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 Procedures Book 1, the Executive published a decree on June 29, 2018 aimed at clarifying many of its provisions 2. In the wake, visibly little slowed by summer absences, the administration quickly updated its tax doctrine 3. In its zeal, it's 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.
Without going back over the June 29 decree, which was the subject of a detailed analysis by Cabinet 4, the article below is intended to take a critical look at the new dimension of the transfer pricing documentation requirement.
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, then clarified, even nurtured this documentary obligation, resounds loud and clear as an unequivocal determination to make transfer pricing a priority in future tax audits. Admittedly, transfer pricing was already high on tax inspectors' shopping lists, when they set out their audit priorities on their first visit. However, the combined involvement of the various authorities and the speed with which the texts have been published show that the tax authorities expect French 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, is a Frenchman from the Direction de la Législation Fiscale. Optimists, for their part, will believe that these reforms are part of the drive for modernity initiated by the current government, by enabling taxpayers to anticipate well in advance the obligations incumbent upon them. In any case, these reforms should serve as a wake-up call: transfer pricing documentation will undeniably be more tedious than it was before, and will require efforts and resources for which many companies are currently unprepared.
Finally, it should be remembered that these documents are intended to circulate between countries. The European directives of the last two years 5 , as well as the multilateral convention resulting from the BEPS project, which came into force last July 6 , now ensure a real exchange of information between the tax authorities of over 100 countries. In this truly global environment, transfer pricing documentation has taken on an almost universal dimension, establishing itself as the most comprehensive and advanced tool for drawing up a group's complete tax profile.
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 the necessary clarification for the provisions set out in the 2018 Finance Law. It's worth noting the speed with which the administration produced this very rich doctrine (no fewer than 67 paragraphs), enabling French taxpayers to get their act together. In doing so, the administration seems to be breaking with its previous setbacks, which consisted in publishing instructions at the very end of the year, contrary to the obligations they were supposed to clarify.
Thus, a combined reading of the doctrine and the decree that preceded it sheds light on the key activities to be taken into account when describing "significant sources of profit" 7, and those forming "the supply chain" and whose description is required in the Master File for "products or services representing more than 5% of the Group's consolidated sales" 8.
Similarly, the Bofip provides concrete examples of "major corporate reorganization operations" 9. Finally, it clarifies certain terminology, such as the notions of "central financing or treasury" 10, "financial statements" 11, and "decisions of the tax authorities" 12 that must be reported in the Masterfile. It remains to be hoped, however, that the other countries which have transposed Action 13 share these definitions, given that the Master File is supposed to be common to all the Group's countries of establishment.
And therein lies the rub. As the new article L13 AA of the LPF is based on the OECD 13 model, there is a risk that the French administrative doctrine, with its numerous clarifications and suggestions for presentation, will reformat 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?
Whether in Belgium, Germany or Australia (to name but three), the obligation to produce a two-part documentation package comprising a Master File and a Local File has been in force for over a year. As a result, some French groups have already had to draw up a Master File to comply with the rules applicable in these countries. However, these obligations have retained the ambiguity attached to the OECD's initial wording, enabling flexible, modular responses to be attempted, which could then easily be replicated in all countries. By imposing its own style, the French administration runs the risk of pushing taxpayers to revise Master Files that have already been drafted, simply to satisfy Bercy's agents. The "French touch", though acclaimed in artistic circles, would have been better left out of the tax sphere.
Finally, the Bofip attempts to include a few additional items of information that do not appear in the law. Such is the case of the "description of the competitive environment " 14 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 resulting from the hasty preparation of the text of the law. Nevertheless, by acting in this way, the administrative doctrine is adding to the law, which is legally prohibited. It would therefore be possible for French taxpayers to dispense with this part without risking the (then illegitimate) wrath of the administration.
Extending transfer pricing to purely domestic flows
The title is evocative and has the merit of capturing the reader's attention. But far from being an invention of the mind, a reading of the updated Bofip throws some light on the issue. Without further clarification, the text states that "The transfer pricing documentation obligation applies to all transactions between associated enterprises".
However, the reference to article L13 AA removes any ambiguity. The law stipulates that companies falling within the scope of the document "must provide the tax authorities with documentation justifying the transfer pricing policy applied in transactions of any kind with related legal entities within the meaning of Article 39(12) of the same Code, established or incorporated outside France " 15. The OECD principles which also inform this administrative doctrine also expressly target flows between multinational companies. We can therefore state without a shadow of a doubt that documentation should only concern cross-border intra-group transactions. Domestic flows, on the other hand, will continue to fall within the scope of the praetorian theory of the abnormal act of management.
OECD principles earn their spurs
The point will delight legal experts who, along with economists, claim a link with transfer pricing.
It is interesting to note that the Bofip makes several express references to OECD principles. In particular, the doctrine states that "[the] documentation now corresponds to the international standard resulting from the work of the Organisation for Economic Co-operation and Development (OECD) (action 13 of the BEPS plan), as described in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations".
And the Bofip adds: "The recommendations provided for this documentation in the OECD standard apply to the documentation provided for in article L. 13 AA of the LPF". 16
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 OECD's documentary insights are just as useful in understanding the underlying principles of article L13 AA.
In this way, it can be stated without hesitation 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.
If, however, the question arises as to whether the OECD principles have the same legal value as administrative doctrine, then do they take precedence over case law, which in French law has no place of its own in the hierarchy of norms? The question is worth asking, as the OECD supports certain positions that French tax judges have always opposed. This is particularly true of the impossibility of revising the value of an intangible asset ex post, a position defended by tax judges but which runs counter to the recent work resulting from the BEPS program, which deals specifically with "intangible assets that are difficult to value". For our part, we assert our attachment to legal theses (vs. economists) and take our place behind the late Professor René Chapus, who considered that "administrative jurisdiction is 'infra-legislative and supra-decretal'".
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 was to have become standardized thanks to the OECD, has taken on an unprecedented dimension. In passing, we note that the suggestion made by the tax authorities in their previous doctrine that "[the documentation] should therefore remain general in nature (in practice, it is not intended to exceed some fifty pages) " 17 no longer appears in the new Bofip text. The original sentence has been cleverly reworked to remove any reference to pagination. It's a skilful dodge, given how quickly new documentation can grow in volume.
Indeed, the objective of transparency, which is one of the three pillars of the BEPS project, could in practice lead companies to deploy considerable resources to meet this new obligation.
Insofar as documentation is linked to fiscal years, it needs to be regularly updated, and the work constantly put back on the drawing board. It takes several months to compile and write the documentation, and as soon as the tax year has been completed, you'll have to start all over again for the next tax year. The Sisyphean taxpayer, however, cannot easily evade this obligation, partly because of the associated penalties, and partly because in some countries the documentation must be filed spontaneously (as in Belgium and Australia, for example), or submitted to the tax authorities within a very short time of the request being made.
In France, this documentation is expected as soon as the audit begins. Despite any extensions that may be granted 18, the content is such that it is difficult to envisage preparing exhaustive documentation in a hurry, after the start of the audit operations.
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 is intended to lighten the already heavy burden of documentation. Examples include the "list of significant service agreements between associated enterprises " 19, the "list of intangible assets or categories of intangible assets " 20, the "list of significant agreements between associated enterprises relating to intangible assets " 21, the "description of significant transactions with associated enterprises and the conditions under which they are carried out " 22, or the "indication of the transfer pricing method " 23.
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 Masterfile is intended to circulate among the tax authorities of all countries of establishment, making it the most comprehensive and universal operational and 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's a fact that this new obligation will add to the already heavy burden of documentary and reporting constraints on taxpayers. But the peace of mind required by the new era of transparency called for by governments the world over depends on these efforts.
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.
Things to remember :
► Transfer pricing documentation has taken on unprecedented proportions under the combined efforts of the OECD and tax authorities;
► Far from being a product of convenience, the documentary exercise requires the utmost care. The documentation submitted, and more specifically the Masterfile, describes in great detail the operating procedures and remuneration policies throughout the Group;
► The documentation can now be communicated to all tax authorities in the countries of establishment. It is emerging as the most comprehensive and advanced tool for drawing up a group's complete tax profile;
► Automated tools should be greeted with the utmost caution: while they can generate a document, the nature of the information requested means that, in practice, the content of these reports is likely to be highly controversial;
► On the contrary, we advise dedicating specific resources to this work to ensure that information is properly collected, efficiently transposed, and preserved over time;
► French documentation, because it tends towards the most total exhaustiveness, should nevertheless be able to be easily reproduced abroad and thus fulfill the tax obligations of other countries of establishment.
[1] Law 2017-1837 of December 30, 2017, art. 107.
[2] Decree 2018-554 of June 29, 2018.
[3] BOI-BIC-BASE-80-10-40-20180718, published July 18, 2018.
[4] See "Décret relatif à la documentation des prix de transfert : des précisions bienvenues et quelques zones d'ombre persistantes", Revue Européenne et Internationale de Droit Fiscal, issue 3/2018, forthcoming.
[5] ECOFIN Directives 2018/822/EU and 2011/16/EU on the automatic exchange of information in the field of direct taxation.
[6] Multilateral Convention on the Implementation of Measures Relating to Tax Treaties to Prevent Base Erosion and Profit Shifting.
[7] BOI-BIC-BASE-80-10-40-20180718, § 100.
[8] BOI-BIC-BASE-80-10-40-20180718, § 110.
[9] BOI-BIC-BASE-80-10-40-20180718, § 160.
[10] BOI-BIC-BASE-80-10-40-20180718, § 250.
[11] BOI-BIC-BASE-80-10-40-20180718, § 280.
[12] BOI-BIC-BASE-80-10-40-20180718, § 290.
[13] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2017.
[14] BOI-BIC-BASE-80-10-40-20180718, § 340.
[15] L13 AA, I.
[16] BOI-BIC-BASE-80-10-40-20180718, § 50.
[17] BOI-BIC-BASE-80-10-20-20141117, § 260.
[18] The company may submit a reasoned written request for an extension of the response time, specifying the duration of the extension, which in no case may exceed a total of two months. In this case, it is the responsibility of the administration to inform the company of the decision taken, indicating, if so, the expiry date of the additional period granted. BOI-BIC-BASE-80-10-40-20180718, § 630.
[19] BOI-BIC-BASE-80-10-40-20180718, § 120.
[20] BOI-BIC-BASE-80-10-40-20180718, § 200.
[21] BOI-BIC-BASE-80-10-40-20180718, § 210.
[22] BOI-BIC-BASE-80-10-40-20180718, § 390.
[23] BOI-BIC-BASE-80-10-40-20180718, § 440.
