For several years, tax audits of French companies belonging to multinational groups include quasi systematically an audit of their transfer pricing policies. New provisions have recently been enacted in France that should allow the tax authorities to better prepare the audits of transfer pricing policies and, also, to more precisely conduct such audits. Transfer pricing should therefore remain a hot topic in France and groups should anticipate more thorough audits by the French tax authorities.
1. Yearly declaration of the transfer pricing policy
Since 2014, French companies belonging to large groups must file each year with the tax authorities a declaration of their transfer pricing policy (article 223 quinquies B of the French Tax Code, "FTC"). This declaration is due within six months from the date of filing of the tax return and includes:
- General information on the group of associated enterprises, i.e.:
- a general description of the activity carried out, including any changes which occurred during the tax year;
- a list of the main intangible assets owned (e.g. patents, trademarks, trade names, know-how); and
- a general description of the transfer pricing policy of the group, including any changes which occurred during the tax year.
- Specific information concerning the enterprise filing the declaration, i.e.:
- a description of the activity carried out, including any changes which occurred during the tax year;
- a statement of the transactions carried out with associated enterprises, by type and by amount, where such transactions (by type) exceed EUR 100,000; and
- a description of the method(s) applied to determine transfer prices in compliance with the arm's length principle, including an indication of the main method used and of any changes made during the tax year.
As from 2017, the financial threshold triggering this obligation is lowered from EUR 400 million to EUR 50 million: to summarize, are now subject to such obligation (i) French enterprises having an annual turnover (taxes excluded) or a gross balance sheet asset value of at least EUR 50 million (the minimum threshold) and (ii) French enterprises controlling or being controlled by an entity which meets the minimum threshold (being a legal entity, body, trust or comparable institution established or constituted in France or outside France).
Based on parliamentary works, the number of groups subject to the obligation should rise from 1200 to 7400. From now on, many small and medium size enterprises established in France should therefore need to collect the information described above and transmit them to the tax authorities.
In practice, enterprises subject to the obligation and closing their tax year on 31 December 2016 should transmit their declaration in an electronic format to the French tax authorities on 3 November 2017 at the latest. Note that for French enterprises belonging to a tax consolidated group, such obligation should be fulfilled by the parent company of the French tax consolidated group.
2. Country-by-country report ("CbCR")
Further to the OECD/G20 Base Erosion and Profit Shifting ("BEPS") project, France introduced in its legislation the obligation to file a CbCR (article 223 quinquies C of the FTC). The French legislation (in particular, enterprises subject to the obligation, content of the CbCR and timing to file) is in line with the recommendations contained in the final report on Action 13 of the BEPS project.
France published recently the form that should be used by French entities subject to this obligation. This form must be filed in English in an electronic format within twelve months as from the end of the financial year; since this obligation applies to financial years opened as from 1 January 2016, the CbCR should be filed for the first time during 2017. Failure to file the CbCR will be punishable by a fine of up to EUR 100,000.
It can finally be noted that France ratified in February 2017 the multilateral competent authority agreement for the automatic exchange of CbCRs. In January 2017, 57 States had signed this agreement. This agreement defines the rules and procedures allowing competent authorities to automatically exchange the CbCRs filed in their respective countries.
3. Hearing procedure to combat international tax evasion
Since the beginning of the year, tax authorities have the right to hear persons – other than the taxpayer – who are likely to provide information useful to combat international tax evasion (article L 10-0 AB of the French Tax Procedure Code, "FTPC"). To date, this new provision has not been commented by the tax authorities.
It can first be recalled that French tax authorities do not generally have the right to hear persons. Such right must be expressly set forth by a provision of the law. The new procedure therefore extends the list of cases in which tax authorities can hear persons.
The law is not precise on the list of persons who could be heard by the tax authorities (the only person who cannot be heard is the taxpayer). However, based on parliamentary works, the list is likely to be long since it seems that (among others) clients, suppliers, accountants, employees and former employees of the taxpayer could be heard.
In practice, tax authorities must send a request to hear a person at least eight days prior to the date proposed for the hearing. The purpose of the hearing must be indicated on the request. The person has the right to refuse to be heard. If the person accepts, in principle, the hearing takes place in the premises of the tax authorities. Though it is not mentioned by the law, the person heard should have the right to be assisted by a lawyer. Minutes of the hearing containing in particular the questions raised and answers received must be prepared by the tax authorities. It must be signed by the tax authorities and the person heard; the latter can refuse to sign the minutes (such refusal is then mentioned on the minutes).
Tax authorities can use this procedure when they search for breaches to certain rules listed by the law. Transfer pricing, the deductibility of certain sums paid to beneficiaries subject to a favourable tax regime and the existence of enterprises taxable in France are among the rules for which such procedure can be implemented. As regards transfer pricing, this new procedure could for example be used by the tax authorities to understand the exact activities of a company and hence check the functional analysis that could be provided by such company.
This new procedure is autonomous and allows tax authorities to collect information. It could therefore:
- be implemented prior or during a tax audit of the taxpayer;
- allow tax authorities to prepare a tax audit or to supplement with hearings the information collected during a tax audit. Tax authorities would not be obliged to inform the taxpayer of the existence of the hearings and of their content during the tax audit: the information collected during the hearings could therefore not be debated during the tax audit. A discussion could take place only further to the use of the information collected in a tax reassessment notice and if the taxpayer expressly requests access to such information.
4. Potential impact on the audit of a transfer pricing policy
Transfer pricing remains an important topic in France: according to parliamentary works, in 2014, nearly 400 reassessments made by tax authorities involved transfer pricing; the amounts reassessed in tax basis were in the range of EUR 3.6 billion.
The new provisions described above confirm that groups must establish their transfer pricing policy and documentation with great care. In France, (i) enterprises having an annual turnover (taxes excluded) or a gross balance sheet asset value of at least EUR 400 million (the minimum threshold) and (ii) French enterprises controlling or being controlled by an entity which meets the minimum threshold (being a legal entity, body, trust or comparable institution established or constituted in France or outside France) must prepare a transfer pricing documentation and be ready to provide it to the tax authorities at the beginning of a tax audit (article L 13 AA of the FTPC).
Groups must also anticipate tax audits by analysing the information provided to the tax authorities prior to such audits (by filing, as the case may be, the transfer pricing declaration and the CbCR) and by checking their consistency with the information that would be provided during a tax audit (in particular, the information contained in the transfer pricing documentation). From now on, for the biggest groups, the French tax authorities would in particular have the following information at their disposal prior to beginning a tax audit:
- Overview of the allocation per jurisdiction of the group's turnover, profit, taxes, employees and activities.
- An indication of the main intangible assets owned (e.g. patents, trademarks, trade names, know-how) and the State of establishment of the enterprise owning such intangible assets.
- A general description of the transfer pricing policy of the group.
- For the French entities, a statement of the main international intragroup transactions carried out, indicating their amount, the State of establishment of the associated enterprises involved and the transfer pricing method used.
Finally, this information is provided in an electronic format to the French tax authorities: groups should therefore also anticipate that, at some stage, tax authorities will use information technologies to automatically treat and cross-check such information.