By Terence WILHELM (Attorney at Law, Managing Partner, CARA Avocats, France)
On December 31, 2017, the French Government gazetted Finance Act, 2018, which revises the current transfer pricing documentation requirements in France. Accordingly, companies falling within the ambit of the new requirements will need to newly submit to the tax authority a two-fold documentation comprising “master” and “local” files, developed under Action 13 of the OECD’s base erosion and profit shifting (BEPS) project. The revised transfer pricing documentation requirement is inserted in Article L13AA of the French Procedural Tax Book (Livre des procedures fiscales) and is applicable to fiscal years beginning January 1, 2018.
Interestingly, the new transfer pricing documentation requirement is by far less ambitious than the initial draft and, to some extent, deviates one inch from the OECD’s guidance. In particular, it does not require:
- A description of the individuals to whom the local management reports, or name of the country (or countries) in which the individuals maintain their principal offices; and
- A list of the key competitors.
The previous documentation requirements only required benchmarking studies depending upon the nature of the transactions. In this respect, several taxpayers used to refer to best practices or to the EU Joint Transfer Pricing Forum (EU-JTPF) studies while supporting inter-company services or low-value added transactions. However, the new documentation requirements make it mandatory to have benchmarking studies prepared to support the arm’s length nature of inter-company transactions. This will create an additional compliance burden on taxpayers and is contradictory to the OECD guidance on low-value adding services.
Current provisions continue to apply
It is important to note that the revised Article L13AA does not lead to revisiting the scope of the transfer pricing documentation requirements in France. The requirement applies to French companies which:
- Record total sales or gross assets above EUR400m at year-end; or
- Are directly or indirectly owned by one or several foreign companies exceeding the above threshold; or
- Own, directly or indirectly, one or several foreign companies exceeding the above threshold; or
- Are part of a French tax consolidation regime in which a member meets one of the above conditions.
Additionally, the penalties applicable in case of failure of taxpayers to provide a complete transfer pricing documentation report remain untouched and continue to be the greater of: 0.5 percent of the inter-company transactions not being documented; five percent of the total reassessments notified in transfer pricing matters; or a minimum of EUR10,000 for each financial year concerned.
Transfer pricing documentation needs to be submitted upon request by the tax authority and only under the framework of a tax audit. As such, taxpayers do not need to spontaneously submit transfer pricing documentation at the time of preparing or filing tax returns. Taxpayers are also not required to insert any specific information in tax returns to indicate that a transfer pricing documentation has been prepared, or is being maintained. The revised transfer pricing documentation constitutes, along with the country-by-country reporting and the transfer pricing return form (2257 form), the complete French transfer pricing package.
More guidance needed
The new transfer pricing documentation requirement is applicable to fiscal years beginning January 1, 2018. Accordingly, taxpayers can document the fiscal years that are open to tax audit based on the previous format and content. However, it is recommended that taxpayers start replicating this new model. With this reform, France takes another step forward in implementing the OECD’s BEPS proposals. Needless to say, the French tax authority must provide further guidance on key aspects of the new requirements that remain unclear.