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?
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 much-needed clarification of the provisions set out in the 2018 Finance Act. It remains to be hoped, however, that the other countries that have transposed Action 13 share these same definitions.
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.
