The 2024 French Finance Bill (law n°2023-1322) was adopted on December 29, 2023, and has introduced new measures reinforcing transfer pricing documentation requirements as well as the power of control by the French tax authorities (FTA) of transactions related to hard-to-value intangibles.
French Tax Reforms: tighter transfer pricing documentation Rules and enhanced possibilities for the FTA to audit and adjust hard-to-value intangibles (HTVI) related transactions
Transfer pricing documentation requirements have been amended:
- by lowering to €150 million (instead of €400 million previously) the threshold for revenues or gross assets above which a transfer pricing documentation becomes mandatory,
- by increasing, from €10,000 to €50,000 per audited fiscal year, the minimum penalty applicable if the documentation is lacking or incomplete (as taxpayers are generally audited for three fiscal years, the minimum applicable penalty amounts to €150,000), and
- by introducing a notion of “opposability” of the transfer pricing documentation, which will, in certain situations, reverse the burden of the proof, from the FTA to the taxpayers, thus allowing the FTA to perform ‘quasi-automatic’ transfer pricing adjustments.
These measures (i) significantly extend the scope of companies subject to mandatory transfer pricing documentation and (ii) modify the nature of French transfer pricing documentations which can no longer be viewed as mere compliance but as a cornerstone of the taxpayers’ defense strategy in the context of tax audits.
This new paradigm reinforces the necessity to anticipate the preparation of transfer pricing documentations to be able to defend the group’s tax position in France efficiently. This is key considering the opposability of the documentation and the increase of the applicable penalty. Properly documenting and defending an intercompany transaction three years later during a tax audit will pose significant challenges, as is often the case at present.
Besides, the FTA’s power of control with respect to intercompany transfers of hard-to-value intangibles (HTVI) (or rights on such assets) has been strongly strengthened through the following measures:
- The possibility for the FTA to rely on ex-post financial data to value HTVI,
- The extension of the statute of limitation period from 3 to 6 years for HTVI related, transactions (3 years being the standard statute of limitation period in France),
- The possibility for the FTA to audit several times, within this 6-year period, the same HTVI transactions by introducing a new exception to the general rule (article L.51 of the French Tax Procedure Code, FTPC) according to which the FTA cannot audit twice the same operations.
Considering the above measures, taxpayers should be very careful in the valuing of their HTVI transactions, especially with respect to the relevance of the business plans and the potential differences that may appear with actual ex-post data. Such transactions should be carefully documented to be able to defend in detail the robustness and the appropriateness of the business plans and the assumptions made when valuing the intangible assets.
Detail of the measures related to the reinforcement of transfer pricing documentation requirements
Lowering to 150 million euros the threshold for mandatory transfer pricing documentation
According to article L.13 AA of the FTPC, certain French entities are subject to mandatory transfer pricing documentation requirements. Under the amended version of this article, the following French entities are subject to these requirements for fiscal years starting on and after January 1, 2024:
- Entities with revenue or gross assets in the balance sheet exceeding €150 million (against €400 million previously), or
- Entities holding, directly or indirectly, more than 50% of the capital or voting rights of a French or foreign entity satisfying one of the conditions mentioned in a.,
- Entities with more than 50% of their capital or voting rights held, directly or indirectly, by a French or foreign entity satisfying one of the conditions mentioned in a.,
- Entities part of a French tax group (under articles 223 A or 223 A bis of the General Tax Code (GTC), in which at least one the entity meets one of the conditions mentioned in a., b., or c. above.
This measure is applicable for fiscal years starting on and after January 1, 2024, and is not retroactive. For instance, this means that if a tax audit of a company with €200 million revenue starts in January 2024, covering fiscal years December 31, 2021-2023, this company will not be considered as subject to mandatory documentation requirements for the three audited fiscal years.
Nevertheless, this measure will significantly extend the scope of companies subject to mandatory documentation in future tax audits, and taxpayers concerned by this new threshold must anticipate this new risk. This is even more important considering (i) the increase of the minimum penalty applicable in case of failing to provide a compliant documentation in time, and (ii) the ‘opposability’ of the documentation.
Note that companies remaining out of the scope of article L. 13 AA of the FTPC can still be required to provide detailed transfer pricing information during a tax audit, based on article L. 13 B of the FTPC.
Increasing the minimum penalty in case of missing or incomplete documentation
The transfer pricing documentation must be made available to the FTA the day the tax audit starts. If not available, or considered incomplete, the FTA may issue a formal request, mentioning the law and the applicable penalty, to provide it. Should the taxpayer fail to provide the documentation within 30 days following the receipt of this request, the penalty may apply.
According to article 1735 ter of the GTC, the maximum applicable penalty can be either (i) 0,5% of the amount of non-documented transactions, or (ii) 5% of the tax adjustment related to these transactions, whichever the greater. In addition, the penalty cannot be lower than a certain amount per audited fiscal year.
However, the 2024 Finance Bill changed this minimum.
For formal requests to provide the documentation issued on or after January 1, 2024, the minimum applicable penalty will now be €50,000 per audited fiscal year, instead of €10,000 previously. Given that French taxpayers are generally audited for three fiscal years, it means that the minimum applicable penalty will generally amount to €150,000.
“Opposability”: enforceability of the transfer pricing documentation against the taxpayer
Under article 57 of the GTC, the FTA is entitled to adjust the prices of cross-border transactions entered into between related parties.
To perform such adjustments, the FTA must demonstrate that these prices do not satisfy the arm’s length principle. This means that, the burden of the proof lies on the FTA.
Applicable for fiscal years starting on and after January 1, 2024, the Finance Bill has modified article 57 of the General Tax Code by adding a paragraph according to which, in certain situations, the burden of the proof will lie on the taxpayers.
The new paragraph of article 57 of the General Tax Code is as follows: “when the method used to determine transfer prices deviates from the one described in the documentation provided to the [FTA] under article L. 13 AA or L. 13 AB of the [FTPC], the difference observed between the actual result and the result that would have been reached if the method described in the documentation had been applied is considered as profit shifting, except if the taxpayer demonstrates that no such profit shifting occurred through the increase or decrease of purchase or sale prices, or through any other means”.
Based on this new paragraph, it should be noted that (i) the transfer pricing policy documented will prevail, and (ii) the burden of the proof will be reversed and borne by taxpayers if a difference is observed between the actual result and the transfer pricing policy documented.
Thus, the description of the transfer pricing policy in the documentation will be key. To be noted that as per article L. 13 AA of the FTPC, intercompany agreements must be included in the documentation as appendices. Therefore, it should be considered, considering the modification of article 57 of the GTC, to also amend intercompany agreements to avoid inconsistencies with actual accounting results.
In addition, the ability of taxpayers to properly reflect their transfer pricing policy in their accounts, generally referred to as ’operational transfer pricing‘, will also be key. This may appear standard, but in practice, for many reasons (parameters of the ERP systems vs. transfer pricing management requirements, availability of real time and reliable financial data, timing of year-end adjustments, etc.), taxpayers often struggle to properly reflect their transfer pricing policy in their accounts.
Since 2018 and the modification of article L. 13 AA of the FTPC, it is required to include in the documentation a reconciliation between the transfer pricing policy and the French accounts, generally through a segmentation of the P&L accounts when the taxpayer has several activities. Such segmented P&L are essential elements in the documentation as they must reflect the actual result of the application of the transfer pricing policy. We can therefore anticipate in this respect challenges on the revenues and costs segmentation which is never an easy exercise and may be subject to long discussions and interpretations on the most relevant allocation keys to be used, because such segmentation will be at the basis of the argumentation of the FTA to try to reverse the burden of the proof.
The modified article 57 of the GTC will only apply to fiscal years starting on and after January 1, 2024. Taxpayers should use this time to adapt their transfer pricing documentations, agreements as well as the management of their transfer pricing policies in ERP systems.
However, it should be noted that during the tax audits that will cover the period 2022-2024, if the FTA identifies, for each fiscal year and for the same transaction, a difference between the transfer pricing policy and the accounting, the question of who, between the FTA and the taxpayers, will bear the burden of the proof may prove to be quite complex.
From a pure legal standpoint, it will be borne by the FTA for fiscal years 2022 and 2023, and by the taxpayer for fiscal year 2024. In practice, as everything will be related to the same transaction and the same general context, it is very likely that the ability for the taxpayer to defend its position will be complex: if the taxpayer is not able to provide the proof that the result in its accounting is arm’s length for fiscal year 2024, how will be treated the same transaction for fiscal years 2022 and 2023, even though the FTA may not be able to provide better arguments and will bear the burden of the proof for these years?
As a conclusion, taxpayers must consider this change in the law as a serious change and must prepare themselves ahead of tax audits to ensure their accounting properly reflects their documented transfer pricing policies.
