Anyone who has ever dealt with the National and International Audit Department (DVNI) knows that the inspectors who make up its ranks are meticulous, shrewd, and devious. They are also revealed to be vengeful and resourceful in the ruling handed down by the Orléans Administrative Court, which offers an unexpected twist to the legal saga pitting the ST Microelectronics group against the tax authorities.
For several years now, several subsidiaries of the eponymous group have been subject to tax adjustments conducted under Article 57 of the French General Tax Code (CGI), which until now have all been annulled by the tax judges of the various jurisdictions to which the controlled companies belonged. In all these cases, the facts were identical: French companies in the group engaged in research and development (R&D) activities on behalf of foreign affiliated companies. As such, they paid for their services using the widely proven transfer pricing method known as "cost plus" according to OECD terminology, consisting of re-invoicing the costs incurred by the services, plus a margin, in most cases equal to 7%. Since the French companies were eligible for the research tax credit (CIR), the cost base on which the 7% margin was based was, however, reduced by the amount of the CIR and the subsidies received. During successive audits, the tax authorities challenged this transfer pricing policy, considering that the deduction of the CIR and other subsidies automatically led to sharing the benefit with foreign related entities and therefore to indirectly transferring profits outside France. This strategy was, however, doomed to failure, since it had already been decided and commented on in the past.
Do the same causes necessarily produce the same effects?
In this saga, it was the Montreuil Administrative Court (TA) that first annulled the corrections. In support of its decision, it stated that "the deduction made by a French company, for the determination of the transfer price of the product of its research to be invoiced to a foreign company related to it […], of the subsidies it had received from the State for the financing of the corresponding projects, cannot be considered as allowing, in itself and independently of the level of the transfer price to which this deduction leads by application of the contractual calculation method, to presume the existence of a transfer of profits abroad, within the meaning of Article 57 of the General Tax Code, with the burden on the French company to establish the existence of a consideration."
In doing so, the judge explains to us that the mere fact of deducting the subsidies from the basis of the costs re-invoiced intra-group is not, as such, demonstrative of a liberality granted to the foreign party. In this case, he shifts the subject to the point of knowing whether independent and comparable companies, placed in an equivalent situation, would also have made such a deduction. The recital then becomes unequivocal: "it does not result from the investigation that the panel of companies on the basis of which these [administration's] rates were determined, […] would have made it possible to identify relevant terms of comparison, having regard in particular to the activities carried out, the existence or not of links of dependency, the invoicing of prices net or gross of subsidies as well as the turnover and size of these companies. Having failed to present terms enabling a valid comparison of the prices charged by the company and those charged between independent companies or to propose another alternative method which could replace this comparison, the administration does not provide any evidence which would give rise to a presumption of the existence of the transfer of profits which it invokes.
As surprising as this solution may seem, the Montreuil Administrative Court has not actually invented anything new. It has simply adopted the provisions of the Sté Philipps France ruling, which had already caused confusion, as much as it had raised some hopes of clarification by the Council of State.
In this judgment, the high court had refused to rule on the point, considering that failing to demonstrate that independent companies deducted (or not) the amount of the CIR from their increased cost base, the tax authorities could not consider that the actions of Philipps France constituted an advantage indirectly transferred by way of transfer pricing. Faced with the doubtful reflections and the strategic issue raised by the case in question, we would have liked the judge to rule on the merits, and to position himself on the legitimacy of this deductive approach, obviously to the advantage of related parties located abroad.
He could have considered the interests of French society; he preferred to reason in terms of the behavior of independent companies, thus, in our opinion, widening the gap a little further between the two theories, which are nevertheless sisters, of the abnormal act of management and the full competition price.
However, during the appeal, the public rapporteur Bruno Coudert seemed to be subtly inviting the ministry to revise its copy in order to convince the supreme judge at the subsequent stage of cassation. In inviting the Court to censure the administration's argument, the public rapporteur emphasized that "the administration's reasoning consists, it seems to us, of starting from the principle that a company which is not the owner of the industrial and/or intellectual property rights developed does not deduct the subsidies it receives for its research activity. But this seems to us to be a begging of the question with which you [the Court] will not be able to be satisfied."
It was therefore necessary to push the reflection further, and probably further develop the axiom around the fundamental interest of "independent and normally operated companies": would they give away the CIR to their partners for the sole reason of gaining market share, even if it meant endangering their financial situation and exposing themselves to tax audits on the CIR and the IS? The debate deserved to be launched, why not in the light of the theory of manifestly excessive risk.
However, although the Minister's argument before the Council of State has evolved, it has come up against the difficulty of the exercise, which is almost impossible to prove since the corrections were placed under the visa of Article 57 of the CGI. In his conclusions, the public rapporteur Romain Victor explains this with great pedagogy and humility. On the thorny issue of the deductibility of subsidies received, he begins by acknowledging that: "the OECD Guidelines applicable to transfer pricing do not help us much." He adds – and one senses a kind of disappointment – that "the administration, which bears the burden of proof, was in any case stumbling over the next step and failing to base the implementation of Article 57 on a sufficiently solid comparability analysis."
So, is transfer pricing just a matter of comparison?
This question then immediately arises, but must, in our opinion, be immediately dismissed. We are indeed among those who strongly believe that the subject of transfer pricing cannot be limited to a simple comparison report, at the risk of becoming an inert and, let's face it, deeply boring discipline. Before entering into quantitative analysis, it is therefore imperative to first estimate the purpose of the transaction, as well as the interests of the parties. To do otherwise would otherwise render meaningless a cardinal formula of our tax edifice, set in stone, according to which "the only deductible expenses are those incurred - or the shortfalls incurred - in the interest of the operation." Public rapporteur Pierre-François Racine will not deny this, and confirmed long ago that "a company (...) has as its purpose the pursuit and sharing of profits. Any action it performs to achieve this purpose is presumed to be carried out in its own interest."
The analysis of the company's interest is therefore a prerequisite and must be imposed before even looking for comparable companies against which to benchmark. The same applies to the very purpose of the transaction, which, without going into detail here on the civil law foundations of this principle, is essential to make any transaction legitimate, enforceable and enforceable in relation to the related parties.
It therefore seems curious that the tax judge did not attempt to determine whether the deduction of the CIR and appropriate subsidies from the cost base re-invoiced with a margin met these imperative conditions. By focusing exclusively on the comparability analysis, he instead adopted a dynamic inspired by OECD principles, even if it meant exempting himself from domestic law. Because, as we have had the opportunity to point out, these two sources "diverge on one essential point. While the arm's length principle establishes the comparability analysis as a cardinal point, this approach is only provided for by Article 57 as a subsidiary measure." This judgment therefore confirms an observation we made, observing that "over time, and through repetition, the arm's length principle has nevertheless influenced our positive law, and from a subsidiary concept, comparative analysis has become an alternative method. From now on, to support its corrections under the visa of article 57 of the CGI, the administration must demonstrate either an advantage by nature or an advantage by comparison.
The comparability analysis therefore indeed governed the judge's decision, both in the Philipps ruling and in its successors rendered in favor of the ST Microelectronics group. But comparing is not quantifying, and the repeated approach of the tax judge tends to indicate that neither the margin added to the cost base, nor the amount of the subsidies that burdened it were the subject. The question rather concerned whether independent and comparable companies would also have deducted these subsidies, regardless of their volume or quantum. This is evidenced by the fact that, in the ruling handed down by the Montreuil Administrative Court, the administration claimed a higher margin, resulting from an alternative analysis. Its considerations clearly state that "if the administration claims that the margin rate resulting from a situation of full competition was 12.66 for the year 2009 and 11.09 for the year 2010 [compared to 7%], it does not follow from the investigation that the panel of companies on the basis of which these rates were determined, […] would have made it possible to identify relevant terms of comparison, having regard […] to the invoicing of prices net or gross of subsidies".
The comparability analysis put forward by the judge in these decisions is therefore in reality confused with the analysis of the behaviors and choices made, or would have made, by independent companies. This is the concept of "realistic available option" developed by the OECD, and which is anchored to the arm's length principle. In its chapter dedicated to this concept, the OECD states in this regard that "All methods based on the arm's length principle are linked to the idea that independent companies examine the different realistic options available to them and, in comparing these options, take into account all the differences that have an impact on the respective value of these options."
Faced with this eminently subjective study and this almost schizophrenic reflection, the tax administration could only fail. It is indeed impossible for it to report such a demonstration. It is already forbidden to interfere in the management of companies, so how could it have known the choices?
Refusal to choose the advantage by nature
To avoid this necessarily subjective and doomed task, the administration could then have been tempted to invoke the advantage by nature, rather than by comparison. Unlike its neighboring concept, the advantage by nature does not suffer from the implacable need to demonstrate the behavior of the parties, or to enter into quantitative reasoning. However, by refusing to re-invoice the amount of the subsidies to the related party, ST Microelectronics mechanically allowed its co-contractor to benefit from the advantage from which it itself benefited. From a strictly semantic point of view, it passed on (or "transferred" to use tax verbiage) an advantage (the subsidy). The failure to invoice the tax gift it enjoys could therefore theoretically have fallen into the category of advantages by nature, not implying any comparison but where only the existence of counterparts favorable to the operation of the company counts.
In this respect, it is interesting to note that in the aforementioned Philipps case, the tax authorities had explored this avenue during the cassation. Changing their approach, they had attempted to explain before the Council of State that the inclusion of the subsidy was an advantage by nature, and that it was therefore not necessary to demonstrate an advantage by comparison. After recalling what constituted an advantage by nature according to case law, the public rapporteur Romain Victor invited the court to consider that what was at issue in this dispute was indeed the level of prices charged by SAS Philips France for the invoicing of its services to the parent company of the group to which it belongs, at a price that was not zero, thus effectively excluding any idea of selling at a loss. "However, if the sale of a service generating a profit margin may, in certain cases, conceal an indirect transfer of profits abroad, when the margin is insufficient, proof of this insufficiency can only result, when the prices charged are not zero, from a comparison with other transactions, this comparison being the only one capable of establishing that the level of prices charged to the associated foreign company differs from that usually charged to other customers or by other similar companies operating normally. Nor are we here in the hypothesis of a free transfer, which can a priori be regarded as devoid of consideration and exempting the administration from establishing a panel of relevant comparables."
Certainly, it is true that the advantage by nature induces a character of gratuity. As soon as the transaction has been the subject of a counterpart, the debate would then implicitly but necessarily be placed on the ground of the advantage by comparison, with all the subjectivity that we have pointed out previously. The system of article 57 of the CGI can then be easily summarized as follows: if the transaction has been the subject of remuneration, the only question that remains is to know if this is sufficient, that is to say if it corresponds to what independent and comparable companies would have claimed in a similar situation, even if perhaps to the detriment of their own interest. This is one of the incongruities of the principle of full competition, whose economic and Anglo-Saxon inspiration has over time overflowed our praetorian axiom of the abnormal act of management, but which we will not address in these columns.
Doesn't the comparability analysis create a double standard?
The matter is therefore settled: the Philipps France and ST Microelectronics cases are based on a comparative advantage, and we will be careful not to question minds as brilliant and enlightened as those of the illustrious public rapporteurs cited above.
However, it must be noted that comparative analysis quickly loses its supremacy when the composition of the cost base to be re-invoiced is invoked in a contract. In a SAP Holding France SAS ruling, the Marseille Administrative Court of Appeal thus validated the increases made by the administration, which, on the grounds that an intragroup R&D services contract (yet another one!) specified that all taxes and customs duties would be borne by the related party, correlatively reintegrated the amount of the contribution on the added value of companies into the basis of the cost-plus method.
Surely drawing the consequences of the Philipps France case law, the taxpayer then attempted to argue that the administration had not made comparisons demonstrating that the price paid in return for the services provided to the foreign company was higher than those charged by similar businesses normally operated with suppliers with no ties of dependency. It is a fact that, to repeat the dialectic of the rapporteur Romain Victor, the prices charged were not zero, and we were not in the hypothesis of a free transfer. The conditions for the application of the theory of comparative advantage therefore seemed to be met. However, the tax judge dismissed the debate by validating the transfer of an advantage, which he did not qualify, on the sole basis of the contract. If this decision then seems to create a two-speed situation, we justify it rather for our part by the subsidiarity of the comparative analysis which irrigates the semantics of article 57 of the CGI under the visa of which these rectifications in matters of transfer pricing are placed.
As we have almost prophetically highlighted, "Article 57 is not a carbon copy of the arm's length principle. The comparability analysis is only mentioned as a subsidiary measure and "in the absence of specific elements". It is therefore quite possible that a correction is made in the sphere of transfer pricing, even though these adjustments would lead to dissociating the remuneration of the related transaction from any arm's length reference."
This debate, which we will be able to resolve here, nevertheless has one merit: that of highlighting the immense difficulty in correctly qualifying the advantage. Since qualification forms the matrix of any demonstration in law, it is therefore not surprising that the administration failed in the dialectic of proof that weighed on it in the Philipps France and ST Microelectronics cases. However, it demonstrated real ingenuity in turning the tables on the taxpayer, by sanctioning incomplete transfer pricing documentation rather than contesting the basis of assessment.
The taxman's counter-attack, or the battle of penalties rather than the tax base
Despite the identity of facts in the various ST Microelectronics cases, the debate submitted to the Orléans Administrative Court did not focus on Article 57 of the CGI, but on Article 1735 ter of the same code. In doing so, the administration deliberately chose to avoid the issue of the basis of assessment, which, in accordance with the dialectic of proof, invited it to relate the demonstration of an indirect transfer of profit, to the question of the completeness of the transfer pricing documentation, which weighs on the taxpayer given its capital and financial dimension.
Indeed, it is useful to recall that this article 1735 ter of the CGI sets out the sanctions relating to the absence, or incomplete submission of transfer pricing documentation as described in article L13 AA of the Book of Tax Procedures (LPF). This obligation introduced into our legal corpus by the effect of the Amending Finance Law for 2009, has evolved to comply with OECD standards. Since the financial years open from 1 January 2018, the content of the documentation has thus been detailed in line with the recommendations of the OECD Committee on Fiscal Affairs and now consists of two reports, producing in turn factual and economic information (for the main file) as well as supporting, corroborative and precise elements (for the local file).
The objective of this documentation is clearly stated by the tax administration, which specifies that this documentation "therefore retains a general nature but must be sufficiently precise to allow the administration to assess whether the transfer pricing policy implemented by the company complies with the arm's length principle." It is thus in line with the OECD, which justifies its existence by stating that it is "(2) to provide tax administrations with the information necessary to enable them to make an informed assessment of transfer pricing risks; and (3) to provide tax administrations with useful information to carry out a sufficiently thorough audit of the transfer pricing practices of taxable entities in their jurisdiction, even if it may be necessary to supplement this documentation with additional information as the audit procedure progresses."
In this respect, transfer pricing documentation contributes to the tax transparency that informs the OECD's so-called "BEPS" work, particularly its Action 13. This action implicitly denounced the imbalance in the balance of power between control services and taxpayers, thereby vitiating the burden of proof on administrations. In its 2015 final report on Action 13, the OECD noted that "transfer pricing verification procedures tend to involve a very large number of elements. They often involve difficult assessments of the comparability of several transactions and markets. They may require the in-depth examination of financial, factual, and sectoral information. The availability of adequate information from various sources during the verification procedure is essential to facilitate a methodical examination by the tax administration of the taxpayer's controlled transactions with associated enterprises, and the application of the applicable transfer pricing rules." The full statement: "In situations where a proper transfer pricing risk assessment suggests that a thorough transfer pricing audit is warranted on one or more issues, it is clear that the tax administration must be able to obtain, within a reasonable time, all relevant documents and information in the taxpayer's possession."
Let us therefore make no mistake: the documentation of transfer prices at the taxpayer's expense is only intended to enable the administration to obtain, on first request, all the contextual, financial and other data enabling it to assess the existence or not of an indirect transfer of profit.
In this respect, it is interesting to note that in its initial version of 2009, Article L13 AA did not appear to require the taxpayer to produce an economic comparability analysis. More precisely, the text only specified that "when the chosen method requires it, an analysis of the elements of comparison considered relevant by the company." The latter, which constitutes the cornerstone of any demonstration of an advantage by comparison, was therefore the exclusive responsibility of the administration. The dialectic of proof was at that time unique and complete, regardless of whether the gifts presumed by the control authorities fell within the sphere of transfer pricing, or of the abnormal act of management.
On the contrary, it was only from 2018 that the new version of Article L13 AA, in its OECD-inspired form, set in stone the obligation for the taxpayer falling within its scope to produce "g) A detailed comparability analysis and functional analysis of the audited company and associated companies for each category of transactions, including any changes compared to previous financial years." This was obviously all that was needed for the administration to clarify the contours of this obligation in its doctrine, and now expects that "For each category of transactions, the comparability analysis describes the company's remuneration conditions, justifying the differences with those of independent companies."
This paradigm shift reflects one of the essential axes of tax law and a major distinction with civil proceedings: the one who can establish must prove, not the one who invokes. In the ST Microelectronics case, the administration therefore skillfully changed its strategy. By confronting the company with the documentary obligation incumbent upon it, the administration no longer had to demonstrate the existence of an advantage granted abroad; it only had to expect the taxpayer to produce proof of its absence in its place.
A new demonstration of the tightening of the burden of proof on the taxpayer
This ruling is part of a dynamic which is certainly unfavourable to the taxpayer, but which, let us recognise, aims to correct several decades of imbalance of power in the relationship to proof which opposes it to the administration.
It was case law that first brought about a tightening of the approach. The reversal initiated by the decision of the Council of State in GE Medical Systems, preferring the net margin method to the method initially put forward (and documented) by the company, is a topical illustration of this. To validate the appeal decision, the supreme judge considered that "In order to conclude, moreover, on the merits of the alternative method proposed by the administration, which was based on the study of net transactional margins […], the court dismissed the company's objections based on the lack of relevance of the sample selected by the auditor, took a position on the reference point used to determine the arm's length net margin and considered that, given the significance of the difference observed between the results declared by the company and its arm's length operating results resulting from the application of the net margin transactional method, the administration should be considered as establishing the existence of an indirect transfer of profit during the financial years audited."
On the same day, in a relevant case, the Council of State also confirmed, with a sibylline formula, the prevalence of the median of the arm's length intervals, by shifting the burden of demonstrating that another point in the interval would be more appropriate to the taxpayer. The consideration, according to which "this median constituted, in the circumstances of the case, the point in the interval that best reflected the facts and circumstances of the transactions concerned", has since been repeated in subsequent decisions, further strengthening the due diligence now imposed on the taxpayer. Thus: "the applicant does not, for its part, provide evidence of any specific circumstances enabling it to establish that the administration, taking into account the transactions in dispute, should have deviated from this median margin, the application of which is moreover recommended by the OECD in matters of transfer pricing, as enabling the amount of the corrections to be calculated and the margins of approximation to be limited in relation to a point situated at one or other of the extreme limits of this interval, which must be regarded as the point of the interval which best reflects the facts and circumstances of the transactions concerned."
This tightening was then manifested in the Finance Act for 2024, which formally made the content of the documentation binding on the taxpayer who produced it. Article 57 of the CGI now has a new weapon, and specifies that "When the method of determining transfer prices deviates from that provided for in the documentation made available to the administration by a legal entity pursuant to III of Article L. 13 AA or Article L. 13 AB of the Book of Tax Procedures, the difference noted between the result and the amount it would have reached if this documentation had been respected is deemed to constitute an indirectly transferred profit within the meaning of the first paragraph of this article, unless the legal entity demonstrates the absence of a transfer either by way of an increase or decrease in the purchase or sale prices, or by any other means."
From a hardening to a reversal, there was ultimately only a gap thinner than the Rubicon, which the administration then crossed easily by skillfully using the texts. This ruling of the Administrative Court of Orléans, far from going unnoticed, must therefore on the contrary alert us to the semantic and procedural risks that now weigh on taxpayers, in particular those falling within the scope of the documentary obligation of Article L13 AA of the LPF. Because it is likely up to them to provide proof of the full competition nature of their intragroup transactions, with all the subjectivity that we know about this concept.
Worse, since the thresholds were significantly lowered during the 2024 finance law, we can bet that the misfortunes of ST Microelectronics will now be shared by a growing number of companies.
It remains to be seen whether, by having de facto reversed the dialectic of proof on the taxpayer, the legislator and the tax judge will not have ultimately created a difference in treatment, or even discrimination, with regard to these taxpayers engaged in cross-border transactions, as opposed to those involved in strictly domestic flows and subject to the sole praetorian concept of the abnormal act of management, which remains the exclusive responsibility of the administration. Faced with this dilemma, there is only one salvation: the perfect alignment of this concept with the ever-expanding discipline of transfer pricing.
Read more:
https://www.doctrine.fr/d/TA/Orleans/2025/TAA1819EC909E54748F631
https://www.doctrine.fr/d/TA/Montreuil/2019/U64A41A86DCBC1446967A
https://www.doctrine.fr/d/CAA/Marseille/2021/CETATEXT000043799583
