OUR ANALYSIS
THE CONCEPT OF TRANSFER PRICING HAS BECOME OBSOLETE
In this case, the tax authorities, followed by the judge, reduced the company's losses on account of the expenses it had incurred, which in its view contributed to the value of the brand held by the Japanese parent company.
Transfer prices are therefore no longer based on economic "transactions", which presuppose a sale, but on economic "relationships", which are exempt from any transfer. This approach, which breaks with years of previous rulings, enshrines a dynamic that was in fact already apparent between the lines of the OECD's work and the proposals for rectification. It brings the matter a little closer to the praetorian theory of the abnormal act of management, which leads to a holistic analysis of a transaction, without having to qualify the presumed anomaly precisely. It is therefore not so much the flow, but the overall situation that
is henceforth scrutinized under the provisions of Article 57 of the CGI.
CONFIRMATION OF THE NET MARGIN METHOD
In this case, the tax authorities compared the company's reconstituted net margin for its retail activity with that generated by a panel of comparables. The economic transaction between Issey Miyake Europe and its Japanese parent company is limited to the purchase of merchandise. The bulk of Issey Miyake's operating expenses are therefore made up of expenses that do not correspond to a clearly designated economic transaction between these two parties.
The transactional net margin method has long been the administration's preferred method. This preference was easily explained by the greater flexibility it offered in the search for comparables, but also, let's face it, by the fact that by focusing on an aggregate close to the tax result, it potentially ensured greater certainty of tax recall. For a long time, the tax judge disagreed with this approach, considering that the analysis of a net margin dilutes the intra-group transactions too much, thus requiring the tax authorities to demonstrate that the losses complained of are directly attributable to excessively high purchase prices or lower sales, and not to excessive management of fixed costs, for example. However, recent rulings in this area had already signalled the beginning of this shift, which is now reflected in a new decision by the Paris Administrative Court of Appeal. For the Court, the responsibility lies with the taxpayer and its management of the adversarial process, and states that "the investigation does not show that the taxpayer had sufficient information, internal to the group, on transfer pricing to enable it to adopt a transaction-based method" (recital 11).
A PAUPERIZATION OF ECONOMIC ANALYSIS?
In order to establish the advantage granted to the Japanese company, the authorities carried out a search for comparables, which identified 7 companies involved in clothing retailing. It would appear that these comparables were not engaged in the luxury sector, and that they may have been multi-brand, positioned in different ranges, or subject to lower sales volumes. All of these criteria, if we adhere to the comparability factors suggested by the OECD, are differentiating factors affecting the comparability and, therefore, the reliability of these companies and the results they produce when studying their margins.
However, the judge validates this panel, on the grounds that the transactional margin method of net margin is exempt from these fundamental differences. In so doing, the entire burden of proof, which should fall on the service provider, is shifted onto the taxpayer. Indeed, we read that "Issey Miyake Europe, which does not propose any adjustment for the impact of the specific charges it claims do not contribute to the valuation of the brand, argues that it was itself unable to identify independent French companies distributing luxury ready-to-wear clothing".
This decision breaks with earlier rulings, which for a long time discredited the adjustments made by the tax authorities when they were unable to identify relevant comparables. From now on, it will be sufficient for the tax authorities to rely on a net margin method and simply capture independent companies engaged in a broad typology of activity (distribution, manufacturing, service provision), without having to apply adjustments to perfect comparability.
THE CONSECRATION OF THE MEDIAN
Finally, this decision puts an end to a debate that the GE Healthcare case had left hanging, and which had apparently paved the way for the service to systematically rectify margins at the median of the interval. A reading of this earlier decision suggested, however, that this assumed tendency on the part of the administration stemmed from a misinterpretation of the 2018 ruling. Doubt is now no longer permitted, and it is up to the taxpayer to provide all the elements needed to assess the automatic inadmissibility of the median, in favor of a more appropriate point in the interval.
Here again, it is regrettable that the burden of proof has been reversed onto the taxpayer, who might be expected to have less information on the state of the market, or of his competitors, enabling him to target a point in the interval that is more faithful to his situation.
