France Plans Tougher Legal Measures in Transfer Pricing Audits

The French government has recently released a plan to combat public finance fraud. It includes over 30 measures, three of which relate to transfer pricing:

• Lowering the turnover threshold above which companies must produce transfer pricing documentation to the French tax authorities in the event of a tax audit.
• Reversing the burden of proof in the event of noncompliance with transfer pricing documentation by companies.
• Extending the statute of limitations for transfers of some intangible assets.

The government has indicated that these measures should be included in the next finance bill for 2024. They are discussed in further detail below.

Reducing the Turnover Threshold

The current rules. These are shown in the table below.

The new rule. The turnover threshold above which companies must produce transfer pricing documentation would be lowered from 400 million euros ($449 million) to 150 million euros. Therefore, in theory many more companies are likely to be affected by the obligation to provide transfer pricing documentation (even if the government hasn’t provided figures).

Consequences in a tax audit. Companies with a turnover of at least 150 million euros are already required to file an annual transfer pricing return (form 2257). This tax return includes a description of intra-group transactions, the transfer pricing methods used, and some charts similar to those in the local file of transfer pricing documentation.

The French tax authorities therefore can already monitor the transfer pricing policy of companies with turnover above 150 million euros. It isn’t certain that the new tax obligation, which represents an additional administrative burden for medium-sized companies, will in practice augment the authorities’ resources.

Switch of the Burden of Proof

The current rules. To make a tax adjustment, the tax authorities must demonstrate that the transfer pricing method applied grants an advantage to another company in the group. The burden of proof of such an advantage lies with the authorities. The taxpayer may then submit counterarguments to prove there’s no such advantage and no ground for a tax adjustment.

The new rules. The transfer pricing documentation would be made contestable with the taxpayer. In other words, if in the course of a tax audit an intra-group transaction didn’t comply with the transfer pricing documentation, the company would have to prove that the transaction complied with the arm’s length principle and that there was no advantage granted to another company. It can’t be ruled out that this switch of the burden of proof would also be applied in cases where some intra-group transactions weren’t mentioned in the transfer pricing documentation.

In addition, the penalties that may be applied by the tax authorities for failure to provide transfer pricing documentation would be increased.

Consequences in a tax audit. The switch of the burden of proof facilitates the tax authorities’ work, because the grounds for a tax adjustment only require that the company hasn’t demonstrated that its transactions comply with the arm’s length principle. In practice, this will certainly give rise to discussion between the tax authorities and taxpayers on the level of the proof required.

This measure is designed to make taxpayers pay more attention to their transfer pricing documentation and ensure that it is consistent with the reality of intra-group transactions.

Regarding the penalties that would increase for failure to produce complete transfer pricing documentation, there are no official figures showing the difficulties encountered by the tax authorities in obtaining this documentation from companies. It’s therefore uncertain whether an increase in penalties will have any effect on compliance with transfer pricing obligations.

Hard-to-Value Intangible Transactions

The current rule. The general French statute of limitations relating to income tax is three years. This period may be extended to 10 years in certain cases (such as undeclared activities). This means that in 2023 the tax authorities can’t in theory make tax adjustments in respect of periods before 2020.

The new rule. For transactions of hard-to-value intangible assets within the meaning of the OECD Base Erosion and Profit Shifting Actions 8–10 (such as lack of reliable comparable, high uncertainty over future cash flows), the statute of limitations would be extended. The new limitation period hasn’t yet been specified but in practice would probably be between four and 10 years.

The government hasn’t yet provided a legal definition of what would be a “hard-to-value intangible,” which will be necessary to comply with the French constitution as the mere reference to BEPS won’t suffice.

Consequences in a tax audit. The tax authorities will try to use post-transaction information to challenge the financial conditions under which the transfer took place.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Thierry Viu is Counsel at CMS France.

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