An adequate and well-founded functional analysis, enabling a precise assessment of the nature of the functions, risks and assets of the parties to an intra-group transaction, and their intensity in the group's value chain and business, is and always will be the cornerstone of any transfer pricing demonstration.
The resulting functional classification determines the selection of the most appropriate transfer pricing method, and hence the allocation of large value pools between the parties and their respective capacity to withstand market volatility and losses over the longer or shorter term.
The obvious, which is now almost a truism, was once again pointed out by the tax judge in the Engie case.
In this case, the French tax authorities challenged the cost-plus method applied within the group to "single voice" contracts, which grouped together various services rendered to subsidiaries in the United States and Luxembourg. Taking the view that the French company was not merely a service provider (or "broker" in the ruling), but had a "strategic function", holding "intangible assets of unique value", the tax authorities substituted the profit split method. This substitution mechanically shifted the profitability hitherto captured by the subsidiaries to the French company, which was then remunerated on the basis of the overall contract and no longer its incurred costs.
Following a detailed analysis of the parties' roles and their importance, the Paris CAA rejected the administration's characterization and overturned the lower court's decision.
The functional analysis revealed that the French company did not mobilize any strategic functions, and that the subsidiaries remained the final decision-makers for all transactions.
The ruling reiterates the imperative need for a precise description of the parties' roles in the light of the value chain in which they are involved, and the importance of materializing these roles through the resources deployed internally (substance enabling the functions to be performed and the inherent risks to be controlled).
CAA Paris June 27, 2024 n°21PA01277
