The Finance Bill for 2024 provides for the content of transfer pricing documentation to be enforceable against taxpayers. To fully appreciate the significance of this measure, it needs to be seen in the context of two other provisions.
Firstly, the bill also envisages lowering the thresholds for the documentary obligation. This will automatically bring a growing number of taxpayers and intra-group flows within the scope of this provision.
Secondly, in its current version, the documentary requirement already calls for the production of a full economic analysis, making it possible to attest to the arm's length nature of transactions between affiliated companies and affecting the taxpayer's results. In practice, these analyses take the form of searches for comparable benchmarks against which to calibrate the company's net margin generated by these intra-group flows (calculated as the ratio of operating income to sales, or operating expenses). In the jargon, this is referred to as the "transactional net margin method", coupled with a profitability indicator such as "operating margin" or "net cost plus".
However, these analyses sometimes produce a range made up of third-party, independent references, and therefore deemed to be at arm's length, in which the margin of the company under test does not fall. This is typically the case when documentation is prepared by computerized or artificial intelligence tools (whose intelligence would then have omitted common sense and pragmatism). In doing so, and given the legal enforceability that transfer pricing documentation will henceforth have, the taxpayer will de facto be in a position for immediate rectification, as he is spontaneously declaring a situation of abnormality.
In order to avoid the pitfall of producing information that would then turn against the taxpayer, one approach is to return to the so-called "traditional" methods as described by the OECD guidelines and recently reiterated in the 2023 edition of the "Guide à l'usage des PME - les prix de transfert". These methods offer the possibility of calibrating not the company's net margin, but its gross margin. Insofar as these methods do not capture aggregates included in operating expenses, they are deemed more reliable and closer to the intra-group transaction that needs to be documented and justified. They do, however, require more complex restatements, which databases often struggle to produce.
In any case, the use of these methods (Resale Price Method, or Cost Plus Method) should make it easier to extract an arm's length interval within which the margin generated by the tested party could fall. This would be the case in particular for companies whose intra-group transactions lead to gross margins falling within the interval, but generating negative operating income (and therefore, mechanically, a negative net margin).
In so doing, it seems to us that the attempt to shift the burden of proof onto the taxpayer - which the reinforcement of the documentary obligation in fact conceals - would be at least partly aborted, since it would then be up to the administration to produce a counter-analysis based on the net margin. Given the highly subjective nature of the exercise, and the current state of case law, we feel it would be easier to criticize the administration's search for alternative comparables based on net margins. After all, it's a French trait: it's always easier to challenge than to propose.
