deliberate failure to comply of 40% in view of the liberality granted; and the whole cascade of taxes and levies whose basis is based on common aggregates, disguising - let's not forget - a double or even triple taxation of the same profits.

The binding force of the contract or the prevalence of form

This position stems from the theory of the binding force of contracts, according to which a legally-formed agreement creates obligations for the parties, who must then scrupulously adhere to it. This is an ancient civil law concept, dear to the written law states, and permeates our entire corpus of private law.

Are we being lied to? Is the autonomy of tax law nothing more than a chimera sold on the benches of law faculties to flatter the egos of apprentice tax lawyers and boast of their singularity? From the pantheon from which he observes us, the much-lamented Professor Maurice Cozian would no doubt object that, although not autonomous, tax law is nonetheless special. Admittedly, its mainsprings are imbued with economics, and in this respect it differs from other themes. However, it cannot be dissociated from other branches of law, and more particularly from the law of obligations, which forms the basis of all relations between private individuals; nor can it be detached from public law, which governs relations between individuals and the emanations of the public force, of which the tax authorities are one.

Of course, one could always argue that related parties would certainly not charge (or no longer charge) 15% mark-ups for administrative services. To corroborate this point, the taxpayer could then go to great lengths to produce comparable research based on specialized databases. However, we find this demonstration questionable. Article 57 of the French General Tax Code, under which transfer pricing adjustments are notified, provides for the possibility of benchmarking intra-group remuneration against independent and comparable references only " in the absence of precise information "⁴. Whatever the consulting firms may say, the way our positive law is constructed means that economic analyses are in reality only of subsidiary importance. This is regularly reiterated by the tax judge, who, in validating the administration's failure to seek comparables, points out that the administration can alternatively demonstrate a discrepancy between the price charged and the market value of the product or ^service5. In the case in point, it could be considered that the market value of the service is that appearing in the contract, since the latter is deemed to have been duly formed between the parties...

Last but not least, the binding force of contracts still has a certain resonance even in OECD transfer pricing principles. Indeed, in its so-called " BEPS " work aimed at understanding tax base transfers and combating tax evasion, the Organization still recognizes a significant role for intra-group agreements in assessing the arm's length nature of a transaction. To cite just a few examples, contracts are referred to as factors of comparability (the cornerstone of the arm's length concept); the qualification of functions and the attribution of correlative risks; or the legitimacy of a party to receive the income linked to the exploitation of an intangible asset.

It seems to us a rather shortcut to conclude that the contract should be de facto binding on the parties, even though it contains a tax-related anomaly. As certainly as what has been done can be undone, the contract duly formed between the parties could be attenuated or even profoundly modified by a new agreement of will. A defense could then consist in explaining that this written contract has in the meantime been amended or novated by another contract, this one oral, to which the repetition of behavior between the bound parties has offered its legitimacy and binding force. This strategy would be further strengthened, we believe, if the original contract contained a so-called " hardship " clause, which in essence allows the contract to adapt to certain circumstances.

The substance and actual conduct of the parties

But imagine the opposite situation. One in which the French taxpayer is the debtor in the transaction and therefore deducts a margin of 15%, in accordance with the contract, but at variance with arm's length standards. Contrary to our first hypothesis, in such circumstances the tax authorities would be quick to shelve the contract. The particularity of tax law would here take on its full dimension, offering the administration, with the blessing of the tax judge, the possibility of making the real intention of the parties prevail in order to give an agreement its just qualification.

This is a freedom derived from a long tradition of case law, which allows the tax authorities to depart from the rigor of the abuse de droit rule, which only allows them to simply disregard the ^contract6. By allowing the auditor to reclassify an agreement, the judge gives him the opportunity to put the parties back in a " normal " management situation. Indeed, it can be postulated that the parties would necessarily seek a fair and appropriate balance, in line with the law, and therefore an arm's length balance. Any agreement that imposes an obligation on one of the parties that appears out of step with this principle would indirectly, but necessarily, vitiate the purpose of the agreement, in addition to highlighting clauses that are probably unfair to the beneficiary party.

A recent ruling by the Riom Court of Appeal seems to add to this trend, allowing the tax authorities to disqualify a contract without resorting to the abuse of rights procedure, provided that it was signed shortly before the tax transaction in question. In this case, the aim was to prevent the application of the Dutreil mechanism applicable to "holding companies animatrices", by highlighting the fact that the strategic coordination, management and commercial assistance agreement between the holding company and its subsidiary had been signed just twelve days before the donation of the parent company's ^shares7. Although this decision was rendered on tax grounds other than transfer pricing, there should be nothing to prevent a holistic application of the solution. Thus, in order to disregard an intra-group contract, the tax authorities will now be able to rely on a temporal element, in addition to the behavior of the parties.

Finally, to echo the previous section and be totally exhaustive, it should be pointed out that, although taken into account by the OECD principles, the conventions establish at most a simple presumption. Actions 8 to 10 of the BEPS program clearly tend to give greater importance to the actual behavior of the parties, and thus to give precedence to operational reality over contractual appearance. This is particularly evident in the construction of the functional analysis and the weighting of functions, particularly with regard to the exploitation of intangible assets (the famous " DEMPE " functions) and, consequently, the attribution of correlative taxable profits.

The last dance

The porous nature of tax law enables it to incorporate concepts from other branches of law, such as the binding force of contracts. This enables the tax authorities to enforce contractual clauses against the parties, and to draw the necessary conclusions from them, if they entail remuneration. Conversely, the authorities now have extensive means at their disposal to thwart agreements which, in their view, do not reflect arm's length conditions, either by requalifying them or simply setting them aside. Substance and form thus seem to complement each other perfectly, as if in a duet dance. In a final graceful movement that seems to remain in suspension, we will borrow from the excellent Emilie Bokdam-Tognetti's recent conclusions in the Ferragamo case, reminding us that " the transfer pricing principles defined by the OECD do not constitute standards and have no legal effect in domestic law. While they cannot be used to interpret the provisions of article 57 of the CGI, they are nevertheless a useful source of inspiration "⁸⁸. With the frenetic pace of international taxation in recent years, it will be difficult to know who will lead the way in terms of form or content.

(1) "In cases where it is appropriate to use a markup, this will normally be modest and experience shows that typically agreed mark ups fall wit- hin a range of 3-10 %, often around 5 %.". EU Joint Transfer Pricing Forum, Guidelines on low value adding intra-group services, DOC: JTPF/020/REV3/2009/EN, §63.
(2) OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, §7.61.
(3) Art. 1103 new Civil Code. It should be added that the new article 1194 specifies that contracts are binding as to what is expressed therein and as to all consequences which equity, usage or the law give to them.
(4) Article 57, paragraph 4: "In the absence of precise elements for making the rectifications provided for in the first, second and third paragraphs, taxable income is determined by comparison with that of similar businesses normally operated".
(5) See in particular CE 8e et 3e ch. réunies, May 29, 2017, n° 401491, Galerie Ariane.
(6) See for example CE, July 20, 2007, n° 232004.
(7) CA Riom, 1er ch. civile, Jan. 26, 2021, n° 19/01179.
(8) Conclusions rendered under CE 9e et 10e ch., Nov. 23, 2020, no. 425577, Sté Ferragamo France.

How can the effects of the Covid-19 pandemic be incorporated into transfer pricing policies?

Posted on July 30, 2020January 22, 2024 by admin1708

(practical answers to questions raised in the field)

We've become accustomed to other announcements. The OECD's Centre for Tax Policy and Administration (CTP), which until recently was waxing lyrical about the "new tax law" associated with the implementation of pillars ^{1 and 2-1}, is now concentrating its efforts on ways of relieving taxpayers in the current unprecedented health crisis linked to the Covid-19 ² pandemic.

For the urgency is both pressing and real. At a press conference held on March 2, the Organization's Chief Economist, Laurence Boone, used measured formulas to temper the alarming statistics observed by analysts ³. It's a fact: beyond its sad health consequences, the crisis is also having a brutal impact on the global economy. In the space of just a few weeks, it brought commercial activity to a virtual standstill on every continent. And while some economic sectors have weathered the storm better than others, most have seen their budget projections shattered, and losses and shortfalls have been recorded in all or part of the value chain.

In our modern economy, these value chains are highly concentrated within groups of companies. The effects of this crisis will therefore first and foremost affect transfer pricing, which governs contractual and financial relations between entities under common control. The question then arises as to how to allocate these effects between the various players, with the underlying components of identification (which players must necessarily bear these effects) and quantification (what proportion of negative effects to attribute).

Of course, the concrete effects of this unprecedented situation will have to be assessed over the long term and with the necessary hindsight, in the light of the regulatory changes that are sure to follow; the paradigm shifts of the tax authorities; and the operational strategies of economic players. Any current analysis must therefore be both cautious and humble.
However, without claiming to be exhaustive, we shall endeavour in the following developments to provide answers to the questions that are on the minds of groups of companies, some of which have already been brought to our attention by those in the field. To do so, we will follow a logical, even chronological, intellectual path, addressing the attribution of losses and proposing a few recommendations for modifying existing transfer pricing policies.

Can all the companies in a group make losses?

The question of loss management in a transfer pricing environment highlights a binary and limiting approach, which in reality has often led over the years to the belief that losses can only be borne by one party. However, this belief cannot stand up to objective legal and economic analysis.

Let's refresh our memories. The arm's length principle developed by the OECD and adopted by almost all countries ⁴ requires the parties to a group of companies to remunerate the transactions that bind them in the light of practices observable in third parties, independent of each other and placed in comparable situations. Because it tends to focus on each linked transaction taken in isolation, this concept of arm's length competition has nevertheless gradually led to linked companies being placed in a blindly binary relationship, reduced to a creditor and a debtor, for whom practice has substituted the terms "entrepreneur" and "routine operator". But to quote the illustrious professor Nicolas Rontchevsky: "all practitioners copy and repeat each other, the problem is that the first one was an idiot".

The truth is that these terminologies are meaningless, and indeed are absent from the OECD guidelines, which form the basis of modern transfer pricing taxation.
This has not prevented practitioners, led by the tax authorities, from developing a Manichean approach to the modern economy, and from considering that the party to the related transaction who takes on the profile of the routine operator should receive a fixed remuneration, as opposed to the entrepreneur, who would be entitled to any residual profits or losses. Year in, year out, this binary vision has in many cases led to the conclusion that the routine operator cannot suffer losses.

One limiting belief generating another, we have seen the emergence of an appropriate concept, that of the "limited-risk" routine distributor or manufacturer, which is scarcely described any further. In the faith of a tax lawyer, we have read in numerous proposals for rectification that this "limited-risk" distributor or manufacturer, because he takes on a routine profile, should receive "a low remuneration, in line with his functions and limited risks, but necessarily positive".

But at what point in the history of the contemporary economy was it considered that an economic player would be protected against the risk of loss? It's a question that tax specialists have for too long avoided answering, no doubt hiding behind the principle of the autonomy of tax law (another misguided concept). In reality, we have to recognize that any company, regardless of its sector of activity, the functions it performs or the risks it carries (what practitioners call its "functional profile"), can at some point in its history sustain losses, whether chronic or sporadic.

In the first place, and unless the intra-group contract provides otherwise, the notion of "limited risk" should in no way imply total immunity from all risk. It is a common feature of any business to face up to the volatility of its market, and to bear the potentially adverse consequences of its decisions. Whether civil or commercial in nature, a company may incur expenses that exceed its profits, thereby generating a deficit. This remains true even for structures whose purpose is not to make a profit, such as sociétés de moyens or groupements d'intérêt général. In the case of the latter, case law has had occasion to point out that, even when placed in a relationship of dependence, their very purpose justifies the absence of profit ⁵. However, there is no reservation as to the impossibility of recording losses.

Generating deficits can even be part of an economic strategy, in line with a company's social interest. As the public rapporteur pointed out in his conclusions in the aforementioned case: "no provision of the General Tax Code obliges a company to make profits ⁶". This leads to a second argument. It has to be said that nothing in positive law prohibits the making of losses, as long as they do not reflect an abnormal act of management. This is the case for market penetration strategies; long-term strategic investments; and what the OECD calls the "portfolio approach", which can be found in the automotive or consumer goods sectors, to name but a ^few7.

The use of tax losses is the subject of several articles in the French General Tax Code. Just the third paragraph of Article 209-I describes the calculation of the loss that can be carried forward with almost automatic precision. Given that the use of losses is clearly and expressly described by the law, without reserving the regime to a specific category of taxpayers, how could we consider that some, on the grounds that they are part of a group, would respond to a different logic? This would violate the very essence of the arm's length principle, as well as breaking the adage learned religiously in law school that "where the law does not distinguish, there is no reason to distinguish".

However, there is another law that may apply in this case, namely "the law between the parties". This concept, which stems directly from the principle of the binding force of contracts, derives from article 1103 of our Civil Code. It assumes that, if a contract is balanced and based on free and informed consent (which is, in fact, a presumption between companies), the parties to the agreement undertake to respect its terms. Regardless of the specific nature of tax matters or the economic environment, this principle is a cardinal point in our legal system, which is based on written law. It is therefore imperative, before any adjustment or modification of the transfer pricing policy, to review the contracts in order to determine the allocation of the obligations of each party to the transaction.

This aside, the question could legitimately be asked about commission agents making losses. Although commercial in essence (the status of commissionaire derives from article L132-1 of the French Commercial Code), commissionaires fall automatically into the chapter of the Civil Code dedicated to agents. Once again, this status is clearly defined and framed by the Civil Code, in particular articles 1984 and following, which commercial judges have helped to enrich over the years. The French Supreme Court (Cour de cassation) initiated a praetorian trend in favor of gas station attendants operating a brand concession. The supreme judge ruled that the contracts binding them to oil groups must necessarily cover losses incurred during management⁸. Lastly, it specified that article 2000 of the French Civil Code precluded the parties from contractually charging the agent for losses caused by an event attributable to the principal ⁹.

The syllogism then becomes tempting: considering that an agent cannot legally or contractually incur losses in the exercise of his mission; and that a commission agent is by nature invested with a sales mandate; should the latter be obligatorily protected against any risk of closing with a loss?

In our view, this is a rather short-sighted legal approach. While the commissionaire must be remunerated in such a way as to cover his costs, the law does not grant him the ability to spend lavishly. Expenses that are the result of his own decisions must be his responsibility. Here again, it is essential to review the contract with the client and ensure that it includes certain safeguards. Finally, we believe that the mandate given to the commission agent is not valid for all the activities commonly carried out during the year, but for each sales transaction. As soon as a sale is made, the commission agent must receive adequate remuneration. If demand collapses and no sales are made, then the commission agent could be considered to be unjustified in claiming his commission. In the event of a significant drop in sales affecting the entire value chain, this could justify losses on the part of the commission agent.

How do you allocate losses between the parties to an intra-group transaction?

The most logical approach would be to allocate these in proportion to each party's contribution to the total value chain. In practice, this amounts to implementing the "profit-sharing" method (which also applies correlatively to losses) described by the ^OECD10.

This method, which has long been reserved for transactions in which the parties make unique, high-value contributions (single intangible assets, for example), is being revitalized under the impetus of the BEPS project. Indeed, the Organization is advocating greater use of this approach, given the known weaknesses of traditional methods, or the "transactional net margin method", which remains the most widespread. It is also at the forefront of recent work on Pillar 1 and the unified approach that will eventually lead to new taxing rights for States.

However, it has to be said that the profit-sharing method is complex to implement and requires the use of accounting and economic aggregates that are difficult to recover in multinational groups. For the time being, experience shows that administrative authorities still lack maturity in the use of this method, and thus tend to set it aside in favor of more traditional formulas, such as the transactional net margin method.

No more profit-sharing. To test the arm's length nature of a transaction, it seems to us more appropriate and simpler to calculate a theoretical remuneration, such as would have been derived from the activity if it had been carried out at a normal period. In practice, this amounts to granting a profitability based on an appropriate basis (costs incurred or sales achieved) and theoretically defined on the basis of known, anticipated aggregates, disconnected from any extraordinary event such as the current crisis. Budgets, when drawn up jointly by the two parties to a transaction, can serve as an appropriate reference. Their reliability will be all the greater if, in the past, it can be demonstrated that the variations between budget projections and the actual data recorded at year-end were small. In some cases, this discrepancy may even serve as an adjustment variable in the implementation of our theoretical method.

In this respect, this approach is in line with that previously validated by the tax judge in the Unilever ¹¹ case. In this case, the company manufactured margarine under the Astra brand and sold it to a Belgian company belonging to the same group. Following an audit of its accounts, the tax authorities questioned the selling prices on the grounds that the company's margins had become structurally unprofitable. Not only was the company's operating profit (often used as a benchmark by the authorities) negative, but its gross margin was also negative, as the company was unable to cover its manufacturing costs. The company argued that this situation was due to the obsolescence of its production units, which in another environment corresponds to a situation where the site is not operating under normal, stable circumstances.

The Court dismissed the administration's claims, agreeing with the recommendations of its Government Commissioner. With economic wisdom, he considers that "it is in a manufacturer's interest to sell at a loss in order to cover its variable costs and part of its fixed costs, in other words, to survive". In his conclusions, he also lists the cases in which invoicing at a loss is sometimes the only way for a company to sell at the market price. The last case corresponds to a company in difficulty, due to the economic situation. In this case, selling at a loss in order to sell at the market price may be a way of continuing to operate, covering part of the fixed costs, the time needed to invest, or even to retrain. In addition, and commercial considerations aside, it should be remembered that tax judges do not rule out on principle the advantage of abnormal invoicing between related companies, if this is the only way to maintain employment on a ^site12.

In order to take a fresh look at any abnormalities linked to intra-group transactions, the Court recommended reconstituting the margins if Astra's production line were operating to normal standards, i.e. free of the extraordinary circumstances that affected its margins. In such an environment, we believe it would be just as conceivable to recalculate the company's profit and loss accounts by placing it in a stable and sustainable situation, for example, by taking into account the budgets achieved before the crisis. Unanticipated costs resulting from the effects of the crisis will not be taken into account, even though they will have a negative impact on the company's total net margin.

What comparables should be used to test the arm's length nature of transactions?

As we have already seen, it should be not only permissible, but perfectly defensible, to book losses on intra-group transactions, even if the transfer pricing policy initially allowed for a margin to be granted to the company. There is, however, a limit to this approach: it must reflect market conditions. It must therefore be demonstrated that, in the same situation, independent and comparable companies would not do much better. This brings us back to the problem of finding reliable comparables on which to base our argument.

Clearly, the comparables currently available on the databases do not incorporate the economic effects of the Covid-19 pandemic. At the time of writing, the most recent data concern financial years ending March 31, 2019, i.e. one year ago. Back then, no one imagined what the world would go through, and yours truly didn't know what a pangolin was. It is therefore necessary to artificially adjust the comparables available to us. Such adjustments are, moreover, permitted and recommended by the OECD, precisely to neutralize observable differences in comparability factors, which include economic circumstances.
A first solution might then be to apply the percentage decline observable in a given sector or country, and derived from statistics kept by INSEE, the OECD or other professional bodies, to the margins of comparables.

An alternative, or corroborative, method might be to calculate the profitability of an activity over the months of the financial year not yet affected by the crisis. In this way, it would be possible to return a true picture, observed over a normal period. These data would then be compared with the most recent references from databases. In the event of a match, it would then be possible to conclude that, apart from exceptional cases such as the current crisis, the transfer pricing policy pursued until then reflected an arm's length situation. However, this approach only works for companies that do not close on December 31, and for which a sufficiently representative range of months is available.

Finally, a third avenue could be to investigate the behavior of the comparables used to previously test the transfer pricing policy, during periods of crisis. For example, once a panel of comparables has been used in 2019, it would be interesting to look at the variation in margins of these same comparables during the financial crises of 2008 and 2010. Of course, despite their violence at the time, it has to be admitted that these crises had nothing in common with the one we're experiencing today. But this approach will at least demonstrate that independent companies with comparable reputations can also see their results rocked during troubled times. Once again, the authorities will be able to argue that companies with a similar, albeit "limited", profile can suffer economically without being protected against losses.

Can intra-group contracts be suspended or modified?

Although transfer pricing is heavily influenced by economic theory, it is not immune to the most basic legal concepts, starting with the binding force of contracts. Before taking any action, it is therefore imperative to review the content of intra-group agreements with a critical eye, in order to ascertain the conditions under which a contract may be suspended, terminated or modified.
A first temptation could be to invoke force majeure. It should be remembered that force majeure constitutes an event beyond the debtor's control, irresistible and unforeseeable at the time of conclusion of the contract13. The advantage of force majeure is that it leads to temporary or definitive exemption from performance of obligations, or to termination of the contract, as the case may be, which in this instance could allow related parties to depart from transfer pricing policies.

In fact, force majeure has never been recognized in the case of pandemic events, since they have not, until now and fortunately, sufficiently affected the activities of economic players. The situation could be different in the case of Covid-19, as there have already been a number of court rulings in the specific cases of administrative detention or administrative measures to remove foreign nationals. In these specific cases, the judges considered that the impossibility of acting as a result of the pandemic constituted a case of force majeure, notably due to the closure of borders. In addition to these remote examples, we might also be tempted to add a reference to Bruno Lemaire's general position on public procurement, according to which the French government will consider the coronavirus as a case of force majeure for companies.

In any event, it is essential to check the terms of any force majeure clauses in contracts and general terms and conditions that may apply, as well as the procedure to be followed where applicable. Indeed, the rules laid down contractually may be more flexible than those of ordinary law, which are merely suppletive. The fact remains, however, that it will be more difficult to withhold payment on the grounds of force majeure, as judges will consider that payment is not fundamentally prevented.

In certain situations, therefore, it may be more appropriate to examine whether unforeseeability can be more usefully invoked than force majeure. Force majeure does not apply to difficult circumstances that have made performance of the obligation particularly onerous, but not impossible. In such cases, renegotiation of the contract can be envisaged, which is logically easier between bound parties. In this context, the parties could legitimately make some temporary adjustments to the transfer pricing policy, and in particular, transgress the remuneration methodology, while providing for an adequate and fair allocation of losses.

What impact do exceptional regulatory provisions have on transfer pricing policies?

To support their taxpayers in this turmoil, the vast majority of countries adopted emergency measures, some aimed at reducing the tax burden, others, like France, preferring to postpone or adjust the timetable. Some corporations have even obtained temporary aid in the form of subsidies, grace periods or grants (notably interest-free loans). However, once these measures have an impact on the company's earnings, the question arises as to how they should be treated when calculating the transfer pricing method. Most transfer pricing methods aim to attribute a fixed margin to the tested party. Should these subsidies be included in the calculation of this margin?

In the substratum, this question inevitably refers back to the Philips decision by the Conseil d'Etat ¹⁴. The question then was whether, for the purposes of calculating the net margin on the basis of total costs that Philips re-invoiced to its parent company, the latter was entitled to deduct the research tax credit from which it benefited from the cost base subject to re-invoicing. Quite logically, the French tax authorities replied in the negative, arguing that the subsidies received were in the nature of investment subsidies and were therefore unrelated to operating expenses, which form the basis of the transfer pricing method used by the group. However, the French Supreme Court overturned the department's claims, confirming the appeal decision, on the grounds that the tax authorities had not demonstrated that independent companies in comparable circumstances would not have deducted the amount of the CIR from their calculation basis.

While this ruling unfortunately does not settle the fundamental question (how to take subsidies into account when calculating the transfer pricing method), it does have the merit of referring to the "normal" behavior of parties in the free market. In this respect, it is unlikely that in times of crisis, when every player in the value chain is affected, one party to a transaction will make the other bear the brunt of a gift offered by another party, in this case the State. In other words, any exceptional benefits received should not be added to the cost base subject to the cost price method, nor, conversely, should they reduce the base retained under the resale price method. What's more, in order to prove that the non-inclusion of these subsidies is abnormal, the tax authorities would still have to produce reliable comparable references, which, given the current state of the databases, is an impossible task.

However, a more recent decision could cast doubt on our position. In the Laps France ¹⁵ ruling, the court held that the taxpayer had to re-invoice the CVAE to its related party on the same basis as its other operating costs, since the method adopted by the group required it to re-invoice all operating costs. As the CVAE was booked as an operating expense (and not as tax), it was automatically included in the base on which the net margin was calculated. In our view, however, this line of reasoning suffers from a number of flaws, in addition to referring to an issue that is quite different from the one analyzed here.

In fact, in this case, it was a question of re-invoicing an expense that had a negative impact on the company's profit, and not a subsidy received. If the benefits received were to be re-invoiced, the company would automatically benefit twice, in addition, as we have seen, to condemning its economic partners a little more. What's more, a comparability analysis based on data, adjusted as we suggested above, would undoubtedly produce greatly reduced margins, whereas our comparables' margins would necessarily be increased.
In short, benefits, subsidies and other gifts received should be considered as exceptional income, and therefore not included in the calculation of any transfer pricing method.

1 On March 31, 2019, the OECD-G20 Inclusive Framework on BEPS published its "Work Programme to develop a consensus solution addressing the tax challenges raised by the digitization of the economy". This document, adopted by the 129 members of the Inclusive Framework, was approved by the G20 Finance Ministers on June 8 and 9, 2019.
2 See on this subject "OECD, FORUM ON TAX ADMINISTRATION, Tax Administration Responses to COVID-19: Measures Taken to Support Taxpayers, 26 March 2020", available on the OECD website.
3 OECD, OECD Economic Outlook, Interim Report Coronavirus: The Global Economy at Risk, March 2, 2020, available at http://www.oecd.org/perspectives-economiques/
4 In France, Article 57, the cornerstone of our transfer pricing regulations, has long been recognized as compatible with Article 9 of the OECD Model Convention, which incorporates the arm's length principle. See, for example, CE, ruling of March 14 1984, no. 34430 and no. 36880.
5 See in this respect CE 25 nov. 2009, 3rd and 8th ss sect. réunies, no. 307227, Cie Rhénane de Raffinage.
6 Conclusions M. Geffray sous CE 25 nov. 2009, 3ème et 8ème ss sect. réunies, n°307227 in BDCF 2010 2/10 n° 106.
7 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2017, §3.10.
8 Cass com 17 déc. 1991, n° 89-20688 ; 90-11661.
9 Cass com 26 oct. 1999, n° 96-20063.
10 OECD Transfer Pricing Guidelines, §2.114 et seq.
11 CAA Versailles, 6ème ch. 5 déc. 2011, n° 10VE02491.
12 For example CAA Nancy 6 mars 1996 société Nord éclair n° 94-1326 n°1464.
13 Article 1218 of the French Civil Code.
14 CE 19 sept. 2018, n°405779, Sté Philips SAS.
15 TA Montreuil, 9ème ch. 14 février 2019, n°1801945.

Dispute resolution in international tax law

Posted on April 14, 2020January 22, 2024 by admin1708

La thématique des règlements des différends en droit fiscal international, outre le fait de renfermer un bon sujet de thèse, se pose comme une question fondamentale dans nos environnements contemporains. Peut-on encore en effet seulement aborder la fiscalité dans un cadre purement domestique, en la soustrayant à toute influence internationale ? Le point d’interrogation qui ponctue cette dernière phrase n’est que pièce rapportée, tant la réponse transpire déjà dans la question. Car sans être nécessairement fiscaliste, tout juriste (au sens large et noble du terme) sait désormais que nos normes sont pour la plupart influencées, voire directement inspirées de sources externes, qu’il s’agisse du droit communautaire, du droit conventionnel, ou encore des travaux d’organismes qui font autorité, à l’instar de l’OCDE ou de l’OMC.

Cela étant posé, en devenant global, le sujet des règlements des différends en devient également plus complexe. Protéiforme même. En effet, la division du monde en une multitude de pays n’a eu d’équivalent que la multiplication proportionnelle des systèmes juridiques. Leur coexistence, combinée à la souveraineté des Etats et aux effets corrélatifs des crises économiques sur les finances publiques, génère forcément des frictions, dont le contribuable engagé dans des opérations transfrontalières peut faire les frais. Si vous me permettez cette digression, ces frictions sont d’ailleurs souvent provisionnées par les entreprises et les nouvelles obligations IFRIC 23, à l’instar des obligations américaines dites FIN 48, n’en sont qu’une manifestation.

Devant cette multiplication des différends, les Etat ont tôt fait d’adopter dans leurs corpus juridiques des procédures de revue, de discussion et d’arbitrage afin de garantir l’équilibre économique et politique. On retrouve ainsi des émanations de ces procédures de règlements dans le paquet fiscal de l’UE qui, dès 1990, posait déjà les bases d’une convention multilatérale d’élimination des doubles impositions ; dans le modèle de convention de l’OCDE et l’ONU ; et dans les travaux récents de l’OCDE, tout particulièrement son programme dit « BEPS ».

Dans cet environnement, la question fondamentale qui doit alors se poser me semble être celle-ci : ces règlements, nécessairement internationaux, sont-ils efficaces ? C’est ce point que je souhaiterais traiter, sous la bienveillante supervision du Professeur Stankiewicz et en complément des dires de mes éminents collègues fiscalistes, qui ont brillamment traité ce sujet avant moi.

En creux, cette question soulève le point de savoir si le contribuable a meilleur temps d’activer ces procédures internationales ou de porter le litige (car si différend il y a, il y a forcément un litige) devant les tribunaux compétents. Ces remous dissimulent en réalité un vieux serpent de mer qui refait surface au gré des affaires, celui de savoir duquel, du procès ou du règlement international, est le plus efficace. Cette question est cependant tronquée, car elle sous-entend déjà, en premier lieu, que le contribuable ait accès à un système judiciaire organisé et efficace, où les juges seraient à même de traiter de questions fiscales nécessairement complexes, car internationales. Si l’on prend l’exemple de la France, qui certainement figure parmi les Etats de droit les mieux organisés, la réponse n’est déjà pas évidente. La pratique montre déjà que, outre le délai de traitement (de plusieurs années), ces questions complexes de droit fiscal international peinent souvent à trouver une audience réceptive devant les juridictions de première instance. Il n’est pas rare en effet que le fond du dossier, autant que le droit, ne soient correctement analysés qu’en appel. A l’incertitude liée à l’issue de l’affaire (de laquelle le contribuable doit répondre devant ses actionnaires, ses commissaires aux comptes, ses investisseurs, son personnel et j’en passe) s’ajoutent les coûts de la procédure et surtout, le fait qu’une décision en justice d’un Etat donné ne saurait automatiquement et mécaniquement trouver à s’exécuter dans un autre Etat concerné par l’opération en cause.

Néanmoins, l’avocat que je suis ne saurait tolérer que l’on balaie si rapidement l’option contentieuse et ce, pour plusieurs raisons.

D’abord, seule la voie contentieuse peut régler une affaire au fond et sur la base d’une règle de droit. Les procédures internationales de règlement des différends, de même que l’arbitrage international, sont davantage des voies diplomatiques qui, bien que souvent pragmatiques, cherchent à préserver les intérêts des parties, et non pas à faire respecter la règle juridique. En cela, une même affaire, pouvant potentiellement lier les deux mêmes parties, mais portée devant deux commissions différentes (par exemple dans des pays ou à des époques différentes) pourrait accoucher de deux solutions contradictoires. La voie contentieuse nous semble de ce point de vue-là offrir davantage de garanties et de sécurité juridique.

En lien avec ce qui précède, la nature diplomatique des procédures de règlement tend à rendre l’issue des affaires portées très aléatoire. Prenons l’exemple des procédures amiables d’élimination des doubles impositions applicables en Europe. Ces procédures, qui découlent d’une convention multilatérale liant les Etats de l’Union, prévoient en théorie que les différends en matière de prix de transfert soient réglés dans un délai maximal de trois années, dont les six derniers mois sont dévolus à une procédure d’arbitrage en cas d’échec des discussions lors des phases précédentes. En pratique, nombreux sont les cas dont le traitement dépasse (parfois même très largement !) ce délai de trois années. Il n’est même pas rare qu’un différend en entraînant un autre, la procédure de règlement n’est pas encore clôturée qu’il faille déjà la lier à une seconde affaire similaire, portant sur des années ultérieures. En outre, de l’aveu même des rédacteurs auprès de l’administration fiscale qui ont à traiter de ces procédures, de nombreuses affaires sont négociées dans le cadre d’un ensemble plus vaste de litiges, au cours des réunions souvent biannuelles que les autorités fiscales organisent entre elles. La solution qui en découle relève donc parfois plus de la négociation, ou pour parler de manière plus grivoise, du marchandage de tapis, que de la lettre juridique ou de principes tout aussi nobles.

Enfin, s’il fallait citer un troisième point clivant, rappelons que le contentieux est fort heureusement ouvert à tout point de droit fiscal, là où la plupart des procédures de règlement des différends embrassent un champ d’application plus restreint. Les procédures amiables d’élimination des doubles impositions en Europe sont en effet cantonnées à la seule sphère des prix de transfert ; Les procédures amiables et d’arbitrage contenues dans les conventions internationales sont applicables aux seuls impôts couverts par ces traités. Or, on le sait désormais en France, un contribuable exonéré ou exempté d’impôt ne peut réclamer le bénéfice d’une convention internationale, dans la mesure où le juge de l’impôt estime qu’il ne peut être considéré comme un résident fiscal ; d’autres affaires m’ont également appris que certaines taxes ou impôts au Brésil ne peuvent être soldés que par la voie contentieuse, car ils ne sont pas visés par les traités.

Je suis conscient qu’en délivrant ce court exposé, je ne réponds pas à la question essentielle que j’ai pourtant moi-même posée. Permettez-moi donc de raccrocher un temps la robe et de revêtir l’habit plus conventionnel « d’homme des affaires ». Après tout, un bon fiscaliste doit d’abord et avant tout être à l’écoute de l’économie et des intérêts financiers de ses clients. Une position pragmatique me pousserait donc à encourager le contribuable vers une procédure internationale, plutôt qu’un contentieux, même si nous n’en avons pas fait mention, mais les deux pourraient tout à fait coexister.

En effet, le monde des affaires commande un traitement des différends rapide, quitte même à y laisser quelques deniers. Or, disons-le tout de go, notre système judiciaire ne brille pas par sa hardiesse, ce que la Cour européenne des droits de l’Homme ne manque pas de nous rappeler régulièrement.

Qui plus est, seule une procédure internationale permet de solutionner un litige dans tous les Etats concernés par l’opération en cause.

Enfin, comme rappelé précédemment, ces procédures internationales sont souvent seules garantes de l’élimination effective des doubles impositions, ce qui assure les droits économiques du contribuable, à défaut d’offrir une solution juridique toujours pertinente. Gageons encore que l’élan d’uniformisation (pour ne pas employer le mot d’harmonisation, plus clivant politiquement) renforcera encore davantage l’efficacité de ces procédures, là où les débats les plus récents sur la réforme de la justice effritent encore un peu plus notre système judiciaire, et la voie internationale termine de s’affirmer comme une solution adéquate, à défaut d’être parfaite.
Il y aurait encore tant à dire sur ce beau sujet, mais mes paroles ont certainement déjà mis la patience de l’auditoire à dure épreuve, et je finirais certainement par plagier ce que les éminents fiscalistes présents lors de ce colloque ont déjà exposé avec plus de talent. Je conclurai cependant par une question évidente, qui même si elle nous écarte de nos envies de juridisme, doit pourtant guider toute notre réflexion : au fond, que souhaite notre client ?

1Voir en ce sens deux arrêts du Conseil d’Etat, CE 9-11-2015 n° 370054 et 371132.

(Article paru dans la Revue Fiscalité Internationale, N°1-2020, février 2020, §10.3)

Terence WILHELM
Docteur en droit, Avocat associé CARA Avocats, Lyon

Expert voice: The new preferential regime for patents and related industrial property rights

Posted on December 2, 2019January 22, 2024 by admin1708

Source : www.ieepi.org
IEEPI gives the floor to its experts, today Terence Wilhelm, lawyer and founder of the law firm CARA Société d'Avocats, specializing in international taxation, transfer pricing and intellectual property taxation. He offers us an analysis of :

The new preferential regime applicable to patents and related industrial property rights

Article 37 of the 2019 Finance Act, codified in Article 238 of the General Tax Code, has profoundly modified the French preferential tax regime applicable to patents and certain other inventions. With effect from January 1, 2019, this special arrangement has been brought into line with the recommendations of the OECD, which, as part of its action plan to combat "tax base erosion and profit shifting", enjoins States to make the application of a preferential tax regime conditional on the actual performance of R&D activities and expenditure having directly contributed to the creation of the invention. But while this new system is certainly more attractive, it is also tougher and less flexible.

Why was it necessary to reform the taxation of patents and related inventions?

Our former preferential tax regime, set out in article 39 terdecies of the French General Tax Code, suffered from two major drawbacks. On the one hand, the 15% tax rate applicable to proceeds from the sale and granting of patents and certain other inventions was unattractive compared with some of our European neighbors. Even though it offered real tax savings compared with the standard rate (then 33.33%), it struggled to compete with the Dutch, Irish and Belgian regimes. On the other hand, and above all, it could enable companies to outsource R&D efforts abroad, while benefiting from a reduced tax rate in France. It was this disconnect between the benefit of the preferential regime in one jurisdiction and the deduction of R&D costs in another that was highlighted by the OECD as part of its work to combat so-called "harmful" tax practices, i.e. those that created a situation of harmful tax competition between countries. As a result, the OECD singled out the French system for criticism, on the grounds that it did not make the benefit of the preferential tax regime conditional on incurring the R&D expenditure that led to the creation of the invention. Admittedly, many of our partners were in the same situation. But they reacted before we did, by revising their preferential tax regime to focus on patents and similar inventions, and above all by integrating the "nexus" approach.

We often hear the term "nexus", so what exactly is it?

Rather than "nexus", we could refer to the "link theory". Behind this mystical formula lies the imperative need to correlate the benefit of a preferential tax regime with the fact that, in the same State and by the same taxpayer, the efforts which led to the development of the asset or operation which is the subject of this preferential tax regime must be borne. To put it more simplistically, the nexus is the weapon that the OECD has drawn against "letterbox" companies, the empty shells that have flourished in certain countries where intangible assets (mainly patents and trademarks) were housed to benefit from the preferential tax regime applicable in that country, without any or very little R&D expenditure having been incurred. The aim of many tax schemes was to house R&D activities in high-tax countries, with minimal remuneration; and once the patent or trademark had been exploited, to transfer the proceeds of sale or concession to an owner established in a lower-tax country. The operation was thus optimal: costs were incurred in high-tax countries, and profits were captured in low-tax countries. The nexus ratio aims to combat this disconnect by introducing a tax liability ratio into preferential tax regimes. Under the French system set out in Article 238 of the General Tax Code, this ratio is equal to R&D expenditure incurred directly by the company or subcontracted to unrelated companies, divided by total R&D expenditure (including any subcontracted to companies in the same group, even though these are not included in the numerator).

Apart from this nexus ratio, are there any other changes compared with the previous preferential regime?

Because it is international in nature, the nexus ratio has tended to focus attention on itself, overshadowing the other changes introduced by the Finance Act. But in reality, more than a simple tidying-up, it is a real overhaul of our preferential tax regime that has taken place. In fact, the former article containing it (Article 39 terdecies of the French General Tax Code) has not just been amended. It has been gutted and a new article has been specially drafted in the code to contain this preferential regime, namely article 238.
Firstly, the scope of application has been modified. Eligible rights still include patents, patentable inventions, plant breeders' rights and improvements to patented inventions. But there's a new addition to the list: software. From now on, the use of software will also be eligible for preferential tax treatment. The idea behind the law was clearly to make France a land of welcome for companies whose purpose is to develop and market software, a sector which is booming.
The calculation of the proceeds from the transfer or concession has also been modified. Firstly, a net result must be calculated, by subtracting all R&D, maintenance and other costs from the results (royalties received, for example); secondly, this net result must be weighted in relation to the taxable income ratio, the famous "nexus".
Lastly, the tax rate has been reduced to 10%, compared with 15% previously (excluding social security contributions for individual taxpayers), to bring France back into line with the European average and prevent it from being left behind in the race for tax competition.

So what are we to make of this new preferential tax regime?

To be perfectly frank, I'm still perplexed, and for the time being my analysis is dominated by disappointment. First of all, the scope of application: before the law was finally drafted, Bercy published a survey in which participants were asked to choose between three options. One of these was to extend the preferential tax regime to a portion of the income earned by companies that market their own products incorporating patents, patentable inventions, VOCs or any other assets falling within the scope, without these assets giving rise to a transfer or concession. The idea was to calculate a kind of "notional income", subtracted from the sale price of the products, and tax this portion at the reduced 10% rate. Instead of this option, the legislator preferred to extend the preferential tax regime to software, which until then had been treated like any other asset for tax purposes, and therefore did not benefit from any particularly favorable treatment. In my view, this is a mistake. Firstly, the current text is cruelly lacking in clarity. It makes application of the regime conditional on software being "protected by copyright", i.e. necessarily linked to a degree of inventiveness. However, as we know from research tax credit applications, this notion of inventiveness is very often undermined. Either all software is inventive, or none at all! The borderline is very blurred. Secondly, the administrative instruction published this summer casts doubt on the products linked to the use of software that could be taxed at the reduced rate. It's confusing. Finally, companies that exploit their own inventions and integrate them into their products will have to set up concession schemes in order to benefit from the preferential tax regime. Not only can such structuring prove cumbersome and costly for some modest-sized companies, but such a project is bound to be essentially fiscal in nature, and therefore bordering on abuse of rights.
Implementing the preferential tax regime also promises to be complex. It entails a twofold obligation: firstly, to file declarations, and secondly, to provide documentation. Every year, the taxpayer will have to append to his income tax return a document summarizing his calculations to determine the amount of net income taxed at the reduced rate. These calculations appear to be relatively complex when you read the instructions, and any error will necessarily be paid for in cash. In addition to this declaration, the taxpayer will also have to provide the tax authorities with a more comprehensive report, detailing the scheme, the assets exploited, the origin and nature of R&D costs, etc. These reports, if added to those already prepared for the CIR or to comply with transfer pricing obligations, will only add to the burden of formal obligations which are already excessive in France.
Finally, while the 10% tax rate is in line with the European average, it should be remembered that social security contributions are added to this, bringing the effective tax rate to 27.2% for individuals. In my opinion, there is little or no point in activating this tax regime, which is only favorable in name, for individual inventors.

So it's a failure...

No, I clearly wouldn't be so abrupt. The text will evolve in line with the final administrative instructions, which have yet to be published and which will be fuelled by the call for comments issued by the tax authorities this summer, and which will run until mid-September. It should also be remembered that France enjoys a real tradition of tax attractiveness when it comes to innovation and research and development. Look at the CIR, the CII - these are real success stories, which other countries have subsequently tried to replicate. We need to give this new preferential tax regime a chance, as it has the advantage of attempting to align with foreign regimes and thus move towards standardization, and perhaps even ultimately harmonization in Europe. It should also reinvigorate the software and digital sectors in general, offering real opportunities for optimization to players who until now have not been concerned. Just imagine, for some, the tax rate could drop from 33.33% to 10%!

What does this mean for companies with intellectual property?

This sends out a very strong message to businesses. Behind this new preferential tax regime lies an underlying trend that affects intellectual property more generally and its tax treatment. In fact, this regime, which is the result of an OECD initiative, is in line with other work by this organization, which in particular advocates a gradual shift in recognition, for tax purposes, from legal ownership to so-called "economic" ownership. The owner in the tax sense - i.e., the person legitimately entitled to receive the proceeds from the exploitation of intellectual property - would not be the person registered as such, but rather the person who performs the essential functions that have made it possible to develop, improve, maintain, protect and exploit this intellectual property. In other words, the schemes we've seen flourish in recent years, whereby intellectual property is placed in the hands of an entity based in Luxembourg, Belgium, the Netherlands, or even more exotic territories, without any activity actually being carried out there, have come to an end and are now condemned. These preferential tax regimes therefore call for a wide-ranging reflection on the legitimate location of intellectual property, and hence the applicability of these preferential tax regimes. For if no R&D activity is carried out in the countries I have just mentioned, then no preferential tax regime should be applicable by the same token. These tax structures would then no longer be of any interest, and on the contrary would expose the taxpayer to a high risk of rectification. I therefore actively advocate greater interaction between IP experts and tax specialists, to secure IP-related schemes and protect the economic and tax interests of inventors. Of course, this may involve some analytical work upstream of any transaction, but the tax savings - which can be quite substantial! - is well worth the effort.

(interview published on the IEEPI website on 18.11.2019)

Transfer pricing: never take the Belgians for Brel! (comparative law treats from Belgium and France)

Posted on April 11, 2019January 22, 2024 by admin1708

Our article could begin like a Belgian story: "Two tax experts walk into a room, one French, the other Belgian". Unfortunately, the wind of reform blowing through the OECD since the start of its so-called "BEPS" project has silenced the laughter. Now is the time for analysis and anticipation, not jokes. Let's face it: there's no kidding around with tax adjustments that could bring down an entire business model, based on concepts now widely shared by tax authorities everywhere. Even the Cayman Islands are on board. What a joke!

The rapid publication of the OECD's initiatives, broken down into 15 concrete actions, has - it has to be said - created a real buzz. Everyone has their own opinion and interpretation. But all agree that international taxation, as it has been practiced for decades, needs to undergo a revolution. Revolution is the right word: in France, we're well placed to know that the phenomenon never goes smoothly, and that ignorance of the basic issues at stake is a breeding ground for antinomian versions of history.

Our Belgian neighbors, hitherto rather quiet on the subject, have acted far more wisely. In response to the ebullition of practitioners, the administration recently issued a draft circular with 11 chapters and no fewer than 50 pages. Published in the country's two official languages and made public on November 9, the draft aims to clarify the basic concepts of transfer pricing and related issues, such as permanent establishments and mutual agreement procedures. It also summarizes the OECD principles and offers a welcome insight into the methods and terminology often used by practitioners, such as "PLI", "Cost Plus" and other such gimmicks.

The initiative is to be welcomed. It was high time that a government department ventured to clearly state its position and interpretation of the workings of transfer pricing. Admittedly, the circular is only at the draft stage, and will undoubtedly undergo a number of modifications. Even when finalized, it will only have the value of doctrine, and as such will have a limited place in the hierarchy of norms and the legitimate quest for legal certainty. Admittedly, this circular will only be binding on the Belgian tax authorities, and as such should not lead us to draw any direct conclusions on our French transfer pricing regulations. Let's face it, the present article is limited in scope, if only to satisfy our desire to write.

However, it is interesting to note the positions taken by the Belgian tax authorities on points that are still the subject of debate in France, or that are fuelling a long-running dispute. We have no doubt that good ideas often lead to others, and it is likely that the best-informed opinions of the Belgian tax authorities will prompt us to revise or reinforce our positions on the same subjects.

"The best market is the most expensive

This old Belgian saying will soon be a thing of the past. Indeed, the draft circular immediately begins its first chapter by setting out and explaining the arm's length principle. To the OECD's sibylline formulas without punctuation, the Belgian administration strikes back with simplicity - a resolutely Belgian quality - and states: this concept "stipulates that in their financial and commercial transactions, related enterprises are required to act as if they were unrelated. If they agree to terms that deviate from the terms that unrelated companies could agree to, the transfer price can be adapted " ².

After outlining the factors of comparability for assessing the relevance of independent transactions, there is one point that is of particular interest to legal experts. The draft circular states that "the determination of a transfer price is based on the analysis of existing contracts concluded between related companies concerning inter-company transactions. The contracts are supposed to express what the functional analysis finds. Otherwise, the behavior of the parties involved in the transaction takes precedence, and contractual provisions are disregarded" ³.

In so doing, the Belgian administration seems to be siding with Anglo-Saxon theories, which relegate contracts to the rank of mere presumption. It should be remembered that Belgian law, which has its roots in the same sources as our own, is first and foremost a written law. Contracts play a key role in the entire legal architecture, and the specificity of tax law is unmistakable.

Admittedly, in French law, the tax judge has long given the administration the right to requalify the intentions of the parties in order to restore the fair value of a transaction ⁴. But requalification is not the same as eviction, and the administration must therefore take into account the existence of the legal act. To disregard the contract, as suggested by its Belgian counterpart, the administration would still have to implement the special procedure for abuse of rights. This boundary between requalification and eviction seems to be blithely crossed in the draft circular, to give precedence to substance over form, or to the actual behavior of the parties over contractual appearance. Will the French position, steeped in written law, hold for much longer?

The treatment of subsidies and tax credits in the calculation of transfer prices

The other element that caught our attention is discreetly tucked away in a "Miscellaneous" section at the very end of the chapter. This deals with the treatment of "subsidies received" and their inclusion in the calculation of remuneration, the arm's length nature of which must be tested. These "subsidies" include both grants and tax credits or reductions. The subject is sure to arouse the curiosity of French practitioners, so reminiscent is it of the stir caused by the "Philipps" decision handed down by the Versailles Court of Appeal ⁵ and upheld by the Conseil d'Etat ⁶.

In this case, Philips France carried on a research activity for which it received subsidies from the French government's Fonds de Compétitivité des Entreprises, as well as research tax credits. Philips France entered into a "General Services Agreement" with its parent company, under which it undertook to transfer to the latter ownership of the unpatentable intangible rights resulting from its aforementioned research activity, at a price equal to the cost price of the corresponding operations, plus 10%. During the audit, the French tax authorities noted that, for the purposes of applying the contract, Philips France had deducted the amount of subsidies received from the French government and the research tax credit from which it benefited, in order to determine the cost price of the intangible assets transferred to its parent company, before applying the 10% mark-up to arrive at the price invoiced to the latter. Taking the view that this deduction led to an indirect transfer of profits abroad within the meaning of Article 57 of the French General Tax Code, the tax authorities increased the company's income by the amount of these subsidies and tax credits added back to the cost price used to determine the sale price.

The question was therefore whether the company could validly subtract from the base on which the margin was calculated the sums received under the preferential schemes applicable in France. In so doing, the method led to a significant reduction in the cost base, and thus to the 10% margin being relegated to a tiny fraction. The company's main argument - skilfully defended, it must be admitted - was that the benefits received were a reward for the investment and research effort attributed to any taxpayer falling within the scope, and should therefore not tarnish the subject of transfer pricing, which is in fact disconnected from these regimes. In order to draw the consequences from one subject to the other, the tax authorities would have had to demonstrate that independent third parties were passing on the effects of the preferential treatment in their pricing. The argument was successful, and the tax judge of last resort cut short the administration's attempts.

The subject would have deserved a better fate, had the administration's defense been different and divorced from the eternal burden of proof. In any case, the Belgian administration has shown fewer qualms, by directly ruling on the subject: "Subsidies are deducted from the cost/sales base, if there is a direct link between the subsidy and the production/sales of the product or the provision of the service. If there is no direct link between the subsidy and the production/sales of the product or the provision of the service, the subsidies are not deducted from the cost base. Tax deductions are not deducted from the cost base. An investment allowance, for example, is not deducted from the cost base" ⁷.

In so doing, the Belgian tax authorities have adopted a clear and unequivocal stance, at odds with the French tax judge. The service can always console itself with the thought that the decision would have been in its favor had the case been decided in the land of Jacques Brel.

France and Belgium share the same view of transfer pricing methods

The second chapter of the draft circular is devoted to transfer pricing methods. The document provides a clear explanation of each of them. These developments may be supplemented by the guide prepared by the DVNI in its day ⁸, whose illustrations still enlighten the layman today, even more than 10 years after its publication.

In describing the cost-plus pricing method, the Belgian authorities take a position on the cost base subject to remuneration, and more specifically on variations in this base. Indeed, it is common in the life of a company to experience sometimes significant fluctuations between its initial projections and the actual landing of its performance. In this respect, the draft circular offers a double perspective.

Firstly, the document points out that, in practice, transfer prices are generally predetermined on the basis of budgeted costs. The Belgian administration therefore indicates that it will monitor the impact on the transaction of the use of budgeted costs, as well as the difference between these costs and actual costs, and the sustainability over time of the type of costs (budgeted or actual) chosen. It specifies: "adjustments will be possible if the actual expenses associated with the transactions are systematically higher than the budgeted costs, or if the use of budgeted costs does not enable the cost base to be brought into line with an arm's length cost base " ⁹.

Semantics are important, as they call for a certain degree of flexibility on the part of inspectors during control operations. Calling for the systematic calibration of transfer prices on the basis of actual data supplied by accounting firms not only requires an additional effort on the part of companies, but also raises the question of the nature and timing of the adjustment to be made. Every year, at the end of the financial year, a microcosm of accountants, auditors and financiers is stirred up to decide how to deal with this adjustment, whether to correct the accounts for the financial year, or enter a credit note or additional invoice for the following year (without raising the VAT and inventory value issues associated with these gesticulations!) The position currently adopted by the Belgian tax authorities means that this issue can be ignored, as long as it remains marginal and not systematic.

Secondly and more importantly, the circular offers an interesting perspective on the slippage observed in cost bases. It explains that "It is generally accepted that higher costs due to inefficiencies are borne by the company supplying the goods or services, since it is this company that is in a position to influence the magnitude of the costs in question. In this situation, an independent buyer will not accept any price adjustments".

By making each player in the value chain accountable, the document deals a serious blow to the tendency observed in the administration (particularly in France) to consider that as soon as the tested entity takes on a routine profile, it should be protected against the risk of losses and systematically generate a margin on these costs. As if, in the real economic world, an independent player would accept that his supplier let his costs slip, only to charge him back shamelessly.

This common-sense stance is reminiscent of an unfortunately little-known decision of principle handed down by the Versailles Court of Appeal, which we have already commented on in another life. The decision, handed down following the adjustments claimed from the Unilever ¹⁰ group, led to the same consequences, by enshrining the fact that the costs of inefficiency should not be borne by the party who did not cause them.

In this case, Astra Calvé, which later became Unilever France, produced margarines in its four factories throughout France. Sales were made to a Belgian group company (an astonishing coincidence) on the basis of the price-plus-10% method. This margin was applied to the capital invested in production, as calculated on the basis of a normal production rate observed in other similar plants. However, the margarine plant was experiencing serious efficiency problems, due in particular to the obsolescence of certain equipment, but also to other intrinsic factors. In practice, the implementation of these factors was causing production costs to soar well above projected expenses that the apparently comfortable 10% margin was not enough to offset operating losses. The tax authorities, anxious to ensure that the negotiated margin prevailed, considered it appropriate to include all costs incurred, including those linked to the plant's inefficiency, in the cost base. The tax judge took a different stance, rejecting the department's claims and returning the plant to its responsibilities of good management.

Along the way, it is interesting to note that this intellectual approach, although rational, had to wait for the recent work of the OECD to remind us that every economic player must bear the consequences of the risks he incurs, provided he concentrates the material, human and financial resources to control these risks. In this respect, the draft Belgian circular simply embodies this concept, while laying down a common-sense principle that the administration will henceforth have to adhere to. Let's hope that it transpires beyond the border!

Comparability analysis in focus

The third chapter of the draft circular focuses on comparability analysis, which is placed at the heart of any demonstration of the arm's length nature of transfer pricing. The document cuts short any hesitation right from the introduction: "Comparability analysis is important for all transfer pricing methods used to assess whether related transactions comply with the arm's length principle and therefore with market conditions. It forms the basis for any justification of the transfer prices used " ¹¹.

Let's take a moment to consider this trend, which aims to position the search for comparables as the keystone of the dialectic of proof in transfer pricing matters. On the French side, this approach seems to be the result of a cross-fertilization between the French tax authorities and a section of the legal profession, which, by dint of its focus on the economic sphere, has forgotten that the demonstration of an abnormality is first and foremost a matter of legalism, which the specificity of tax law cannot erase. Let's put it bluntly: transfer pricing is a legal issue. Admittedly, it is based on concepts borrowed from economics and finance. However, it cannot avoid the most basic concepts of our law, particularly civil law.

With this premise in mind, the fourth and final paragraph of Article 57 of the French General Tax Code stipulates that only "in the absence of precise information for making the required adjustments" is taxable income determined by comparison with that of similar businesses operating normally. In other words, comparability analysis is merely an alternative method for the tax authorities, who are initially invited to make adjustments by any means. Take, for example, a contract between two companies belonging to the same group, providing for remuneration that exceeds the levels produced by comparable companies. Unless it can be shown that there is a significant imbalance between the parties (another legal concept borrowed from contract law, by the way!), the contract remains enforceable against the tax authorities, who should therefore be able to demand performance of the contract independently of any economic analysis. It should be noted that this subsidiarity of comparable research was still reflected, albeit in a very prudish way, in the former article L13AA of the Livre des procédures fiscales, which required the production of such studies "only if the method so requires" (in other words, the method used to determine transfer prices).

Today, the quasi-automaticity of the search for comparables is reiterated by the tax judge, who quotes over and over again his now widely-repeated recital: "When it finds that the prices charged by a company established in France to a related foreign company are lower than those charged by similar companies operating normally, i.e. at arm's length, the tax authorities must be considered to have established the existence of an advantage which they are entitled to reintegrate into the results of the French company, unless the latter can justify that this advantage had at least equivalent counterparts for it. In the absence of such a comparison, however, the tax authority is not entitled to invoke the presumption of profit transfer thus established, but must, in order to demonstrate that a company has granted a liberality by invoicing services at an insufficient price, establish the existence of an unjustified difference between the agreed price and the market value of the asset transferred or the service rendered " ¹².

That's all it took for the French administration to follow suit. In its recent instruction on the new vintage of the documentary obligation, the French tax authorities unashamedly affirm the imperative need to produce a comparability analysis. It states unequivocally that "A detailed comparability analysis and functional analysis of the company and its associates should be prepared for each category of transaction, reflecting any changes from previous years. For each category of transactions, the comparability analysis describes the company's remuneration conditions, justifying any differences with those of independent companies " ¹³.

So, of course, the very principle of arm's length requires us to behave like third-party companies. It's a shortcut to consider that comparability analysis is at the heart of any transfer pricing study. But the desire to compare everything erases the specificities or factors, exogenous or endogenous, which act as vectors of value. As surely as Narcissus met his doom, the search for one's own reflection is not always virtuous.

A Vademecum of comparability analysis

These considerations aside, the draft circular outlines what could be a reliable search for comparables from the Belgian point of view. The approach is commendable, if we consider that it pursues the objective of legal certainty by limiting errant interpretations and disputes between technicians. However, it fails to address the specificities of each situation, which may call for alternative approaches. Above all, by asserting a Belgian model, it leads to the de facto exclusion of research carried out abroad (particularly if the tested party is located outside Belgian territory) and which could be based on other criteria.

For example, the draft circular adds to the OECD's recommendations on the use of multi-year data. The guidelines state: "The examination of multi-year data is often useful in a comparability analysis, but it is not a systematic requirement. Multi-year data should be used where it improves the transfer pricing analysis. There is no need to set standards for the number of years to be covered by multi-year analyses " ¹⁴. The Belgian administration, however, goes further and considers that "at least 3 years should be considered in the analysis of comparables " ¹⁵. In practice, this also corresponds to the approach commonly applied by the French administration, which tends to favor the use of a three-year period preceding the year of the audited financial year.

But as is often the case, the devil is in the detail, and the key point is hidden in the second part of the sentence. The project continues: "On the other hand, in the part to be tested, the data is logically limited to that relating to the transaction examined for a given year".

This assertion seems surprising to us, even if we have to admit that it echoes the usual practices of the French administration too. Indeed, how can we reconcile the principle of the independence of fiscal years and the right of recovery (of three years in both countries, barring exceptions) with this necessarily arbitrary approach? The approach would not capture the exogenous economic effects potentially observable in a particular year, the effects of which would be smoothed out (and therefore attenuated) if a range of years had to be systematically employed.

If the French authorities were to take such a step, we believe that a 2009 decision by the Versailles Administrative Court could prevent them from doing so. In the "Man camions et bus" case, the tax judge rejected the Minister's claims, ruling that by neglecting the preponderance of the presence of an economic player like Renault on the French market, and by focusing on pan-European references, the administration had failed in the dialectic of proof incumbent on ^it16. By extension, it can be considered that by not sufficiently capturing the economic factors affecting the market in a particular year, the comparability analysis would necessarily be flawed.

Another point of attention is the origin of the references selected as a result of the search for comparables. Here, the Belgian administration is more courageous than its French counterpart, taking a clear stand. Thus, when looking for so-called "external" comparables, the draft circular states: "The Administration accepts pan-European studies, preferably based on the 15 EU countries that were part of it before its enlargement in 2014" ¹⁷.

Clearly, in accordance with Community law, the tax authorities cannot display a national preference by demanding the use of comparables that are necessarily domestic. It would have been an outrage to see the Belgian administration sanctioned by the Brussels judges! But the use of comparables from the Europe of 27 does not seem relevant to us either, given the significant market differences between member countries. For our part, we subscribe to this position, subject to taking into account any specificities of each sector, as highlighted by the "Man" ruling mentioned above.

Haro on losses!

In the same chapter, the tax authorities state bluntly: "With regard to comparables in the intervening period, the tax authorities will not accept any company that has had two or more loss-making years " ¹⁸. While this postulate is clearly in line with a trend widely shared by auditors in both countries, it seems to us no less contrary to the most elementary economic and fiscal concepts.

It's worth remembering that the vagaries of economic cycles can unfortunately lead to chronic losses. Our administrations know this better than anyone else: what can we say about countries such as Belgium and France, which have been in deficit for so long that they almost seem to wallow in it? In this environment, it seems absurd to ask economic players to adopt a financial stance that governments have long since renounced.

What's more, certain economic sectors or market strategies require major investments to be made in the hope of producing more virtuous returns in the future. This is the very essence of entrepreneurship. Suggesting the rejection of loss-making companies therefore runs the risk of capturing only players situated on a potentially different level of the economic and commercial cycle than the audited taxpayer. In so doing, the approach ignores a fundamental element of comparability analysis, namely corporate strategy, which is one of the OECD's five basic ^criteria19. What's more, this approach would send back to the taxpayer a smooth, inaccurate and therefore distorted reflection of a company that is necessarily virtuous and shielded from the vagaries of the market. Needless to say, this state of grace has no basis in reality.

From a legal point of view, it should be remembered that nowhere in positive law is there any reference to a prohibition on making losses for two years or more. On the contrary, our carry-forward mechanisms implicitly but necessarily validate the possibility of a taxpayer making a loss. So it's a delicate matter to deny under transfer pricing what tax law validates in other circumstances.

Above all, the exclusion of loss-making companies from comparable panels would in practice mean depriving the audited taxpayer of a freedom offered to independent third-party companies. In so doing, the very principle of arm's length competition would be shattered, given the obvious difference in treatment that the situation would entail.

This scent of iniquity is reminiscent of previous, well-founded discussions which, on the subject of so-called "implicit" guarantees arising from membership of a group, led to the remuneration of a transaction that was simply induced and that third-party companies could not possibly know about. The French judge cut short the discussion in a landmark ruling by the Bordeaux Administrative Court ²⁰, the recital of which was taken up shortly afterwards by the Conseil d'Etat ²¹. In these rulings dealing with the "halo effect", the solution was unequivocal: one cannot set up against a related taxpayer what one disregards in an arm's length environment.

Last but not least, there is now a well-established body of French case law to the effect that operating losses are not in themselves sufficient to demonstrate an indirect transfer of profits for transfer pricing purposes ^22.

For once, then, law and economics are on the same wavelength, arguing in favor of a strong mitigation, if not outright rejection, of the Belgian administration's approach of rejecting comparable companies with two years of losses. On the French side, we believe that the taxpayer has the necessary weapons at his disposal to counter an identical stance, even if adopted by the auditors.

Welcome explanations of today's controversial issues

A welcome initiative: the draft circular sets out to explain recent OECD developments in the most contemporary and scrutinized areas, namely intra-group services, intangible assets and financial relationships between affiliated companies. These three topics alone take up almost half the report.

Unofficial statistics derived from observation in the field tend to show that these types of transactions regularly occupy the attention of the auditing departments, and therefore naturally account for the bulk of the adjustments notified. As we are wont to say, although the subject matter is not particularly complex, transfer pricing services are often the cream of the crop when it comes to transfer pricing. How many groups fail to deduct shareholder costs from the base to be re-invoiced to subsidiaries, or to describe in detail the benefits provided to debtor subsidiaries?

On this point, the draft circular specifies how to handle so-called "low value-added" services, which should significantly lighten the documentary and supporting burden on taxpayers concerned by these flows.

Government attention to intangible asset and cash flow transactions is more a reflection of the times. The former echoes the nature of our modern economy, and the fact that key success factors are now almost exclusively embodied in intangible elements. The latter are the continuation of a political movement that began in the wake of the 2008 crisis, which pointed an accusing finger at finance and the abuses that can result from intelligently thought-out capital movements within integrated institutions such as business groups.

As far as intangible assets are concerned, once again Belgium is distancing itself from its culture of written law, in order to adopt the Anglo-Saxon theses that permeate the new OECD principles. Notably, with regard to the qualification of intangible assets, the administration announces: "It has been explicitly chosen not to adhere to the accounting standards that apply to intangible assets. An intangible asset therefore does not always have to be expressed in the entity's annual financial statements in order to be entitled to remuneration for its use or disposal. Nor does an intangible asset have to be protected by law in order to claim remuneration for its use or disposal" ²³. In so doing, the Belgian administration is moving more towards the notion of intangible "element", which voluntarily no longer echoes a right, the contours of which are more certain and the qualification assumed. This thesis refers back to the famous "something of value" developed by American theorists, which escapes any accounting or legal definition, and which reflects the idea of an intangible element that carries value. In a way, this notion refers to the "goodwill" already familiar to appraisers.

For the time being, this step has not been taken by our French tax authorities, and even less so by tax judges. Our attachment to written law, from which stems the need to be able to qualify the flow in order to apply the appropriate tax treatment, permeates our legal system, even if it means, unfortunately, that our tax authorities have a difficult task to perform, to say the least.

In the same way, the Belgian administration is moving away from legal ownership of intangible assets to emphasize economic ownership, reflected in the performance and control of essential functions known as "DEMPE " ²⁴. In this way, the contract, like the title deed, would be no more than a bundle of clues, which operational reality could lead us to disregard. Here again, if the same system were to be replicated in France, we might well wonder how it would fit in with our own article L64 of the Livre des procédures fiscales, which only allows a contract to be completely disregarded in the very limited context of an abuse of rights.

Another significant development is that the Belgian tax authorities have adopted the OECD's "ex-post" approach. This approach allows tax authorities to reassess the value of an intangible item when it has been the subject of a transaction, and the circumstances that led to the valuation have changed significantly in subsequent years. Here again, this approach runs counter to eminent concepts of written law, namely the intangibility and force of contract. In our civil law, the contract is formed and becomes immutable when there is agreement on the thing and on the price, unless of course it can be demonstrated after the fact that there has been a manifest error as to the cause or object, or an imbalance in the obligations of the parties.

Above all, this ex-post approach enables the tax authorities to extend the recovery period. The draft circular discreetly states: "In the context of the good faith execution of the relevant double taxation agreements, the tax administration will proceed, at the latest 7 years after the closing of the accounting period of the disposal of an intangible asset, to an adjustment of the transfer price in accordance with the principles described above " ²⁵.

In France, the tax judge has ruled that the price cannot be re-evaluated by the administration years after the transaction, on the grounds that the value of the brand has changed due to market developments. ²⁶ The very essence of the economy is random, and the taxpayer would be hard-pressed to anticipate its volatility! In the absence of a crystal ball, taxpayers cannot always predict the success or failure of their operations. The emergence of a new patent or a competing brand can undermine the value of these elements, and therefore the intrinsic value reflected in the sale or concession price. This approach, which may seem outdated in the light of OECD developments, in our view ensures a higher degree of legal certainty, by limiting the trade-in period to its ordinary law period, and by protecting the binding force of contracts.

Finally, with regard to financial transactions, the draft circular provides a number of elements that the tax authorities will take into account when processing files involving such transactions. Chapter X deals successively with intra-group loans, the provision of intra-group guarantees for loans, and treasury agreements. The central notion of "rating" (or credit rating), which is involved in the analysis of all these flows, is also clarified in the very first sections. On this point, the Belgian tax authorities endorse the OECD's position, de facto rejecting the notion of "halo", which the French tax judge has already had occasion to deal with. The draft document confirms: "It should also be borne in mind that no compensation should be paid for the implicit guarantee " ²⁷.

This chapter shows that the Belgian administration has adopted the OECD principles and encourages a sequential approach when determining the arm's length nature of a financial flow. In this context, access to specialized databases will be more than necessary. However, as the subjective element in these transactions is limited, the analysis should be facilitated by the same effect.

In conclusion

The Belgian tax authorities' approach is to be commended. Not only does it clarify a number of essential concepts, it also has the merit of clearly stating the tax authorities' intentions on a number of issues. Our French administration would be well advised to replicate the formula, rather than sowing administrative instructions over the years, the content of which is not always crystal-clear. The fact remains, however, that the circular's clear and marked attachment to the work of the OECD presents a new aspect of Belgian tax law, leaning more towards economic rationality than written law. The document is still at the draft stage. While adjustments will undoubtedly still be made, this ambitious first draft already highlights the future areas of control for both the Belgian and French administrations. Brel sang "quand on a que l'Amour". That was long before BEPS. From now on, transfer pricing taxation is clearly part of the dance!

1/ Article published in Nouvelles Fiscales (Lamy) n°1239, March 1, 2019, courtesy of Wolters Kluwer Group.
2/ Circulaire relative aux prix de transfert, p. 5.
3/ Idem.
4/ See for example CE, July 20, 2007, n°232004.
5/ CAA Versailles, Oct. 11, 2016, n° 14VE02651.
6/ CE, 8ème et 3ème ch. réunies, Sept. 19, 2018, n° 405779.
7/ Circulaire relative aux prix de transfert, p. 7 and 8.
8/ Prix de Transfert, Guide à l'usage des PME, Nov. 2006.
9/ Circulaire relative aux prix de transfert, p. 12.
10/ CAA Versailles, 6ème ch. 5 déc. 2011, n° 10VE02491.
11/ Circulaire relative aux prix de transfert, p. 12.
12/ See eg. CE, 8ème et 3ème ch. réunies, 19 sept. 2018, n° 405779.
13/ BOI-BIC-BASE-80-10-40-20180718, published 18 Jul. 2018, BIC - Base d'imposition - Transfert indirect de bénéfices entre entreprises dépendantes - Obligation documentaire permettant le contrôle des prix de transfert, §430.
14/ OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2017, §3.75.
15/ Circulaire relative aux prix de transfert, p. 18, §83.
16/ CAA Versailles, 3ème ch. 5 mai 2009, n°08VE02411.
17/ Circulaire relative aux prix de transfert, p. 21, §108.
18/ Circulaire relative aux prix de transfert, p. 21, §111.
19/ OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2017, §1.36.
20/ CAA de Bordeaux, 3ème ch. 2 sept. 2014, n° 12BX01182.
21/ CE 9eme et 10ème ch. réunies, 19 juin 2017, n° 392543.
22/ For a recent example, see TA Melun, 3ème ch. 14 juin 2018, n° 1502063.
23/ Circulaire relative aux prix de transfert, p. 21, §137.
24/ OECD acronym for Development, Enhancement, Maintenance, Protection and Operation.
25/ Circulaire relative aux prix de transfert, p. 21, §168.
26/ CE 9ème et 8ème sous-sections réunies, March 16, 1990, n°41059.
27/ Circulaire relative aux prix de transfert, p. 21, §264.

France is world champion...in transfer pricing zeal

Posted on December 26, 2018January 22, 2024 by admin1708

Rarely has the taxpayer been accustomed to such a succession of texts in such close succession. After the 2018 Finance Act had profoundly reshaped the transfer pricing documentary obligation contained in Article L13 AA of the French Tax Procedure Book ⁽²⁾, the Executive published a decree on June 29, 2018 aimed at clarifying many of its provisions ⁽³⁾. In the wake of this, visibly little slowed by summer absences, the administration quickly updated its tax doctrine ⁽⁴⁾. In its zeal, it is interesting to note that it overrode its previous doctrine, which was still applicable to fiscal years opened up to December 31, 2017 and therefore still open to audit.

Transfer pricing: a key target for tax authorities

Let's dispel any doubts: the enthusiasm with which the legislator, the executive and the administration have created and then clarified this documentary obligation, resounds loud and clear as an unequivocal determination to make transfer pricing a priority in future tax audits. Admittedly, the subject was already high on the tax inspectors' shopping list, when, on the occasion of their first visit, they set out the focus of their audits. However, the combined involvement of the various authorities and the speed with which the texts have been published show that the administration expects taxpayers to be able to produce exhaustive documentation for financial years starting on or after January 1, 2018.

Perhaps this overzealousness is a continuation of the work of the Director of the OECD's Centre for Tax Policy and Administration, who initiated the BEPS program and who, it should be remembered, came from the Tax Legislation Directorate. The fact remains that transfer pricing documentation will now be undeniably more time-consuming than it was, and will require efforts and resources for which many companies are not yet prepared.

Doesn't doctrine overstep its role?

And therein lies the rub. As the new article L13 AA of the LPF is based on the OECD model ⁽⁵⁾, French administrative doctrine runs the risk of reformatting, through its numerous clarifications and suggestions for presentation, the spirit that initially inspired the Committee on Fiscal Affairs. Indeed, who can say that the sequence of information now described in the Bofip corresponds to what other countries that have adopted Action 13 of the BEPS plan, sometimes even before France, intend to require of their taxpayers?

Finally, the Bofip attempts to include a few additional items of information that are not included in the law. Such is the case of the "description of the competitive environment" ⁽⁶ ) which, although included in the OECD model, had been dropped from the new version of article L13 AA. The aim was undoubtedly to rectify an unfortunate omission, induced by the hasty preparation of the text of the law. Nonetheless, in doing so, the administrative doctrine is adding to the law, something it is legally prohibited from doing.

The OECD principles integrate the hierarchy of standards

This point will delight those in the legal profession who, along with economists, claim a link with transfer pricing. It is interesting to note that the Bofip makes several express references to the OECD principles.

Until now, administrative doctrine has only cited the OECD principles to clarify the notion of arm's length towards which all intra-group transactions must imperatively aim. Now, the doctrine confirms that the law has been directly borrowed from the work of the OECD. What's more, it confirms that the documentary insights provided by the OECD are just as useful in understanding the underlying principles of article L13 AA. In this way, it can now be asserted without blinking that the OECD principles now occupy a real place in the hierarchy of French standards. This place, which one might be tempted to place at the level of doctrine, would therefore legally allow the guiding principles to be set against the tax authorities, without the latter being able to add to or contravene the law or decrees.

The fantasy of automation

A careful reading of the Bofip (and the decree before it) reveals the level of detail now expected from tax authorities. Documentation, which should have become standardized thanks to the OECD, now takes on an unprecedented dimension in France. What's more, the documentation will have to be regularly updated, and the work will have to be constantly put back on the drawing board.

In this environment, IT tools are emerging to automate and standardize the drafting of Master and Local Files, and to update them regularly. Let's face it: the nature of the information required in these documents, as well as its source and the ability to articulate it, should challenge companies about the realistic options open to them. For the time being, we doubt that a robot can take the place of an expert capable of asking the right questions, gathering information and digesting it intelligently, so as not only to complete the new documentation, but also to avoid putting the company at fault on certain subjects.

Of course, Bofip suggests presenting certain sections in tabular form. This is a commendable proposal, and attempts to lighten the already heavy burden of documentation. However, the matrix presentation of information in no way detracts from the subtlety required to retrieve data and process it efficiently. Indeed, information is very rarely available in its current state, so that a data vacuum cleaner, even one powered by artificial intelligence, cannot replace the functional interviews and the ability to discern the useful from the dangerous that only human analysis can still provide.

Finally, transfer pricing documentation is the opposite of a commodity product. The Master File is intended to circulate among the tax authorities of all countries of establishment, and is the most comprehensive and universal tax profile ever produced. The new dimension embodied by documentation, and the strategic and financial stakes involved, call for the utmost caution. Against the backdrop of automation and digitalization, we believe that the documentation exercise as newly described in the Bofip requires more than ever a personalized approach.

How to manage transfer pricing documentation efficiently

The proportions that the new transfer pricing documentation has taken on should encourage companies to anticipate the preparation of the Master and Local File. It is a fact that this new obligation will add to the already heavy burden of documentary and declaratory constraints on taxpayers.

In practice, we suggest mobilizing in-house resources to conduct interviews, compile information, digest it and cross-reference it with contracts and financial statements. These people will also have to ensure that reports are filed or sent on time, according to the (often different) schedules adopted by the group's countries of establishment.

If preparation is outsourced to external firms, the challenge for them will be to offer quality assistance, controlling budgets in relation to the documentary work done previously, despite the real additional workload induced by this new vintage.

The fact remains, however, that in its bulimic doctrine, the French tax authorities have laid the foundations for extremely comprehensive documentation, perhaps even the most exhaustive in the world. Taxpayers can rest assured that if they are able to produce documentation for French purposes, it will be much easier for them to replicate it for other countries of establishment.

(published in Les Nouvelles Fiscales Lamy, n°1229, October 1, 2018 ¹

(1)Courtesy of Ms. Sabine Dubost, Head of the Droit fiscal et Sociétés collection.
(2) Law 2017-1837 of December 30, 2017, art. 107.
(3) Decree 2018-554 of June 29, 2018.
(4) BOI-BIC-BASE-80-10-40-20180718, published July 18, 2018.
(5) OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2017.
(6) BOI-BIC-BASE-80-10-40-20180718, § 340.

A French paradox: patent taxation lacks inventiveness

Posted on December 26, 2018January 22, 2024 by admin1708

Once again this year, statistics from the World Tourism Organization reassure us on one point: France remains the world's leading tourist destination, far ahead of its European competitors and the United States. Travellers from all over the world come to our roads to admire the architectural wonders that embellish our cities, to taste the diversity of our culinary expertise, or more prosaically, to raid the stores on the beautiful avenues to display the products and brands that make up our dynamic economy. In this respect, let there be no doubt: France remains eminently attractive, thanks to all the intangible elements with which it abounds and which set it apart from other destinations.

But what's true for the tourist, is it equally true for the tax expert? Once he's rid himself of his guidebook and camera, the taxman must face the facts: France has a paradox on its hands. It's a paradox that France trains immensely talented engineers; that it bases its success largely on intangible, distinctive and value-bearing elements; but that it doesn't pamper these elements from a tax point of view. At a time when society is going digital and intangible assets are playing a major role in growth plans, it would be a good idea to offer an attractive environment for those who wish to house their industrial property and make it grow without having to pay the taxman's price.

Is the French preferential tax regime applicable to patent assignments and concessions outdated?

Our preferential tax regime is best known by its code number, "39 terdecies", in reference to the article of the French General Tax Code that refers to it. Its name, which smacks of technocracy, reminds us that it was first introduced in 1965 and has undergone only minor modifications since then.

Under this system, transfers or concessions of patents, patentable inventions, manufacturing processes ancillary thereto and plant breeders' certificates are taxed not at the standard rate, but at the rate applicable to long-term capital gains, i.e. 15% for companies subject to corporation tax, or 12.8% for others.

Let's be frank: in our view, the 39 terdecies mechanism suffers from two major pitfalls. First, its rate. Even when reduced, the current 15% rate applied to companies subject to corporation tax remains high, particularly when compared with those adopted by several of our European partners. With their "knowledge development box", the Irish offer a rate of 6.25%. The Dutch have done even better with their "Innovation box regime", breaking the codes and taxing income from the exploitation of patents and other inventions at 5%. Luxembourg has opted for an abatement approach, taxing a mere 20% of income. The UK has set the bar at 10%. Another way of looking at it is to compare the reduced rate of 15% with the standard rate, which is set to rise to 25% by 2022 for all companies subject to corporation tax. When our rate was still 33.33%, the time lag could give the illusion of a truly attractive rate. Now, the 15% rate means that companies lose "only" 10 points, whereas the countries mentioned above have opted for deeper cuts.

The other stumbling block is the scope of the preferential regime. It currently covers only patents and similar inventions. Admittedly, administrative doctrine and the tax judge have intervened on numerous occasions to extend the list of rights concerned and bend the initial text a little. But the regime is confined to inventions, even in the broadest sense of the term. For the time being, software is not covered, although it benefits from certain more favorable amortization mechanisms, but its exploitation is not particularly favored from a tax point of view. Trademarks, methods and processes (especially biological ones) also escape the French preferential regime ⁽²⁾.

For these reasons, we feel it is necessary to revise our preferential treatment system to bring it fully into line with the global economy of the 21st century. The OECD provides us with a unique opportunity to do so, by laying the foundations over the past few years for a model towards which all preferential treatment schemes should henceforth strive.

The OECD has kicked the tax can down the road

Driven by the twin objectives of consistency and substance, the OECD has laid the foundations for a common-sense approach. In Action 5 of its BEPS program ⁽³⁾, the Organization suggests linking the benefit of preferential regimes offered by countries to the performance of "substantial activities". Without having a clear definition of these activities, it would appear that they include research work leading to an invention. In so doing, the OECD seeks to exclude empty shells whose only merit is to legally hold assets without ever having contributed to their development. Favored tax regimes therefore appear to be the counterpart of real activities, having mobilized concrete human, material and financial resources.

This concept is described as the "nexus approach". Without being chauvinistic, we prefer it to the Anglo-Saxon " nexus" approach, which sounds more like a mystical incantation. According to this approach, the OECD explains: "we examine whether the IP regime makes its benefits dependent on the importance of the research and development activities of the taxpayers who benefit from it. It is inspired by the basic principle that governs R&D credits and similar inbound tax regimes that apply to expenses incurred in the creation of IP. [...] The nexus approach extends this principle to apply on exit to tax regimes that apply to income earned after the IP has been created and exploited" ⁽⁴).

It is interesting to note that the linkage approach is unrelated to the tax rate applied under the preferential regime. Some countries, like our European neighbors, have already modified their domestic regulations to incorporate the nexus approach, while offering very low tax rates. It is therefore essential to make it clear that the OECD's work is not aimed at eliminating tax competition, but simply at rationalizing and structuring it.

In the future, our preferential treatment system will be in line with the OECD recommendations, but could go even further.

In its work on Action 5 of the BEPS program, the OECD set out to analyze the preferential tax regimes of member countries and of the "inclusive framework", in order to detect whether they incorporated the linkage approach. Surprisingly, France has been downgraded. Not that our 39 terdecies regime really contributes to the "harmful tax practices" tracked by the Organization. But its current wording makes no reference to the said substantial activities carried out on our territory, nor does it correlate the reduced rate with the commitment to R&D expenditure.

It was therefore imperative to amend the text of Article 39 terdecies. Seized of the subject, the French National Assembly mandated Bercy's Tax Legislation Directorate, which then launched a public consultation from April 24 to May 25, 2018 on corporate tax reform. Among the subjects studied, the tax regime for intellectual property was at the top of the list.

Immediately, the "DLF" postulates. The reform that will soon see the light of day in the 2019 Finance Act will have to proportion the income benefiting from the reduced tax rate to the level of R&D expenditure carried out. The "link" approach will therefore be enshrined in French law. However, the main purpose of the consultation was to analyze the appropriateness of using the additional room for maneuver provided by the OECD.

This is where the initiative disappoints. There is no reference to a revisited reduced rate, more in line with the practices of our partners. While it is certainly utopian to imagine that our face rate will ever be low, we could have dreamt that it would show a real break with the future common law rate of 25%, if only to create the appearance of attractiveness.

However, several other avenues were being explored to maintain the scheme's efficiency and strengthen its role in supporting business innovation. The DLF puts forward three distinct options. We would have liked them to be complementary.

The first option is to extend the scope of assets eligible for the reduced rate. The new regime could apply to income from the use of software recognized and protected by the French Intellectual Property Code. Option 2 suggests incorporating the notion of notional income. At present, the preferential regime only applies in cases where the invention is transferred or made available. When the patent is simply exploited by the company that originated it, it does not benefit from any preferential treatment. To provide greater support for innovation by companies (especially SMEs), reduced taxation could then be applied to a proportion of the selling price of goods and services corresponding to the value added by the patented innovation. Finally, under Option 3, taxpayers could claim the reduced rate for capital gains on the sale of patents, even within groups.

Admittedly, these options demonstrate a clear willingness on the part of the government to revisit our preferential treatment scheme, going beyond simple refurbishments. Even so, it's hard to resist a touch of pessimism. The reforms envisaged could have gone further, drawing on the work of the OECD, feedback from the business world and feedback from neighboring countries.

At the time of writing, the Government had registered the draft law with the French National Assembly on September 24. It has to be said that, for the time being, it contains very timid advances, and confines itself to transposing the link approach, in addition to extending the regime to software (Option 1 above). This bill, as its name suggests, may still undergo major changes before its final version. So let's try to remain positive. We'll know in the next few months whether France is destined to remain a tourist destination, or whether it is on the way to becoming a tax haven as well.

(article published in Les Nouvelles Fiscales Lamy, n°1233, December 1, 2018 ¹ )

(1) Courtesy of Ms. Sabine Dubost, Head of the Tax and Corporate Law collection.
(2) Bofip n° BOI-BIC-PVMV-20-20-20-20140414, updated April 14, 2014.
(3) Fighting harmful tax practices more effectively, taking into account transparency and substance, final report published in October 2015.
(4) OECD, Final Report on Action 5, 2015, §28, page 28.

New transfer pricing documentation requirements: isn't too much being done?

Posted on August 27, 2018January 22, 2024 by admin1708

Rarely has the taxpayer been accustomed to such a succession of texts in such close succession. After the 2018 Finance Act had profoundly reshaped the transfer pricing documentary obligation contained in Article L13 AA of the French Tax Procedures Book ¹, the Executive published a decree on June 29, 2018 aimed at clarifying many of its provisions ². In the wake, visibly little slowed by summer absences, the administration quickly updated its tax doctrine ³. In its zeal, it's interesting to note that it overrode its previous doctrine, which was still applicable to fiscal years opened up to December 31, 2017 and therefore still open to audit.

Without going back over the June 29 decree, which was the subject of a detailed analysis by Cabinet ⁴, the article below is intended to take a critical look at the new dimension of the transfer pricing documentation requirement.

Transfer pricing: a key target for tax authorities

Let's dispel any doubts: the enthusiasm with which the legislator, the executive and the administration have created, then clarified, even nurtured this documentary obligation, resounds loud and clear as an unequivocal determination to make transfer pricing a priority in future tax audits. Admittedly, transfer pricing was already high on tax inspectors' shopping lists, when they set out their audit priorities on their first visit. However, the combined involvement of the various authorities and the speed with which the texts have been published show that the tax authorities expect French taxpayers to be able to produce exhaustive documentation for financial years starting on or after January 1, 2018.

Perhaps this overzealousness is a continuation of the work of the Director of the OECD's Centre for Tax Policy and Administration, who initiated the BEPS program and who, it should be remembered, is a Frenchman from the Direction de la Législation Fiscale. Optimists, for their part, will believe that these reforms are part of the drive for modernity initiated by the current government, by enabling taxpayers to anticipate well in advance the obligations incumbent upon them. In any case, these reforms should serve as a wake-up call: transfer pricing documentation will undeniably be more tedious than it was before, and will require efforts and resources for which many companies are currently unprepared.

Finally, it should be remembered that these documents are intended to circulate between countries. The European directives of the last two years 5 ^, as well as the multilateral convention resulting from the BEPS project, which came into force last July 6 ^, now ensure a real exchange of information between the tax authorities of over 100 countries. In this truly global environment, transfer pricing documentation has taken on an almost universal dimension, establishing itself as the most comprehensive and advanced tool for drawing up a group's complete tax profile.

Doesn't doctrine overstep its role?

It is worth pointing out that the legal literature provides a number of welcome examples in certain sections, which had previously seemed very cryptic. In this sense, the Bofip fulfills its role perfectly, providing the necessary clarification for the provisions set out in the 2018 Finance Law. It's worth noting the speed with which the administration produced this very rich doctrine (no fewer than 67 paragraphs), enabling French taxpayers to get their act together. In doing so, the administration seems to be breaking with its previous setbacks, which consisted in publishing instructions at the very end of the year, contrary to the obligations they were supposed to clarify.

Thus, a combined reading of the doctrine and the decree that preceded it sheds light on the key activities to be taken into account when describing "significant sources of profit" ⁷, and those forming "the supply chain" and whose description is required in the Master File for "products or services representing more than 5% of the Group's consolidated sales" ⁸.

Similarly, the Bofip provides concrete examples of "major corporate reorganization operations" ⁹. Finally, it clarifies certain terminology, such as the notions of "central financing or treasury" ¹⁰, "financial statements" ¹¹, and "decisions of the tax authorities" ¹² that must be reported in the Masterfile. It remains to be hoped, however, that the other countries which have transposed Action 13 share these definitions, given that the Master File is supposed to be common to all the Group's countries of establishment.

And therein lies the rub. As the new article L13 AA of the LPF is based on the OECD ¹³ model, there is a risk that the French administrative doctrine, with its numerous clarifications and suggestions for presentation, will reformat the spirit that initially inspired the Committee on Fiscal Affairs. Indeed, who can say that the sequence of information now described in the Bofip corresponds to what other countries that have adopted Action 13 of the BEPS plan, sometimes even before France, intend to require of their taxpayers?

Whether in Belgium, Germany or Australia (to name but three), the obligation to produce a two-part documentation package comprising a Master File and a Local File has been in force for over a year. As a result, some French groups have already had to draw up a Master File to comply with the rules applicable in these countries. However, these obligations have retained the ambiguity attached to the OECD's initial wording, enabling flexible, modular responses to be attempted, which could then easily be replicated in all countries. By imposing its own style, the French administration runs the risk of pushing taxpayers to revise Master Files that have already been drafted, simply to satisfy Bercy's agents. The "French touch", though acclaimed in artistic circles, would have been better left out of the tax sphere.

Finally, the Bofip attempts to include a few additional items of information that do not appear in the law. Such is the case of the "description of the competitive environment " ¹⁴ which, although included in the OECD model, had been dropped from the new version of article L13 AA. The aim was undoubtedly to rectify an unfortunate omission resulting from the hasty preparation of the text of the law. Nevertheless, by acting in this way, the administrative doctrine is adding to the law, which is legally prohibited. It would therefore be possible for French taxpayers to dispense with this part without risking the (then illegitimate) wrath of the administration.

Extending transfer pricing to purely domestic flows

The title is evocative and has the merit of capturing the reader's attention. But far from being an invention of the mind, a reading of the updated Bofip throws some light on the issue. Without further clarification, the text states that "The transfer pricing documentation obligation applies to all transactions between associated enterprises".

However, the reference to article L13 AA removes any ambiguity. The law stipulates that companies falling within the scope of the document "must provide the tax authorities with documentation justifying the transfer pricing policy applied in transactions of any kind with related legal entities within the meaning of Article 39(12) of the same Code, established or incorporated outside France " ¹⁵. The OECD principles which also inform this administrative doctrine also expressly target flows between multinational companies. We can therefore state without a shadow of a doubt that documentation should only concern cross-border intra-group transactions. Domestic flows, on the other hand, will continue to fall within the scope of the praetorian theory of the abnormal act of management.

OECD principles earn their spurs

The point will delight legal experts who, along with economists, claim a link with transfer pricing.

It is interesting to note that the Bofip makes several express references to OECD principles. In particular, the doctrine states that "[the] documentation now corresponds to the international standard resulting from the work of the Organisation for Economic Co-operation and Development (OECD) (action 13 of the BEPS plan), as described in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations".

And the Bofip adds: "The recommendations provided for this documentation in the OECD standard apply to the documentation provided for in article L. 13 AA of the LPF". ¹⁶

Until now, administrative doctrine has only cited the OECD principles to clarify the notion of arm's length towards which all intra-group transactions must imperatively aim. Now, the doctrine confirms that the law has been directly borrowed from the work of the OECD. What's more, it confirms that the OECD's documentary insights are just as useful in understanding the underlying principles of article L13 AA.
In this way, it can be stated without hesitation that the OECD principles now occupy a real place in the hierarchy of French standards. This place, which one might be tempted to place at the level of doctrine, would therefore legally allow the guiding principles to be set against the tax authorities, without the latter being able to add to or contravene the law or decrees.

If, however, the question arises as to whether the OECD principles have the same legal value as administrative doctrine, then do they take precedence over case law, which in French law has no place of its own in the hierarchy of norms? The question is worth asking, as the OECD supports certain positions that French tax judges have always opposed. This is particularly true of the impossibility of revising the value of an intangible asset ex post, a position defended by tax judges but which runs counter to the recent work resulting from the BEPS program, which deals specifically with "intangible assets that are difficult to value". For our part, we assert our attachment to legal theses (vs. economists) and take our place behind the late Professor René Chapus, who considered that "administrative jurisdiction is 'infra-legislative and supra-decretal'".

The fantasy of automation

A careful reading of the Bofip (and the decree before it) reveals the level of detail now expected from tax authorities. Documentation, which was to have become standardized thanks to the OECD, has taken on an unprecedented dimension. In passing, we note that the suggestion made by the tax authorities in their previous doctrine that "[the documentation] should therefore remain general in nature (in practice, it is not intended to exceed some fifty pages) " ¹⁷ no longer appears in the new Bofip text. The original sentence has been cleverly reworked to remove any reference to pagination. It's a skilful dodge, given how quickly new documentation can grow in volume.

Indeed, the objective of transparency, which is one of the three pillars of the BEPS project, could in practice lead companies to deploy considerable resources to meet this new obligation.

Insofar as documentation is linked to fiscal years, it needs to be regularly updated, and the work constantly put back on the drawing board. It takes several months to compile and write the documentation, and as soon as the tax year has been completed, you'll have to start all over again for the next tax year. The Sisyphean taxpayer, however, cannot easily evade this obligation, partly because of the associated penalties, and partly because in some countries the documentation must be filed spontaneously (as in Belgium and Australia, for example), or submitted to the tax authorities within a very short time of the request being made.

In France, this documentation is expected as soon as the audit begins. Despite any extensions that may be granted ¹⁸, the content is such that it is difficult to envisage preparing exhaustive documentation in a hurry, after the start of the audit operations.

Of course, Bofip suggests presenting certain sections in tabular form. This is a commendable proposal, and is intended to lighten the already heavy burden of documentation. Examples include the "list of significant service agreements between associated enterprises " ¹⁹, the "list of intangible assets or categories of intangible assets " ²⁰, the "list of significant agreements between associated enterprises relating to intangible assets " ²¹, the "description of significant transactions with associated enterprises and the conditions under which they are carried out " ²², or the "indication of the transfer pricing method " ²³.

However, the matrix presentation of information in no way detracts from the subtlety required to retrieve data and process it efficiently. Indeed, information is very rarely available in its current state, so that a data vacuum cleaner, even one powered by artificial intelligence, cannot replace the functional interviews and the ability to discern the useful from the dangerous that only human analysis can still provide.

Finally, transfer pricing documentation is the opposite of a commodity product. The Masterfile is intended to circulate among the tax authorities of all countries of establishment, making it the most comprehensive and universal operational and tax profile ever produced. The new dimension embodied by documentation, and the strategic and financial stakes involved, call for the utmost caution. Against the backdrop of automation and digitalization, we believe that the documentation exercise as newly described in the Bofip requires more than ever a personalized approach.

How to manage transfer pricing documentation efficiently

The proportions that the new transfer pricing documentation has taken on should encourage companies to anticipate the preparation of the Master and Local File. It's a fact that this new obligation will add to the already heavy burden of documentary and reporting constraints on taxpayers. But the peace of mind required by the new era of transparency called for by governments the world over depends on these efforts.

Things to remember :

► Transfer pricing documentation has taken on unprecedented proportions under the combined efforts of the OECD and tax authorities;
► Far from being a product of convenience, the documentary exercise requires the utmost care. The documentation submitted, and more specifically the Masterfile, describes in great detail the operating procedures and remuneration policies throughout the Group;
► The documentation can now be communicated to all tax authorities in the countries of establishment. It is emerging as the most comprehensive and advanced tool for drawing up a group's complete tax profile;
► Automated tools should be greeted with the utmost caution: while they can generate a document, the nature of the information requested means that, in practice, the content of these reports is likely to be highly controversial;
► On the contrary, we advise dedicating specific resources to this work to ensure that information is properly collected, efficiently transposed, and preserved over time;
► French documentation, because it tends towards the most total exhaustiveness, should nevertheless be able to be easily reproduced abroad and thus fulfill the tax obligations of other countries of establishment.

[1] Law 2017-1837 of December 30, 2017, art. 107.
[2] Decree 2018-554 of June 29, 2018.
[3] BOI-BIC-BASE-80-10-40-20180718, published July 18, 2018.
[4] See "Décret relatif à la documentation des prix de transfert : des précisions bienvenues et quelques zones d'ombre persistantes", Revue Européenne et Internationale de Droit Fiscal, issue 3/2018, forthcoming.
[5] ECOFIN Directives 2018/822/EU and 2011/16/EU on the automatic exchange of information in the field of direct taxation.
[6] Multilateral Convention on the Implementation of Measures Relating to Tax Treaties to Prevent Base Erosion and Profit Shifting.
[7] BOI-BIC-BASE-80-10-40-20180718, § 100.
[8] BOI-BIC-BASE-80-10-40-20180718, § 110.
[9] BOI-BIC-BASE-80-10-40-20180718, § 160.
[10] BOI-BIC-BASE-80-10-40-20180718, § 250.
[11] BOI-BIC-BASE-80-10-40-20180718, § 280.
[12] BOI-BIC-BASE-80-10-40-20180718, § 290.
[13] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2017.
[14] BOI-BIC-BASE-80-10-40-20180718, § 340.
[15] L13 AA, I.
[16] BOI-BIC-BASE-80-10-40-20180718, § 50.
[17] BOI-BIC-BASE-80-10-20-20141117, § 260.
[18] The company may submit a reasoned written request for an extension of the response time, specifying the duration of the extension, which in no case may exceed a total of two months. In this case, it is the responsibility of the administration to inform the company of the decision taken, indicating, if so, the expiry date of the additional period granted. BOI-BIC-BASE-80-10-40-20180718, § 630.
[19] BOI-BIC-BASE-80-10-40-20180718, § 120.
[20] BOI-BIC-BASE-80-10-40-20180718, § 200.
[21] BOI-BIC-BASE-80-10-40-20180718, § 210.
[22] BOI-BIC-BASE-80-10-40-20180718, § 390.
[23] BOI-BIC-BASE-80-10-40-20180718, § 440.

CARA Société d'Avocats becomes a partner of the LOU Rugby

Posted on July 13, 2018January 22, 2024 by admin1708

Because we share the same values of fighting spirit, tactical intelligence, performance and team spirit, CARA Société d'Avocats is proud to become a partner of the LOU Rugby for the 2018/2019 season!
For CARA, rugby embodies on the pitch the commitment we produce for our customers. The LOU naturally emerged as a partner of choice because of its ambition, its humility, and its desire to bring out talent, all qualities that reflect the very DNA of our firm. We look forward to welcoming our customers, service providers and partners to join us this season and support the LOU Rugby with us!

Transfer pricing burden of proof: CARA Société d'Avocats wins an unprecedented victory before the tax judge

Posted on July 4, 2018January 22, 2024 by admin1708

Par une décision du Tribunal administratif de Melun du 17 mai 2018 (non encore publiée), le cabinet CARA Société d’Avocats a obtenu la décharge totale des surplus d’imposition en matière d’impôt sur les sociétés, de cotisation minimale de taxe professionnelle, de cotisation sur la valeur ajoutée des entreprises et des pénalités correspondantes, initialement réclamés à l’issue d’un contrôle fiscal portant en matière de prix de transfert. Plus spécifiquement, le jugement traite de la charge de la preuve qui pèse sur l’administration fiscale et apporte de nouveaux considérants, inédits à notre sens.

Les faits étaient assez classiques et prédisposaient au maintien total des rectifications. En l’espèce, une filiale française d’un groupe américain, dont l’activité consiste à distribuer sur son marché les produits acquis auprès de divers fournisseurs du groupe, affichait un résultat d’exploitation négatif depuis plusieurs années, conduisant à des déficits fiscaux continus jusque sur la période couverte par le contrôle fiscal litigieux. Selon le service, ces pertes récurrentes traduisaient une anormalité dans la politique de prix de transfert appliquée à la société. Pour asseoir ses rectifications, l’administration avait comme très souvent eu recours à la méthode transactionnelle de la marge nette (« TNMM » en anglais) pour tester la marge d’exploitation de la société. Cette marge avait ensuite été mise en perspective de la médiane obtenue d’un panel composé de sociétés indépendantes réputées comparables.

Une première originalité tenait au fait que le panel de comparables utilisé par l’administration n’était autre que celui produit dans la documentation prix de transfert de la société. Le service s’estimait alors légitime à opposer à la société ses propres analyses sans autres forme de démonstration, ni produire de recherches de comparables complémentaires.

Un autre élément insolite tenait au fait que l’administration considérait que le transfert indirect de bénéfice opéré par le truchement des prix de transfert profitait à la société mère américaine, alors même qu’aucune transaction économique ne liait celle-ci à sa filiale française. Le service estimait en effet que la mère, prise en son rôle d’entrepreneur et d’actionnaire principal du groupe, imposait implicitement mais nécessairement les prix de transfert au sein du groupement d’entreprises. Ce faisant, le service postulait que cette société aurait dû « au moins indirectement » profiter de la structuration des politiques tarifaires intragroupes.
Nous avons réussi à emporter la conviction du Rapporteur public, puis plus tard du Tribunal, en soulignant que :

►   La documentation prix de transfert ne saurait conduire à renverser la charge de la preuve sur le contribuable. En effet, l’objet de la documentation prix de transfert est avant tout de produire de l’information pour l’administration fiscale afin de permettre à celle-ci d’appréhender l’environnement économique, opérationnel et fiscal de la société. La documentation prix de transfert ne saurait ainsi soustraire l’administration aux obligations fondamentales qui pèsent sur elle, et en tout premier lieu la charge de la preuve qui lui incombe.

►   Cette charge de la preuve n’est pas remplie lorsque l’administration se focalise sur la marge nette de la société, alors que cette marge vient confondre plusieurs agrégats déconnectés des flux intragroupes. Comme le relève le juge dans son considérant : « l’insuffisance de résultats d’une société peut provenir d’autres facteurs, tels que des charges trop importantes ou des conditions de revente difficiles sur un marché particulièrement concurrentiel ».

►   Enfin, la marge nette de la société consolide diverses transactions intragroupes, de nature et d’origines différentes, de sorte que l’administration aurait dû au préalable, pour identifier la source de l’anormalité qu’elle dénonce, déterminer avec précision quelle transaction présente un caractère de non concurrence.

On regrettera que le juge ne se soit pas prononcé sur la question de savoir si l’existence d’un transfert indirect de bénéfice peut être avéré en l’absence de transaction économique (en l’espèce, au profit de la société américaine). Ceci aurait permis d’obtenir un arrêt de principe bienvenu dans l’environnement juridique des prix de transfert en pleine mutation depuis les initiatives BEPS de l’OCDE.

On se consolera tout de même du fait que cette décision ajoute encore un peu plus à la pesanteur de la charge de la preuve portée par l’administration, et fragilise la démarche pourtant répandue du service consistant à se focaliser sur la marge nette globale des contribuables, sans autre forme d’analyse plus fine. A ce titre, il nous semble que cette décision pourra être opposée à l’administration chaque fois que celle-ci estimera avoir apporté la démonstration d’un transfert de bénéfices en testant la seule marge nette de la société (Retour net sur ventes ou Total Cost plus), quitte même pour elle à recycler les analyses de comparables produites par le groupe.

Ce qu’il faut retenir :

►   La documentation des prix de transfert doit être préparée avec toutes les diligences nécessaires pour permettre, du point de vue du contribuable, de justifier du caractère de pleine concurrence de ses transactions intragroupes. La documentation ne constitue pas pour autant une loi d’airain et ne saurait sans autre forme d’analyse servir de preuve dans un environnement contentieux.

►   La charge de la preuve qui pèse sur l’administration doit conduire celle-ci à opérer toutes les analyses nécessaires pour démontrer une éventuelle anormalité. En recyclant la recherche de comparables du contribuable, sans avoir au préalable recherché si cette recherche était pertinente et adaptée, l’administration a manqué de respecter la charge de la preuve qui pèse sur elle.

►   Cette même charge de la preuve doit conduire l’administration à dissocier les transactions intragroupes dans lesquelles le contribuable est engagé pour déterminer laquelle porte en son sein une éventuelle anormalité. De la même manière, le service ne peut se fonder sur la marge nette sans autre forme de retraitement, dans la mesure où cette marge concentre des agrégats déconnectés des transactions intragroupes litigieuses.