Thought leadership from our experts

France and BEPS: a changing transfer pricing landscape

, EY, France

The operative, but not exclusive, article of law in France that currently governs transfer pricing is Article 57 of the French Tax Code ("FTC"), entitling French Tax Authorities ("FTA") to reassess related transactions whose conditions deviate from what independent parties would have agreed under similar circumstances. Article 57 predates the OECD TP Guidelines1 and its formulation is considered by some to be less than adequate to deal with (often complex) transfer pricing cases.

In addition to Article 57 FTC, the FTA can and does rely on the long standing and still existing tax principle of the so-called "abnormal act of management" theory ("AAM" theory or principle). This principle is firmly based on comprehensive case law and requires that a French taxpayer needs to act in its own best interest, i.e. the group's interest cannot prime the interest of the French taxable entity on a standalone basis.

Armed mainly with Article 57 and the AAM principle, the FTA started transfer pricing tax audits in earnest in the late 1990ies, somewhat assisted by an additional transfer pricing article that came into existence in 1996 (Article L13 B of the French Procedural Tax Code, or "FPTC"). Although the application of this new article of law provided for the reversal of the burden of proof, putting the onus on the taxpayer instead of on the FTA, invoking the article was (and is) subject to stringent conditions, hampering a wider application than the FTA may have wished for.

In practice, transfer pricing tax audits in those days tended to focus on rather routine cases, such as routine distributors' and manufacturers' returns and management fees. With due consideration to the (relative low) amounts at stake, most cases tended to be settled between the FTA and the taxpayer through negotiations and transfer pricing case law was limited.

Fast forward to 2010, when the OECD published its guidance relating to the Attribution of Profits to Permanent Establishments and Business Restructuring. These publications in July 2010 almost coincided with an important legislative step, when French Parliament voted formal transfer pricing documentation requirements for French-based entities that pass a threshold test of EUR 400 million (net sales and/or gross assets based on stand-alone accounts); where the threshold test needs to be met by the French entity itself and/or by any related party up or down the legal ownership chain. These specific requirements are ruled under Articles L13 AA and L13 AB of the FPTC, and oblige those covered taxpayers to have an OECD-type transfer pricing documentation available in case of tax audit. Penalties for non-compliance were strengthened in 2014, with current transfer pricing documentation penalties amounting to a minimum of EUR 10,000 per year not documented to a maximum of 5% of gross amounts reassessed or 0.5% of the transaction amounts that are not documented. In other words, the French documentation penalties are not tax-geared and the mere fact of not documenting can lead to a penalty of 0.5% of the related party transactions' amounts.

In the meantime, French tax audit departments increased their interest in operations pertaining to the purchase/sale or licensing of intangibles, business restructuring, conversions, and group financing. Accordingly, transfer pricing reassessments increased dramatically, easily passing the EUR 1 billion mark. In addition to the "usual" tax audit procedures, the FTA also started to rely on so-called "tax police raids" (Article L16 B of the FPTC), in particular when it suspected taxpayers to have implemented tax efficient supply chains or what the OECD refers to as "artificial avoidance of permanent establishment" structures. Furthermore, since 2013, French taxpayers are obliged to provide the FTA with Accounting Electronic Files, handing over their accounting records in a predefined electronic format and thus enabling the FTA to run automated tests and in-depth investigations from the comfort of the inspector's office.

And then there was the OECD's paper in February 2013: Addressing Base Erosion and Profit Shifting. This paper and its Action Plan of July 2013 inspired quite a comprehensive literature from the French Ministry of Economy and Finance, the FTA representatives, and eventually law makers. Since the 2014 Finance Bill, French businesses meeting conditions similar to those of Article 13 AA FTPC shall disclose their management accounts at the inspector's request, and any taxpayer holding consolidated accounts shall provide them along with other accounting data at the inspector's request. Another law dated November 2013, and whose title "Fight Against Tax Evasion and Financial Criminality" clearly states the mindset of the FTA, provided a new Article 223 quinquies B FTC according to which taxpayers already covered by Article 13 AA FPTC shall file a specific tax declaration outlining key transfer pricing policy features and intangibles location, on a yearly basis. The stated aim of the FTA is to use this so-called "TP Statement" to plan the use of its resources more efficiently and target entities that have a higher transfer pricing risk profile. Article L13AA itself was also modified and now requires French taxpayers to disclose in its transfer pricing documentation all tax rulings, i.e. not limited to transfer pricing-related tax rulings and not limited to the French territory, that are in its possession.

So what can French taxpayers expect for the near future? Will the OECD's BEPS measures, to be published on October 5th 2015, be applied by the FTA?

A first comment to make is that the FTA has already started to apply BEPS-related thinking in its current tax audits and it has already implemented BEPS-like measures in its most recent bilateral treaties (e.g. the latest treaty between France and Colombia). However, we believe that the FTA will need further legislative changes to implement some of the most visible and talked about BEPS guidance from the OECD.

For example, the OECD's recommendation that the Masterfile needs to contain information that may not be available to a local entity – as it is maintained at group level, such as its financing arrangements- is likely to meet legislative road blocks: demanding that a French taxpayer hands over information that is not in its possession could be considered unconstitutional.

Another example that could be mentioned is the OECD's recommendation that legal ownership of an intangible alone, without performing any functions, would not be entitled to any intangible related returns: it remains to be seen whether French judges would agree with this point of view based on current articles of law. It is thus expected that the FTA continue its work on drafting legislation, potentially to replace Article 57 FTC and/or update the other articles of law mentioned in this foreword, and work towards a full reversal of the burden of proof for transfer pricing-related matters.

In the meantime, the FTA continues to apply anti-BEPS measures during its transfer pricing audits without awaiting legislative changes. Whereas previous audit cases tended to be settled amicably, numerous tax audits nowadays involve amounts that are just too big and that are –to say the least- based on rather weak legislative grounds for them to be settled outside court. We therefore also expect a substantial uptick in transfer pricing case law in France, combined with legislative changes (national and international) that will need to be monitored closely in order to ensure compliance by French taxpayers.


  1. Article 57 FTC originates from a French law dated May 31st 1933.