The heatwave that is sweeping the country is also putting a damper on upcoming tax reforms. On Wednesday August 23, ministers met for their first back-to-school council meeting, in particular to draw up the outlines of the Finance Act for 2024. Bercy is struggling to solve a seemingly impossible equation: reducing France's titanic debt, without betraying its promise not to raise taxes.
The first, immediate and easy solution is for auditors to increase the number of tax audits and reassessments. The microsphere of tax experts can testify to this: new, tougher positions are being taken in areas that were previously much less scrutinized, such as payroll tax and financial transactions.
Another, which is becoming increasingly apparent, is to reduce the thresholds for the application of certain documentary and reporting obligations, non-compliance with which attracts mechanical penalties, while at the same time providing the tax authorities with a wealth of welcome financial and economic information with which to define future control strategies. It is against this backdrop that Bercy is seriously exploring the possibility of extending the transfer pricing documentation obligation set out in article L13 AA of the French Tax Code to smaller companies than those currently concerned. As a reminder, this obligation applies:
to companies with sales or gross balance sheet assets in excess of €400 million for the last financial year;
(ii) companies owned, directly or indirectly, by another company exceeding these thresholds;
or (iii) companies that directly or indirectly own such businesses.
Small companies could already fall under this obligation if a vertical reading of the organization chart revealed a direct or indirect holding by an intermediate-sized company. The same applies if a company is part of a tax consolidation group, and one of its members falls within the scope of this obligation. By capillary action, this obligation applies to all members of the tax consolidation group. However, experience has shown that unless a company's name is well known, leaving no doubt that it belongs to a large group, many companies have escaped the documentary fork in the road. Much to the chagrin of good tax management, moreover, as the exercise often makes it possible to point out risks or shortcomings, and thus to correct them ahead of an audit.
However, in order to attract a greater number of companies to this obligation, Bercy is seriously considering lowering the threshold, currently set at €400 million.
One possibility currently under consideration is to raise the threshold to €50 million. This would realign the scope of application with that of the annual electronic declaration of transfer pricing policies (form 2257-SD), which when drafted in 2013, had already aligned its conditions of application with those of the documentary obligation of article L13 AA cited above. In so doing, the aforementioned declaration would become obsolete and redundant, and Bercy could sacrifice it on the altar of lightening the obligations weighing on companies. A fine pirouette that gymnastics fans will appreciate a year before the Olympic Games.
Lowering the threshold will, however, have a number of consequences, which companies not yet subject to the law will need to prepare for.
First and foremost, these companies will need to be able to document exhaustively and in depth the flows of all kinds that they maintain with affiliated companies located abroad, as well as the associated remuneration policies. The task is not an easy one, requiring the recovery, consolidation, review and synthesis of accounting and financial information, as well as contextual and market data, and details of the functions and risks assigned to the parties involved in the transactions.
It is also essential that this information is consistent with the accounting records, the reliable audit trail, but also with sometimes more subtle sources such as those accessible on the Internet. In particular, we have seen rectifications based on mentions on the company's website, or on the Linkedin profiles of its employees, to discredit the functional qualification described in intra-group reports.
In this respect, new taxpayers will be at a disadvantage, as audit teams have had ample time to perfect their transfer pricing documentation review skills during audits of larger companies already subject to transfer pricing.
Secondly, the extension of the documentary obligation should automatically lead to a reduction, or even the disappearance, of the administrative tolerance whereby taxpayers are exempted from drawing up such documentation when intra-group transactions represent less than 100,000 euros per category of flows. While this threshold might seem to reflect insignificant transactions for taxpayers declaring sales of over 400 million euros, the proportionality is no longer the same for companies with sales of 50 million. Documentation of intra-group flows could therefore become necessary from the very first euro of income or expense.
Last but not least, this reform in the making highlights the future areas of control and rectification that the tax authorities will be pursuing. By revisiting the contours of a specific transfer pricing obligation, Bercy is revealing its intention to tighten the noose even further on international business groups and intra-group flows. This is all the more obvious as it is part of the hunt for tax evasion, a legitimate but rather facile witch-hunt that has enabled successive governments to justify their costly economic policies.
Finally, there is no doubt that no transaction will be spared. While flows of goods and services still make up the bulk of transactions, in recent years the tax authorities have developed a particular appetite for financial flows of all kinds (intra-group loans, shareholders' current accounts, treasury agreements, guarantees, etc.) and transactions involving intangible assets (transfers and concessions of trademarks, patents, know-how). The lower thresholds should thus enable the tax authorities to considerably increase the scope of their controls, both in personal terms (the taxpayers concerned) and in material terms (intra-group flows placed under the microscope).
It remains to be seen whether Bercy will have the necessary resources to collect and review all these new reports, or whether, as with form 2257 or the CBCR (country-by-country declaration), this revised documentary obligation will mainly serve to keep private-sector tax specialists busy.
