1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
In France, the amending finance bill for 2009 has introduced a transfer pricing documentation requirement for financial years beginning on or after 1 January 2010.
Under article L 13 AA of the French tax procedure code (“FTPC”), legal entities established in France are subject to the documentation requirement if:
- (A) They have an annual turnover (taxes excluded), or gross balance sheet asset value of at least EUR 400 million (hereafter “the minimum threshold”); or
- (B) At the close of the tax year, they directly or indirectly hold more than half of the financial or voting rights in an entity which meets the minimum threshold (being a legal entity, body, trust or comparable institution established or constituted in France or outside France); or
- (C) At the close of the tax year, more than half of their financial or voting rights are directly or indirectly held by an entity which meets the minimum threshold; or
- (D) They have the benefit of a ruling granting a worldwide tax consolidation regime as provided for by article 209 quinquies of the French tax code (“FTC”) (in such a case the obligation applies to all enterprises which are taxable in France and which fall within the scope of the consolidation) [The worldwide tax consolidation regime has been abolished for financial years closed as from 6 September 2011.]; or
- (E) They belong to a French tax group under article 223 A of the FTC, and that group includes at least one legal entity meeting one of the requirements above.
In cases (A) to (C) above, we believe that the documentation requirement should apply to French companies not meeting the minimum threshold where they own at least 50% of a foreign affiliate which does meet the minimum threshold, or where they are at least 50% owned by such an affiliate.
In the statement of practice published in 2010 [Statement of practice 4 A-10-10 of 23 December 2010. For taxable events occurring on or after 12 September 2012, the former statements of practice containing the French tax authorities’ commentaries on the tax legislation have been revoked and replaced by a new internet resource called “BOFiP”, which is supposed to incorporate the former commentaries without change. However, in the first few months of the new system it has become apparent that a number of commentaries are missing (either partially or even totally on certain issues). These include statement of practice 4 A-10-10 of 23 December 2010. The French tax authorities are currently collecting the missing elements and correcting the published commentaries. For taxable events occurring on or after 12 September 2012, to be in a position to oppose their commentaries to the French tax authorities, it will be advisable to check that the BOFiP as it then stands does include the aspects of statement of practice 4 A-10-10 of 23 December 2010 referred to in this document.], the French tax authorities indicated that the expression “legal entities established in France” included foreign legal entities having a permanent establishment in France. In this situation:
- The conditions mentioned in (A) above would be considered to be fulfilled if they were fulfilled at the level of the French permanent establishment or of the foreign legal entity;
- The conditions mentioned in (B) above would be considered to be fulfilled if they were fulfilled at the level of the French permanent establishment;
- The conditions mentioned in (C) above would be considered to be fulfilled if they were fulfilled at the level of the foreign legal entity.
For entities outside the scope of this legislation, there is no formal transfer pricing documentation requirement. However, under article L13 B of the FTPC, if the French tax authorities gather information, in the course of a tax audit, which tends to indicate that the enterprise in question has made an indirect transfer of profits to a related non-French entity, they may require certain documents and information to be produced. The taxpayer then has a maximum of three months to provide the information required. In order to comply with this time frame, French companies which are not subject to the documentation requirement, but whose transactions with foreign associated companies are significant, generally document their transfer pricing policy in advance.
2. What is the content of the documentation that must be prepared?
a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?
The documentation must cover all transactions entered into with associated enterprises established or constituted outside of France.
b) What is the definition of “associated enterprises” for the purposes of this requirement?
Associated enterprises are entities (established or constituted outside of France) with which dependency ties exist. Such dependency ties are deemed to exist between two enterprises where:
- One enterprise directly or indirectly owns the majority of the share capital of the other, or effectively exercises decision-making powers within the other enterprise;
- Both enterprises are under the control of the same third enterprise (control being defined as above).
c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?
The content of the French transfer pricing documentation is very close to that of the EU TPD.
Indeed, the “standard” content encompasses the two levels of documentation proposed by the Code of Conduct drawn up by the EU Joint Transfer Pricing Forum:
- General information concerning the group of associated enterprises (the concept of a masterfile under the Code of Conduct); and
- Specific information concerning the associated enterprise subject to a tax audit (the concept of country-specific documentation under the Code of Conduct).
As regards general information on the group of associated enterprises, the following must be provided:
- A general description of the activity carried out, including any changes which occurred during the period subject to the tax audit in comparison with prior tax years;
- A general description of the legal and operational structures of the group, identifying associated enterprises which are engaged in controlled transactions;
- A general description of the functions carried out and risks assumed by the associated enterprises, to the extent that they affect the audited enterprise;
- A list of the main intangible assets owned (e.g. patents, trademarks, trade names, know-how), in relation to the audited enterprise; and
- A general description of the transfer pricing policy of the group.
As regards specific information concerning the audited enterprise, the following must be provided [Note that statement of practice 4 A-10-10 of 23 December 2010 includes certain precisions as regards the specific information to be prepared by enterprises operating within the banking industry]:
- A description of the activity carried out, including any changes which occurred during the period subject to the tax audit in comparison with prior tax years;
- A description of the transactions carried out with associated enterprises, including the nature of flows and the amounts thereof (including any royalties);
- A list of any cost-sharing agreements and a copy of any advance pricing agreements or transfer pricing rulings which affect the audited enterprise’s results;
- A description of the method(s) used to determine transfer prices in compliance with the arm’s length principle, including an analysis of functions carried out, assets used and risks assumed, and an explanation as to how the chosen methods were selected and applied; and
- When the chosen method so requires, an analysis of the comparables (benchmarks) regarded as pertinent by the enterprise.
Under article L 13 AB of the FTPC, “additional” documentation must be provided where transactions are undertaken with one or more associated enterprise(s) established in a non-cooperative State or territory (within the meaning of article 238-0 A of the FTC). The “additional” documentation should include, for each associated enterprise, all documents required from companies which are subject to corporate income tax, including the balance sheet and profit and loss account drawn up in accordance with French GAAP (as provided for by the French CFC rules – article 209 B of the FTC). On 1 January 2012, the list of non-cooperative States or territories is as follows (this list is updated on a yearly basis):
- Marshall Islands;
d) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?
The French tax authorities may only request information from French taxpayers. In practice, such requested information can include information located in another State.
To obtain information located in another State, the French tax authorities can request the assistance of foreign tax authorities under the exchange of information provisions of the applicable tax treaty.
e) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?
The French tax authorities generally accept regional benchmark studies and, in particular, pan-European benchmark studies when a French taxpayer is involved.
Statement of practice 4 A-10-10 of 23 December 2010 provides that the benchmark studies should contain the most recent information available at the time of invoicing of the transactions. However, where there has been no change to the circumstances under which the activity is carried out, it is permissible for the benchmark studies to be updated every three years.
f) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?
The transfer pricing documentation should be in French. However, in practice, documentation that has been prepared in English is often accepted by the French tax authorities. Though the legislation contains no specific provision, it is likely that the French tax authorities will accept at least the first part of the documentation (general information on the group of associated enterprises) in English. Note that statement of practice 4 A-10-10 of 23 December 2010 indicates that the French tax authorities may require the taxpayer to provide a translation of documents drafted in a foreign language.
3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?
The documentation must be made available to the French tax authorities on the date the tax audit begins, i.e. on the date of the first on-site arrival of the tax inspector as mentioned in the notification of tax audit.
Where the audited enterprise does not provide the documentation, or where it provides incomplete documentation, the French tax authorities must send a notice to provide or, as the case may be, complete the documentation, within a 30-day period. This notice must specify the documents or supplementary information required and the penalties applicable in the event of non-compliance.
The documentation requirement applies to transactions undertaken during tax years beginning on or after 1 January 2010.
4. In the event that the documentation is not provided within the applicable timescale, or is incomplete, do documentation-related penalties apply in your jurisdiction? If so, please detail the penalties and the circumstances in which they do and do not apply.
If the audited enterprise does not provide the documentation required under articles L 13 AA and L 13 AB of the FTPC, or if it provides incomplete documentation within the period mentioned above, the enterprise is liable, for each tax year covered by the tax audit, to:
- A penalty of EUR 10,000; or
- If the corresponding amount is higher and depending on the seriousness of the default, a penalty of up to 5% of the transfer pricing reassessment made by the French tax authorities (article 1735ter of the FTC).
5. Does the absence or incompleteness of documentation reverse the burden of proof as regards the arm’s length character of the transactions?
The absence of documentation or an incomplete documentation does not reverse the burden of proof as regards the arm’s length character of the transactions: to make a reassessment, the French tax authorities still need to demonstrate that the transactions do not comply with the arm’s length principle.
6. In the event that the tax authorities (i) impose documentation-related penalties and (ii) make a transfer pricing reassessment, does the imposition of documentation-related penalties prevent the taxpayer from initiating any mutual agreement procedure which may be contained in an applicable tax treaty (or, for EU countries, the procedure contained in the EU Arbitration Convention) with a view to eliminating any double taxation resulting from the transfer pricing reassessment?
Statement of practice 4 A-10-10 of 23 December 2010 confirmed that the documentation-related penalty does not constitute a serious penalty within the meaning of article 8-1 of the European Arbitration Convention of 23 July 1990. Therefore, such a penalty does not prevent the enterprise from using the procedures provided for by that Convention, or the mutual agreement procedures provided for by bilateral income tax treaties (the French practice being generally to refuse the benefit of the latter, as well as the former, where a serious penalty is imposed).
Where a company subject to a transfer pricing reassessment opens a mutual agreement procedure under an applicable bilateral income tax treaty, or the procedure set forth under the European Arbitration Convention, the collection of the reassessed tax may be suspended in certain circumstances (article L 189 A of the FTPC). In statement of practice 4 A-10-10 of 23 December 2010, the French tax authorities indicated that, in such a case, the collection of the documentation-related penalty would not be suspended.