New regulations on transfer pricing

May 4th 2018

France integrates the BEPS program in its transfer pricing regulations

The 2018 finance law updates the content of the documentation on transfer pricing (Art. L.13 AA of the French Tax Procedure Code) by adding certain obligatory information provided in the OECD standard in the context of action 13 of the BEPS project (the objective of which is to prevent the erosion of tax bases for corporate tax and profit transfer).

The companies that must comply with such obligation have to provide the tax authorities with a document in dual entry, including:

  • a master file reiterating general and standardized information on the documentation for the group’s transfer pricing policy. This file is identical in each state in which the documentation must be presented.
  • a local file reiterating the specific information on the transactions made by the controlled company. This file is specific for each state depending on the location of the controlled company.

This structuration is similar to the previous structure (which also had a general and a specific section), but it also includes new information, based on action 13 of the BEPS, which must be reiterated in the documentation.

In particular, it concerns information relating to the group’s strategy for intangible assets, the group’s financing, the allocation of transactions depending on the tax jurisdiction of the beneficiary / paying entity etc.

Yet, besides the new information to add to the documentation, for which the integration of the regulations on transfer pricing was expected in the medium to long term, the key issue, in our opinion, is that Article L.13 AA of the French Tax Procedure Code renders a comparative study (or benchmark) obligatory to substantiate the compliance with the arm’s length principle of the controlled intra-group transactions.

Under the previous provisions, such a comparative analysis was not systematically required, insofar as it was only required to perform such analysis when the selected transaction implied to do so.

Accordingly, in practice, it was possible for certain types of transaction (in particular, transactions referred to as “low added value” transactions) to make reference to best practices recognized by the OECD or research analysis carried out by the EU Joint Transfer Pricing Forum (JTPF).

It is now no longer possible to avoid such comparative analysis, which must also include a description of the financial indicators used in this context and the selection methods for the comparable data with an indication of the source of such information.

Entry into force of the updated provisions

This updated provision applies to the fiscal years started on January 1, 2018.

Accordingly, in practice, the tax payers may continue to make reference to the fiscal years still open to a tax audit and ended prior to January 1, 2018, in accordance with the format and content provided by the previous provisions.

However, we consider that it is highly recommended to anticipate the effort of adaptation required to complete the documentation required for the fiscal year 2018, in particular with regard to the obligation to systematically include benchmarks for all the intra-group transactions falling under the scope of Article L.13 AA of the French Tax Procedure Code.

A decree must be published in the coming months to provide additional instructions on certain practicalities for which the text does not provide any specification (language in which the files must be drafted, the substantiation threshold required to define “significant transactions” etc.).

With such reform, France fully intends to implement the program set up in the context of the BEPS project, which undoubtedly involves more documentary work for companies but also sets a simplification objective through standardization of such documentation.