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France's New Transfer Pricing Environment : What You Should Know


Recent developments in France indicate that the tax authorities are shifting the transfer pricing issue to the top of their agenda, as it is now on the European level. News is being made on several fronts.

Transfer pricing adjustments have skyrocketed over the last 10 years from Euro200 million to 1 billion. In today's environment, major companies are likely to encounter transfer pricing questions.

In particular, the FTA has made clear that stripped distribution structures, such as a commissionaire structure with a Swiss principal, would be scrutinized. However, that does not prevent the FTA from addressing the structure through the advance pricing agreement program.

It is true that the French government is making the APA program a success. The program is pragmatic and has proven efficient. Several bilateral APAs involving EU and non-EU countries have been reached since 1999, and the procedure is now extended to unilateral APAs. (See section III.A.)

Also, a specific private ruling procedure has been implemented for foreign companies doing business in France to clarify whether their presence may give rise to a permanent establishment. Uncertainty deriving from case law may now be resolved.

On the European front, transfer pricing and the coexistence of 25 different direct taxation regimes are seen as a main obstacle to an efficient and competitive single market. Efforts are being made to reduce compliance burdens and to alleviate double taxation. Thanks to the work of the EU Joint Transfer Pricing Forum (JTPF), an EU documentation was adopted, the EU arbitration convention reentered into force, and an EU APA may no longer be fiction.

This article is a snapshot of the new transfer pricing environment in France. It revisits the applicable principles as background for a review of attitude of the tax authorities enforcing them. Next, we assess whether double taxation is history thanks to the efficient APA program and the EU arbitration convention when it comes to wholly EU transactions.

In France, one set of provisions deals specifically with transfer pricing.

Section 57 of the French tax code (FTC) targets transfer pricing in a cross-border context only. It provides that an indirect transfer of benefits is presumed each time the FTA proves that a controlled transaction with a foreign counterpart is not at arm's length.

The FTA may also indirectly address transfer pricing in determining whether some transactions are made in the interest of the taxpayer with the so-called sound decision (acte anormal de gestion) theory. Courts have confirmed that this principle may allow the FTA to adjust inappropriate remuneration or expenses even in wholly domestic transactions. Under section 57, the FTA may challenge the transfer pricing policy adopted by a French taxable entity vis-à-vis a non-French affiliate. When parties to a cross-border transaction are in a dependency/control situation, a transaction that is not arm's length in any respect (pricing, terms, and so forth) is deemed an indirect transfer of benefits. That transaction exposes the French taxpayer to adjustments and withholding tax on the deemed distribution component (subject to any double tax treaty).

There is no limitation in the scope of transactions that could be challenged (transfer of assets or remuneration for services, use of intangibles, participation in cost funding or sharing arrangements, and so forth).

The French authorities bear the burden of proof. They must demonstrate that the transaction is a controlled transaction, that is, one involving parties in a control/dependency situation, 1unless the non-French party benefits from privileged tax treatment (that is, its taxation is lower than 16.66 percent, half the French corporate tax rate) and also that the transaction is not at arm's-length. The taxpayers may then demonstrate that the terms are arm'slength in putting forward any direct or indirect benefits received in consideration.

1. The Arm's-Length Principle 
Article 57 requires French company taxpayers to comply with the arm's-length principle. France follows the OECD guidelines. Prices and/or profits between controlled taxpayers must be the same prices and/or profits that would have existed had the parties been unrelated but otherwise engaged in a comparable transaction under comparable circumstances.

French taxpayers are not subject to the best method principle. The purpose of transfer pricing documentation is primarily to support the transfer pricing policy as being arm's length and thereby avoid adjustments.

Emphasis is made on compliance with the arm'slength principle on a transaction- by-transaction basis. Accordingly, transaction-based methods are favored (another difference with the United States). In France, as in Europe, the comparable uncontrolled price, the cost plus (CP), and the resale minus methods (RMM) are usually used (at more than 80 percent) unless they prove inaccurate. Only in that case, the profit split and comparable profits methods are used, whereas U.S. multinationals generally favor the comparable profits method in compliance with IRC section 482. In our experience, the use of a profit level indicator to test the transfer pricing policy is, however, more and more accepted, and FTA may even resort to it.

2. Burden of Proof and French Documentation 
There is no formal documentation requirement as there is in the United States, the United Kingdom, or Germany. However, the lack of appropriate documentation may easily expose the taxpayer to an adjustment. Penalties for failure to keep transfer pricing documentation are not material.

A transfer pricing audit can be managed efficiently in reaching the right balance between the FTA having to address an unbalanced transaction with precise justification and the taxpayer whose job is to provide information. In the course of an audit, the FTA may resort to two procedures a general procedure under the tax procedural code section L 10, and the special transfer pricing inquiry under section L 13 B.
Section L 10 governs the information procedure for all tax audits. Taxpayers are generally required to bring information, justifications, and an explanation of any aspects or transactions affecting the taxable profit or loss (P&L) about which the FTA may inquire. Taxpayers should submit the requested information within 30 days from the request unless otherwise agreed (as is often the case in transfer pricing audits). Taxpayers should expect to receive, and take care in answering, a transfer pricing questionnaire.

Section L 13 B is intended to apply only when taxpayers fail to respond or respond inadequately to the FTA. For section L 13 B to apply, the FTA should presume a transfer of benefits, that is, an unbalanced transaction. However, the FTA is not required under the regulations to justify precisely what led them to conclude that a transaction is not arm's length. The audited taxpayer must provide comprehensive
transfer pricing documentation addressing its relationship with the other party to the transaction, the transfer price methodology, and the activities of the other party. Taxpayers are often required to produce a functional and risk analysis and a broad description of the group, the activities, the policies, and, if appropriate, the tax treatment abroad. The tax treatment question may be asked only if the audited French taxpayer holds at least 50 percent of the other party.

The documentation must reflect the situation at the time the transactions occur even if it must not be contemporary to the transactions. According to the law, the documentation should be in French. However, in practice, the FTA often accepts transfer pricing documentation in English.

Depending on the business of the taxpayer, pan-European comparables may be used. French comparables are generally useful if comparable business/groups exist in France.

Hence, French taxpayers must be in a position to make available at least some transfer pricing documentation at any time. Failure to submit the requested information satisfactorily within a maximum period of three months exposes the taxpayer to penalties and may shift the burden of proof to the taxpayer.

As bearing the burden of proof, the FTA is generally seen as encouraged to initiate and promote a streamlined exchange of information between the taxpayer and the auditors. Case law on section 57 shows that in an audit, taxpayers with comprehensive and reliable transfer pricing documentation generally prevail. Taxpayers that provide targeted and sufficient information have an advantage.

To reduce compliance costs and exposure to documentation-related penalties, a standardized and partially centralized ''EU Transfer Pricing Documentation'' (EU TPD) for all EU affiliates of a multinational group has been proposed for adoption in the member states.2 It consists of a master file with country-specific documentation. The EU TPD fits the OECD guidelines.

It remains for member states to accept the EU TPD as a satisfactory basic set of information that at least waives documentation penalties (when applicable). Once introduced in domestic law, the EU TPD should remain optional for taxpayers even if the proposed code of conduct encourages taxpayers to apply that EU-wide approach.

3. Audit Environment 
Major companies can expect an audit every four years. The statute of limitation period is three years. In our experience, U.S. companies do not suffer any special treatment.

Companies are generally audited by auditors specialized in the field of the activity of the taxpayers. An IT task force may be used by the FTA. The task force is authorized to sneak into the taxpayer's computer system to pick up any French or non-French information viewed as impacting the taxpayer's taxable P&L. It is therefore advisable to appoint an employee to deliver to the IT auditor the requested data in order to prevent its direct access to the IT auditor. Intranet systems should prevent - as far as possible - access to foreign operations. An international tax team with the FTA (''30eme Brigade'') may also be involved. It is very familiar with international transfer pricing issues.

4. Discussion With the Authorities 
As in the United States, the transfer pricing method used must have a great degree of comparability and reliability; but French taxpayers are not required to demonstrate that the method used is the ''best method'' as in U.S. Internal Revenue Code section 482. The threshold is different. In light of the activity performed, the method must be appropriate.

The French transfer pricing approach may be compared to the U.K. ''self-assessment'' regime. As the reader may guess, however, the first step in the exchange with the FTA is to demonstrate that the pricing policy reflects risks borne and functions performed. A risk and functional analysis is therefore helpful. Having successfully climbed that hill, the next step focuses on the benchmark to justify that there is no discrepancy between the margins retained and the relevant comparable. As in the United States, benchmarks are usually performed by economists relying on multinational data banks (for example, Amadeus in Europe).

The taxpayer must be prepared to address those issues. The necessity of a transfer pricing documentation prepared in advance is therefore twofold. It generally prevents the FTA from challenging the method retained and from picking up whatever method may be more favorable to them. As a result, the discussion is narrowed to the way the method is applied. Second, with a reliable documentation that includes comparables and benchmarks, even on that latter issue, the FTA generally loses ground.

In the Cap Gemini case settled recently,3 the French Supreme Court determined that the FTA failed to demonstrate the indirect transfer of benefit in the absence of a comparability study even though the criticized transaction consisted of a royalty-free license of the Cap Gemini trademark and logo. The Court did not consider it material that French subsidiaries were charged 4 percent for the same services. According to the appellate court decision, the actual value of a trademark and logo is determined on a case-by-case basis and depends on the market where they are used. Moreover, the value may change from time to time. The Supreme Court considered that the mere fact that French and foreign subsidiaries are treated differently was not relevant. This new court decision does not break new ground, but reaffirms the established principle that a transfer pricing reassessment must rest on solid evidence. The Cap Gemini case covered fiscal years in the late 1980s. Since then, the FTA has updated its procedures and is now familiar with economists' work and transfer pricing methods. As a result, the FTA now does not hesitate to use comparables.

Although the taxpayer is expected to provide the FTA with domestic comparables, there is a general acceptance for European comparables. The recently proposed transfer pricing code of conduct encourages member states to accept pan-European databases instead of disregarding them because they are not domestic.4 The FTAuses secret comparables, but should provide sufficient information upon request to assess their relevance.

5. Stripped Distribution Structured Questioned 
France, like other high tax civil law jurisdictions, saw numerous multinational groups embracing new business models and converting domestic ''full fledged'' distributors into ''stripped entities,'' namely commissionaire or limited risk distributors. The same trend hit manufacturers. The FTA decided to tackle the issue to prevent the erosion of its revenues and respond to the growing public discontent toward these ''tax delocalization schemes,'' as denounced by French unions.

To the best of our knowledge, most of commissionaire structures and the like have already been audited. Representatives of the FTA said in seminars that the conversion of a classic distribution structure into a commissionaire would be scrutinized. Conversion to a limited function entity may expose the French distributor to capital gains tax and transfer tax issues on deemed transfers of clientele and actual transfer of intangibles, to potential limitation of net operating losses (NOLs), and taxation of a deemed indemnity for the termination of the former distribution agreement. Generally, arguments based on the commissionaire's legal and commercial status (under the Commercial Code section L 132-1) exist to avoid adjustments on those grounds. Once the new structure is set up, the main issue is whether a commissionaire may deem an agency to be the PE of its principal (generally in Switzerland). According to the FTA, the limited function entity is dependent and the substance of its activities gave it sufficient authority to bind the principal. On the other hand, commissionaires, acting freely within boundaries inherent in their agency functions, legally own the clientele and act in their own name. They are independent and do not bind the principal. Also, the PE question raises numerous procedural issues, including an extended statute of limitation of six years with no relief for tax already paid by the same structure as the distributor. The tax treaty wording and OECD guidelines should not allow the FTA position to prevail even if that latter ground might become less certain. (See OECD Second Annual Centre for Tax Policy and Administration Roundtable: Business Restructuring, January 26-27, 2005.)

In our experience, the FTA would challenge the commissionaire structure only if compensation is not appropriate for the functions performed and the risks assumed. The FTA is concerned with ''tax reorganizations'' that lack substance. In several cases, the FTA found the structure was valid and properly compensated and to the best of our knowledge, the stripped distribution structure has not led to any court decision.
In any event, whatever the ground for a proposed adjustment, the debate would ultimately end up in discussing the appropriate remuneration of the commisionaire/distributor or attribution of profits to the PE, which takes us back to transfer pricing issues and the necessity of preparing solid transfer pricing documentation.

6. Is the French Transfer PricingLegislation EU-Proof?
Under EU law, a market access principle applies according to which domestic rules (whether tax or not) should not impede or make less attractive the exercise by a person of its right to work or establish itself within the European Union and to obtain or supply goods, services, and capital (the so-called ''Four Freedoms''). Under ECJ case law, the principle of freedom of establishment is not only directed at ensuring that host member states do not treat foreign nationals or companies in a less favorable manner than nationals, but also at preventing the member state of origin from hindering the establishment in another member state of nationals or companies established under its legislation. 5 

The ECJ admits, however, that some restrictions or difference of treatment might be justified on public interest grounds. In any event, achievement of the pressing reasons of public interest should not go beyond what is necessary for that purpose (''proportionality principle''). Three justifications may include ensuring the coherence of a national tax system, ensuring the effectiveness of the fiscal supervision or compliance, or preventing tax evasion.
To counteract uncertainty created by ECJ decisions, the U.K. government, for instance, introduced the extension of transfer pricing rules to domestic transactions in the 2004 Finance Act:

  • Transfer pricing and thin capitalisation rules are essential to the maintenance of a fair system of taxation. Decisions of the European Court of Justice had created uncertainty about the application of these rules. To remove that uncertainty, the Government announced its intention to extend transfer pricing rules to domestic transactions.

In targeting exclusively controlled transactions with foreign parties, section 57 also creates a discrimination or difference of treatment that might prevent French taxpayers from establishing a presence in another member state or from doing business with EU affiliates. That would then constitute a tax obstacle to cross-border activities within the EU single market with no acceptable justification; the ECJ is likely to strike it down.

Section 57 is likely to be found in breach of EU law in litigation on that ground. However, that debate might not be worthwhile because the FTA, aware of the relative weakness of section 57, also bases adjustments on the general theory of sound business decision, which applies also to wholly domestic transactions.

Under the sound business decision theory, the FTA must demonstrate6 respectively that a business decision is purposely not sound or that profits are transferred between related parties. In French case law, the intent7 of the taxpayer in the sound business decision theory is inferred from a joint interest between the parties. The definition of the joint interest is construed as wider than the definition of the control/dependency relationship targeted under section 57. For example, managers or directors8 of a company, its shareholders,9 or even an unrelated company whose shareholders are relatives of the shareholders of the first company are considered as holding a joint interest with the first company .10 

In both procedures, the burden of proof is initially on the FTA. However, if the FTA can provide the required proof, the burden is transferred to the taxpayer. The taxpayer would therefore have to demonstrate that the deemed transfer of profit or the at first glance unsound business decision was balanced by a commensurate counterpart.

Under L 13 B proceedings, the FTA, in the course of an audit based on section 57 of the FTC, is entitled without limitation to request any information likely to clarify the disputed operation. That does not differ from the general proceedings, when the auditors are entitled, in the course of an audit, to request or scrutinize any information likely to affect, directly or indirectly, the net or taxable income (FTC, section 54 and L 10). Nonetheless, in the general proceedings, the taxpayer failing to provide the requested information is not subject to the Euro10,000 penalty.

Therefore, the sound business decision theory seems to be practically equivalent, from the taxpayer standpoint, to section 57 of FTC. At best, one may consider under some circumstances that the balance between the taxpayer requested to provide information and the FTAbearing the burden of proof might slightly favor the taxpayer.

The EU argument may be of little relevance for related-party transactions with the U.S. or any non-EU affiliate. In any event, the FTA may resort to the sound business theory.

Nicolas Sarkozy, then France's finance minister, announced several measures to improve relations between the FTA and taxpayers on November 3, 2004.11 Those measures were later formally adopted.

The APA program has been strongly developed, both in its legal basis and its resources. (See III.A below.)
Effective January 1, 2005, foreign taxpayers may approach the FTA for a private ruling on whether a foreign company operates in France through a PE (PTC, section L.80-B-6). That can be especially useful to determine if a subsidiary constitutes a PE. Indeed, in 2003, the Conseil d'Etat did rule out that a subsidiary of a Swiss parent company12 could give rise to an agency PE even if the case was settled in favor of the taxpayer.

Therefore, a favorable private ruling would protect the foreign taxpayer from subsequent adjustment on that ground. Failure of the FTA to answer within the three-month period from the application would be considered as a non-PE answer. Most relevant rulings should be published without reporting the identity of the parties.

Taxpayers suffering double taxation following a transfer pricing reassessment who introduced a mutual agreement procedure (MAP) either under the EU Arbitration Convention (90/436/CEE, July 23, 1990) or a double tax treaty benefit from a suspension of tax collection during the entire procedure under domestic law (PTC, section L.189 A). The suspension is effective for requests introduced after January 1, 2005. Practically, tax collection is suspended until the third month following the date the relevant authorities notified the taxpayer of their decision.

In the course of an audit and before tax assessments, the tax auditor may take a position on a limited number of questions.13 The scope of that request ranges from the tax characterization of a specific operation to any kind of question likely to give rise to future reassessments. The position possibly14 taken by the tax auditor consequently prevents the FTA from making future adjustments on the same matter under an interpretation differing from the original one. However, the FTA excludes transfer pricing issues from the scope of that procedure, considering that transfer pricing should be addressed through the APA program.

According to the finance bill for 2006, late payment interest to be paid on adjustments is reduced to 0.4 percent per month from 0.75 percent, which results in a 4.8 percent annual interest rate (in lieu of the current 9 percent). Moreover, since January 2005, taxpayers that, in the course of an audit and before any adjustments, spontaneously proceed to tax adjustments may apply for a 50 percent lowering of the related late payment interest.

Double taxation from transfer pricing adjustments may be prevented in an easier way than a few years ago. The French APA program, slow to start, is now a success. Bilateral, multilateral, and now unilateral APAs can be easily reached. Absent an APA, taxpayers that suffer from double taxation in the European Union are guaranteed to have the relevant member states settle the issue and alleviate the double taxation within a maximum three-year period based on the EU arbitration convention, which provides for a mandatory arbitration procedure.

A. The APA Program 
Taxpayers may resolve transfer pricing matters by reaching an APA with the FTA subject to a tax treaty with a MAP. The program was introduced in 1999 based on the MAP of the double tax treaty and administrative regulations. In 2004 the guidelines were codified into law under FTC section L 80 B-7.

As in any other country, an APA is an agreement between two or more jurisdictions that is accepted by the taxpayer. It contains a transfer pricing method and the rate of remuneration for services provided and protects taxpayers from further challenges from the tax authorities on the method used. It guarantees conformity with domestic legislation
and OECD guidelines. Typically, an APA applies from three to five years, usually starting the year following the year in which the application is requested by the company.

Because transfer pricing is also a critical challenge to France, as to any other country, the FTA is eager to reach agreements; it proves accordingly pragmatic and business-oriented.

The scope of the APA is freely designed by the applicant, including the applicable countries, industry(ies), activity(ies) within the industry, and the definition of functions or even transactions. The FTA, however, reserves the right to deny an internally inconsistent application.
. An APA may be bilateral, unilateral (from 2005 on), or even multilateral. Two multilateral agreements were reached in 2004. One was for Airbus that involved France, Germany, the United States, and Spain. The second agreement, reached in 2004, concerned Michelin with France, the United Kingdom, and Spain. Another interesting multilateral APA with France, Belgium, and the Netherlands was signed by Euronext and Clearnet in the financial service area15.

. The extension of the program in 2005 to unilateral APAs is good news for SMEs, even if the FTA is not prevented from favoring bilateral APAs when the other jurisdictions have suitable APA programs. However, unilateral APAs might be particularly helpful for simpler controlled transactions such as cross-charge of fees, cost, management fees, and so forth. This procedure should be less time- and costconsuming. The first application was filed recently. However, unlike bilateral or multilateral agreements, a unilateral APA is less likely to eliminate the risk of juridical or economic double taxation because all of the relevant tax administrations do not take a position on the arm's-length basis of the transaction.

APAs are supposed to apply for three to five years. Although an APA usually starts the year following the year in which the application was filed, it can apply to the filing year. The FTA is flexible. A roll-back may be agreed in some cases with the taxpayer subject to the agreement of the other jurisdiction's tax authorities. Obviously, MNEs view the APA program as the best way to prevent tax audits not only for the future, but also for past years. Therefore, MNEs may be eager to also reach APAs for past financial years whether or not they are audited.

. APAs are generally reached within 18 to 24 months from the application; that does not compare badly to other countries with similar programs. In the United States, a unilateral APA or the IRS position in a bilateral APA is reached from 12 to 15 months after the application date; then the negotiation phase lasts from four months to four years. An APA may be renewed.

The program is now at a mature stage and has been accelerated. At the end of January 2006, 22 APAs were signed; the dedicated team (CF3) is working on 30 applications. The APAs cover various jurisdictions in Europe and elsewhere, including Japan, the United States, and Switzerland. The industries covered include aeronautic, automotive, financial institutions, energy, packaging, and pharmaceutical. They govern various activities, including banking, manufacturing and distribution, IP licensing, and overheads.

Effectively, the taxpayer must file an application with the APA team of the FTA and concerned foreign tax authorities at least six months before the beginning of the financial year when the APA is to be effective. Generally, a prefiling meeting with the FTA is recommended to obtain a preliminary determination from the FTA, at least on the acceptability of the file within the APA program. That meeting can also be done on an anonymous basis.

Either immediately or within approximately one month following the meeting, the FTA will let the taxpayer know if they are willing to address the taxpayer's demand. If the FTA decide to handle the case, the taxpayer must send the official request with the transfer pricing documentation supporting the transfer pricing method proposed. The FTA then studies the case and can request additional information in writing and/or request working meeting(s) with the taxpayer. When the FTA reaches a position on the file, it usually meets with the foreign authorities to discuss their respective positions. As noted above, the FTA abides by the OECD guidelines and enforces them pragmatically. In our experience, if it agrees to handle an APA procedure, the FTA generally reaches an agreement.

The documentation to provide for anAPAincludes charts of the group organization, a functional and risk analysis of the transactions and entities covered by the APA, benchmarks justifying the transfer pricing method retained and that the prices are at arm's length, the identity of the group's major competitors, and so forth. The French entities concerned are subject to further documentation requirements - tax returns and auditors' and management's reports for the past three years.

Once the APA is reached, the taxpayer is expected to provide the FTA with an annual report showing that the very method retained in the terms of the agreement is applied consistently and that the critical assumptions underlying the APA are still valid. According to the FTA, an APA depends more on the pricing method than on the prices to be charged within the scope of the group16.

B. The EU Arbitration Procedure 
Following its communication ''Towards an Internal Market Without Tax Obstacles,''17 the European Commission set up the EU JTPF to tackle the critical issue of transfer pricing within the single market. Representatives of tax authorities, of the European Commission, and of the business community sit on the JTPF. Its mission is ''to identify pragmatic, non legislative solutions to the practical problems posed by transfer pricing practices in the EU.'' It reactivated and improved the EU arbitration convention and promoted a common approach for documentation requirements. The JTPF is at work on alternative dispute avoidance and resolution procedures (including APA and prior clearance). The JTPF also concentrates its efforts on penalties for transfer pricing adjustments and the influence of accounting systems on transfer pricing (among other areas of improvement).

The JTPF achieved its first goal already. The JTPF proposed a code of conduct for the improvement of the Arbitration Convention (90/436/EEC of July 23, 1999)18, which has been adopted by the European Council. Moreover, the JTPF action contributed to the reentry into force of this convention. As a result, the EU arbitration convention signed on July 23, 1990, and expired January 1, 2000, reentered into force on November 1, 2004, with retroactive effect from January 1, 2000. However, the convention does not apply yet in the 10 new member states. The JTPF code of conduct ensures a more effective and uniform application by all the member
states of the convention.

The European experience may appear particularly interesting with the increasing recognition of mandatory arbitration as the most efficient way to resolve disputes under the MAP. 19 

Associated companies - as defined for tax treaty MAP purposes - facing double taxation subsequent to a transfer pricing audit in one member state can bring the case to the domestic competent authority. Should the latter conclude that double taxation arises and that no domestic relief exists, it must initiate a MAP along with the other competent authority as governed by the MAP tax treaty and following the OECD guidelines.

If the parties fail to reach an agreement within two years from the company's request, an advisory committee is appointed to issue an advisory ruling within six months. The taxpayer is permitted to appear before the advisory committee. The tax authorities would then have another six months to reach an agreement, which may or may not be based on the ruling. Failing that, the opinion becomes binding.
Meanwhile, as recommended by the JTPF code of conduct and approved by the French Parliament, tax collection will be suspended during the MAP either based on the convention or on the double tax treaty MAP effective January 1, 2005. Tax collection is therefore postponed until the competent authorities have reached a decision.

The OECD arm's-length guidelines should govern the procedure ''without regard to the immediate tax consequence for any particular contracting state.'' 20 

Two cases have gone to arbitration. One involved France and Italy, the other France and Germany. The decisions have not yet been published at the request of the taxpayers.

The French-Italian case concerned profit allocation between a manufacturing affiliate and a distributing affiliate. The taxpayer wishes to resolve its similar transfer pricing disputes with Belgium, Germany, and Spain before consenting to publication. 21 
The procedure should last no more than three years. Cases should be resolved generally more quickly because the involved member states face the prospect of mandatory arbitration after two years.

Even if three years might be viewed as a long time frame, a mandatory resolution appears to be major progress in comparison with the tax treaty MAP under which an issue may remain unresolved and the double taxation unrelieved. 22 It can also be
favorably compared to the time required to have a final court decision; in France it takes approximately 10 years.
Because France does not offer ''fast-track'' APAs, taxpayers should weigh APA and arbitration. Even if member states' tax authorities are keen to work together, multilateral APAs still lack an EU legal framework, are often complex, and may give rise to difficulties due to differences between countries' APA programs. On the other hand, an APA provides certainty and allows taxpayers to address transfer pricing issues in an efficient and business-oriented way.

C. How Far Is the End of Double Taxation as We Know It? 
The ECJ is eager to remove any obstacle to the exercise of the EU four freedoms (freedom of establishment, and freedoms of movement of individuals, goods, and capital), and direct tax is under fire. Transfer pricing regulations targeting outbound or inbound transactions only would not survive the European market access principal as applied by the ECJ.

The European authorities have resolved to make the transfer pricing compliance burden and double taxation a thing of the past. Beyond the reactivation of the EU arbitration convention, alternative dispute avoidance and resolutions procedures are under review.23 For instance, the JTPF is willing to promote the use of similar approaches for the APA programs in terms of scope, documentation, duration, transparency, and so forth. Different sets of rules make bilateral and multilateral APAs more time-consuming and burdensome, accordingly less attractive to taxpayers. Also on the agenda is contemplating a prior approval or agreement between the involved tax authorities on an appropriate transfer price. A new process of a mutually agreed transfer pricing adjustment between the tax authorities following a transfer pricing audit is therefore already discussed at the EU level.

The definitive answer to the transfer pricing issue may be the introduction in the European Union of an EU consolidation regime. 24 It would mainly result in a decrease of compliance costs, consolidation of the profits and losses, and disappearance of transfer pricing issues within the EU group.The European Commission has been working on that solution for years.25 The project took a new turn recently with the ECJ ruling striking down the U.K. group relief to the extent that losses incurred abroad by local subsidiaries of a U.K. parent company are not available, even though the ECJ position was not as tough on member states as some practitioners had expected.26 The two main options include the home state taxation (HST) and the common consolidated corporate tax base (CCCTB).

HST targeting primarily small and medium-size enterprises is seen as a ''workable solution'' that might be a first step toward the CCCTB. HST, easier to implement, would give the ability to EU group to calculate the apportionable income under the tax rules of the member states where the group is headquartered. HST is voluntary to member states and companies. Domestic rules of the ''home state'' (where the lead parent company is established) would apply to all the entities of the group, even those established in other member states (''host state''). The domestic rules would include, for instance, the consolidation regime (therefore crossborder losses might be used), transfer pricing rules, and antiabuse rules. The European Commission has adopted a communication (COM/2005/702)27 pressing the member states to introduce the regime for a five-year trial period starting in 2007.

The commission is also expected to submit to the council a proposal to introduce the CCCTB in 2008. 28 EU member states and the European Commission have been working on the initiative in special working groups. Member states must agree on a unanimity basis on the definition of an apportionable income, a group, cross-border offsetting of losses, and the apportionment formula. However, consensus may be difficult to reach as numerous member states promote tax competition and brush aside any attempt which might be seen as leading to tax rate harmonization.

The control test is met each time one party is directly or indirectly in a position to exercise the decisionmaking power in the other one (whether it holds 50 percent or more of its voting rights or it simply holds a sufficient stake). The dependency test refers also to the ability to weigh in on decisions of the other party with no financial/ownership relationship because of other commercial leverage. Several converging clues are necessary to satisfy the dependency test. In our experience, the courts adopt a case-by-case approach. 
Case Cap Gemini, Conseil d'Etat, Nov. 7, 2005; n° 266436; RJF 1/06; n° 17 and preliminary brief of the Commissaire du Gouvernement in RJF 1/06, p. 11. The Conseil d'Etat rejected the appeal of the FTA. 
The European Commission submitted to the Council for adoption a Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European Union (COM(2005) 543 final) on Nov. 7, 2005 - IP/05/1403; see also MEMO/05/414. 
See Code of Conduct on Transfer Pricing Documentation in the EU - Frequently Asked Questions MEMO 05/1403 or IP/05/1403. 
Case C-264/96 ICI (1998) ECR I-4695 and Case 81/87 Daily Mail and General Trust (1988) ECR 5483. 
CE July 27, 1988 n° 50020, Boutique 2M, RJF 10/88 n° 1139. 
CE June 14, 1978, n° 9403 : RJF 7-8/78 n° 316; CE October 21, 1987, n° 57500: RJF 12/87 n° 1199; CE Feb. 19, 2003, n° 220732, 8e et 3e s.-s., SARL Scadi, RJF 5/03 n° 541. 
CE June 14, 1978 n° 9403, RJF 7/78 n° 316. 
CE Mar. 18, 1994 n° 68799-70814, SA Sovemarco-Europe, RJF 5/94 n° 532. 
10 CE Oct. 21, 1987 n° 57500, RJF 12/87 n° 1199. 
11 Based on a report to the Minister of Economy, Finance and Industry, ''Improving the certainty and reputation of French tax law in order to make France more attractive to foreign firms'' (''Améliorer la sécurité du droit fiscal pour renforcer l'attractivité du territoire'') by Bruno Gibert, avocat, partner, with the assistance of Corso Bavagnoli, inspector of finances, and Jean-Baptiste Nicolas, inspector of finances. 
12 CE June 20, 2003 n° 224407, Sté Interhome AG, RJF 10/3 n° 1147. 
13 Administrative guidance 13 L-3-05, released July 20, 2005. 
14 It is not mandatory for the FTA to answer the taxpayer's request. 
15 It concerns a publicly listed company that sought certainty on the future use of the profit-split method. See Christopher M. Netram, ''European Practitioners Weigh APA and Arbitration Options at EU Level,'' Tax Notes Int'l, May 10, 2004, p. 555. 
16 See Bruno Gibert, ''Consolidating and Developing the French Advance Pricing Agreement Procedure,'' European Taxation, Feb. 2005. 
17 COM(2001) 582 final of Oct. 23, 2001. 
18 COM(2004) 297 final of Apr. 23, 2004. 
19 See Geoffrey S. Turner, ''Canada-U.S. Competent Authority MOU: First Steps to Mandatory Arbitration?'' Tax Notes Int'l, Sept. 26, 2005, p. 1223. 
20 JTPF code of conduct, para. 3.1 a). 
21 Comment formulated by one of the arbitrators, Pascal Saint-Amans at the Sept. 3, 2004, IFAmeeting of the U.S. and French branches (see ''French Competent Authority Details First Arbitration, Says Process Works'' (Sept. 15, 2004) Tax Management Transfer Pricing Report, vol. 13, p. 473. 
22 The OECD set up a working group to improve the effectiveness of the MAP of article 25 of the OECD model tax treaty, however. Suggestions ranging from the creation of supplementary dispute resolution mechanisms to mandatory arbitration are considered. (See Cross Border Tax Treaty Dispute Resolution: Country Profiles and Draft Progress Report, released on July 27, 2004.) 
23 See JTPF's ''Secretariat Discussion Paper on Alternative Dispute Avoidance and Resolution Procedures'' of May 30, 2005. 
24 ''Company Taxation in the Internal Market'' SEC(2001) 1681, Oct. 23, 2001, and ''Towards an Internal Market Without Obstacles - A Strategy for Providing Companies With a Consolidated Corporate Tax Base for Their EU-Wide Activities'' (COM(2001) 582 final, Oct. 23, 2001. 
25 See the Ruding Report issued in 1992. 26ECJ, Mark & Spencer Plc. v. Halsey, Dec. 13, 2005 (C-446/03). 
27 See also Frequently Asked Questions (MEMO/06/4). 
28 (66 DTR G-5, 04/06/06) and Provisional Communication of the Commission, ''The Contribution of Taxation and Custom Policies to the Lisbon Strategy'' COM(2005). 

Bruno Gibert, Michel Collet, Resident Partner New York