The Law against tax fraud and economic and financial crime dated 6 December 2013 introduces a new filing requirement in the framework of transfer pricing. Furthermore, the Finance Bill for 2014 contains provisions, in relation with transfer pricing, that strengthen the powers of the French Tax Authorities (FTA hereafter) in case of a tax audit.
1. Transfer pricing provisions enacted in the Law against tax fraud and economic and financial crime
The Law against tax fraud and economic and financial crime introduces a new Article 223 quinquies B in the French Tax Code (FTC hereafter). Companies already subject to the French contemporaneous transfer pricing documentation requirement pursuant to Article L13AA of the French Tax Procedure Code (FTPC hereafter), i.e. mainly companies whose gross annual turnover or gross assets equal to or exceed EUR 400 million, or which hold or are held, directly or indirectly, by a legal entity exceeding the above mentioned thresholds, will have to file with the FTA, within six months following the deadline for filing their annual income tax return, a document which should contain part of the elements included in the transfer pricing documentation they also have to prepare in case of tax audit pursuant to that same article. Before Article 223 quinquies B of the FTC came into force, such documentation was only required to be made available at the beginning of a tax audit. Part of it (with notable exceptions such as a legal chart, a detailed functional analysis or benchmarks), will therefore now have to be filed in a simplified format at the end of every tax period.
Although the transmission process is still to be determined, delivery by ordinary mail should be sufficient.
The law does not provide for specific penalty for lack of filing. Therefore, the general penalty of € 150 per document provided by Article 1729B of the FTC should apply.
This filing requirement will apply to tax years for which the tax return will have to be filed after this new regulation is in force. For example, a taxpayer with a 31 December 2013 tax year-end would have to submit additional documentation no later than 5 November 2014, i.e. 6 months after the May deadline for filing the return.
2. Transfer pricing provisions enacted in the Finance Bill 2014
The draft Finance Bill for 2014 included several provisions in relation with transfer pricing. However, some of them were eventually cancelled by the Constitutional Court in its decision n° 2013-685 DC whereas having priory been approved by the Parliament.
a. Provisions in relation with transfer pricing approved by the Constitutional Court
- Disclosure of foreign tax rulings as part of the transfer pricing documentation
The Finance Bill for 2014 expands contemporaneous transfer pricing documentation requirements as set forth in Article L13AA of the FTPC. Transfer pricing documentation should include a copy of the rulings obtained from foreign tax authorities by associated enterprises. Rulings issued by foreign tax authorities may concern the tax rate or calculation of the taxable base for any income that would be paid by the French company under tax audit.
It should be noted that rulings are considered confidential tax information by some foreign authorities. It should be further investigated how such information will be communicated.
- New requirement to provide management accounts and consolidated accounts in case of a tax audit
The Finance Bill for 2014 introduces a requirement to disclose management accounting and / or consolidated accounts (new paragraphs II and III of Article L13 of the FTPC).
The disclosure requirement regarding management accounts applies to companies to the extent they keep such accounts and meet one of the following criteria:
- for companies providing goods or supplying houses, a turnover exceeding €152.4m;
- for any other business, a turnover exceeding €76.2m;
- for all companies, a gross amount of assets equal to or greater than €400m.
It also applies to companies which direct or indirect > 50% parents or subsidiaries meet one of the above-mentioned conditions.
The requirement for mandatory supply of consolidated accounts applies to commercial entities that are required to have consolidated accounts pursuant to Article L. 233-16 of the French Commercial Code (French consolidating entity).
However, the Constitutional Court invalidated the initially suggested penalties which amounted to 0.5% of the turnover (see below). Only the € 1,500 penalty provided for by Article 1729D of the FTC will apply for failure to provide management accounts and consolidated accounts in case of a tax audit.
- End of the suspension of the collection of tax pending resolution of mutual agreement procedure
The Finance Bill for 2014 removes Article L 189 A of the FTPC which provided for the suspension of tax collection during the entire mutual agreement process in cases a mutual agreement procedure to avoid double taxation is initiated further to a tax reassessment.
The abrogation of the suspension of tax collection applies to mutual agreement procedures initiated as of 1 January 2014.
If the taxpayer receives a formal notice requiring the collection of reassessed tax, it will still be allowed to bring the case before the competent administrative court and to apply for a suspension of payment. Nonetheless, if the company opts for the payment of the tax in dispute, and if the company eventually obtains a decrease of the reassessed tax, it will recover its outlay increased by a 4.80% tax-free annual interest.
b. Rejected provisions, declared inconstitutional by the Constitutional Court
- Penalties for failure to provide management accounts and consolidated accounts in case of a tax audit
As mentioned, although new paragraphs II and III of Article L13 of the FTPC require to provide management accounting statements and consolidated accounts in case of a tax audit, taxpayers who fail to provide such information could be liable only for a penalty of €1,500 provided by Article 1729D of the FTC.
Indeed, the Constitutional Court invalidated the initial penalty which amounted to 0.5% of the reported turnover, or of the turnover as adjusted further to the tax reassessments if any, on the grounds that these penalties were out of proportion with the sanctioned behaviour.
- Penalties for incomplete documentation
Failure to provide the transfer pricing documentation can currently result in a penalty amounting to up to 5% of the transfer pricing reassessment. Under draft Article 1735 ter of the FTC, the penalty could have been up to 0.5% of the turnover.
Such amended Article 1735 ter of the FTC was also considered as disproportionate to its objective.
- Shift of the burden of proof in case of transfer of function
The finance bill for 2014 was intending to modify Article 57 of the FTC. It would have shifted the burden of proof to the taxpayer where functions or risks are transferred by a French entity to a related party in case the EBIT of the transferring company decreases by 20% or more in comparison to the average EBIT over the three financial years preceding the transfer. In such a case, the company should have demonstrated that it received a compensation equivalent to the compensation non related parties would have agreed to.
Such provision was censured by the Constitutional Court ruling that the concepts used by the legislator were insufficiently defined and were likely to make the law hardly understandable.