STARTING SITUATION
STMicroelectronics carries out R&D in the field of
semiconductor technologies, for which it receives a research tax credit. It has signed a framework agreement with its parent company, STMicroelectronics NV, under which STMicroelectronics carries out R&D operations on behalf of STMicroelectronics NV. STMicroelectronics NV defines the research program and owns the resulting intellectual property rights. STMicroelectronics NV pays STMicroelectronics NV a fee calculated by applying a mark-up of 7% to the costs of R&D operations incurred by STMicroelectronics NV (Net Cost Plus), less the amount of research tax credits and public subsidies linked to research operations received by STMicroelectronics NV.
ADMINISTRATIVE CONTROL
Following an audit of STMicroelectronics' accounts for the years ended 2012 and 2013, the French tax authorities considered that the deduction of research tax credits and public subsidies from the basis of costs re-invoiced by the company led to an indirect transfer of profits abroad, within the meaning of Article 57 of the French General Tax Code. It increased the income recorded by the company by the amount of the subsidies and the research tax credit added back to the cost price used to determine the sale price, and notified the company of the increases in its corporate income tax assessment bases. Drawing the consequences, for the determination of the controlled company's added value, of the rectification of the income booked, the tax authorities notified STMicroelectronics of reminders of the company's added value contribution, its additional taxes and management fees for the years ended 2012 and 2013.
ADMINISTRATIVE COURT DECISION
In judgment no. 1907583 of December 17, 2020, the Montreuil Administrative Court discharged the company from paying the additional corporate income tax, social security contributions and exceptional corporate income tax, as well as the corresponding penalties. However, the company considers that this ruling is vitiated by a clerical error, and is seeking discharge from the additional corporate income tax, social security contribution and exceptional contribution and from the corresponding penalties.
DECISION BY THE ADMINISTRATIVE COURT OF APPEAL
On August 16, 2022, the Court of Appeal overturned the ruling and discharged the tax.
In the opinion of the tax judge, the deduction of the CIR by a French company to determine the sale price of the product to be invoiced to a foreign company with which it has a contractual relationship, cannot in itself be considered to give rise to a presumption of the existence of a transfer of profits abroad, within the meaning of Article 57 of the French General Tax Code.
OUR ANALYSIS
BENEFITS BY NATURE VS BENEFITS BY COMPARISON
In this case, the Court reiterates one of the foundations of the dialectic of evidence in transfer pricing matters, which consists in apprehending in a different way what the Commissaire du Gouvernement Emmanuel Glaser described as advantages "by nature", as opposed to advantages "by comparison". The former are easy to perceive, as they are not offset by any direct consideration, such as interest-free loans. The latter are more tenuous, as they require an economic analysis (a benchmark) aimed at identifying third-party references that are necessarily independent and placed in conditions similar to those surrounding the intra-group transaction that is the subject of the rectifications. This distinction has given rise to a recital almost systematically taken up by judges in transfer pricing matters, inviting the tax authorities, in order to provide a presumption of indirect transfer of profits abroad, according to which "in the absence of having carried out such a comparison, the service is not, on the other hand, 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".
It is interesting to note here that the Court considers that the advantage criticized by the administration is an advantage by comparison, which therefore required the department to demonstrate, by means of a search for comparables, that third-party and independent references would (or would not) have deducted the amounts of the CIR and other subsidies from their cost base on which the margin is based.
WHAT DEDUCTION?
In this case, the ruling highlights the fact that the company had deducted the CIR amounts from its cost base, thus reducing the base on which the 7% margin is based. In doing so, the company applied the transactional net margin method, coupled with a "Net Cost Plus" profit indicator. An alternative would have been to deduct the CIR not from the cost base, but from the total amount comprising this 7% Net Cost Plus. The decision might then have been different, since the CIR compensates for the costs incurred. The company's approach thus respects the very nature of the CIR, by considering that its impact is on costs, and not on the company's total profitability.
ONE MORE STONE
The Paris CAA's decision adds another stone to the solution provided by the Versailles CAA's decision of October 11, 2016, Sté Philips France (n°14VE02651). In this former case, the judge had rejected the administration's claims on the grounds that the comparables produced were not independent. The evidence was therefore inherently flawed. Before the Conseil d'Etat, the Minister was again dismissed on the grounds that no more well-founded economic analysis had been provided (CE, September 19, 2018, n°405779). However, it was already clear that the advantage deemed to exist was an advantage by comparison, and not by nature.
BEWARE OF CONTRACTS!
In the Conseil d'Etat's 2018 ruling, the tax judge considered "that even though the agreement between the two companies did not expressly stipulate that the cost price taken as the basis for calculating the sale price would be the cost actually incurred, net of the amount of subsidies, the Minister is not entitled to argue that the administrative court of appeal erred in law". At the time, only the comparative analysis counted. It seems to us that this approach could now be called into question, not least because of the decision SAP France Holding (CAA Marseille, July 08, 2021, n°20MA00804). This decision reminds us of the imperative need to specify, in the contract, the exact components of the cost base on which the margin is based. In the SAP case, the contract stipulated that all costs had to be rebilled. Inspired by this, the department deduced that the CVAE, which is deducted from the company's income, should therefore be included in the costs re-invoiced to the foreign partner.
