France publishes comprehensive transfer pricing documentation guidance

By Terence Wilhelm, CARA Avocats, Lyon, France

The French government last week issued important guidance for multinational groups on transfer pricing documentation, addressing both the form and content of the master file and local file. This detailed guidance is welcome as it includes key clarifications of the local file’s materiality threshold for controlled transactions, though some questions remain.

France has a history of being slow to introduce modern transfer pricing provisions. For example, France’s transfer pricing documentation requirements applicable prior to 2018 were implemented in late 2009 whereas most countries already had thorough standards and regulations in place at that time.

This trend belongs to the past, though, as France has released in a rather short period both a completely revised version of its transfer pricing documentation law, through Finance Bill 2018, published December 30, 2017, and detailed transfer pricing documentation regulatory guidance on June 29.

The French Finance Bill’s transfer pricing provisions pursue a clear objective to embrace the BEPS initiatives and, more particularly, its Action 13.

In doing so, France joined the community of countries that adopted the full three-tiered approach recommended by the OECD. Yet, one could have objected at that time that the Bill was rushed and the transfer pricing documentation law left taxpayers with great uncertainties.

The new guidance sheds a bright light on those grey areas and provides further details on how to interpret each item of France’s revised transfer pricing documentation requirement, which replaces the former version of Article L13 AA of the French Procedural Tax Book.

The method is, in itself, a clear demonstration of the willingness of the new government to quickly take steps in the field of transfer pricing. Previous transfer pricing regulations were enriched with tax administration doctrines, which are deprived of any legal status or force.

Plus, such doctrines were published several years after the original requirement, leading taxpayers to face uncertainties and live with the potential risk of compliance penalties.

The new guidance, in contrast, is enforceable and immediately creates legal obligations for French entities falling within the ambit of the formal French transfer pricing documentation requirement. Considering the new version of Article L13 AA applies to fiscal years starting after January 1, 2018, taxpayers will now have more than six months to digest and weigh each input of this guidance.

The guidance concerns both the form of the transfer pricing documentation and its content.

Form of documentation

The guidance states that the report must be provided on an electronic format, yet the tables and quantitative data must be provided in a format that enables the French tax administration to perform reviews and checks, to eventually modify formulas and filters.

In practice, this means that the tables must be provided in an unprotected Excel document. Even though this reform is a step into the digital era, one may have legitimate doubts about the capacity of the French tax authority to download all these files at once on its servers without suffering from severe bugs and congestion.

Also, the guidance seeks to sort out the never-ending list of items mentioned under Article L13 AA in eight sections: five for the master file and three for the local. These eight sections perfectly fit the model released in the Appendices I and II of Chapter V of the 2017 OECD report.

Master file content

The new guidance provides the following clarifications regarding the content of the master file:

• The legal chart that must be embedded as part of the operational structure section must include permanent establishments. This also holds true for the other sections, where intercompany transactions with branches will need to be disclosed.
• Group turnover must identify the five largest products and/or service offerings as consolidated turnover. This implies that intercompany transactions must be neutralized for purposes of preparing this specific section.
• When providing the brief description of important service arrangements between members of the MNE group, French taxpayers must disclose all indications that suggest substance at the level of the service provider. This requirement is designed to assess the capacity of the service provider to deliver the services and to help the tax authorities identify empty shell profit centers. Also, as part of that section, specific care must be given to present the complete recharge methodology, e., provide indications of the nature of the costs being recharged, the allocation method, and eventually, the transfer pricing methodology applied to determine the price of said services.
• The restructuring transactions, acquisitions, and divestitures to be documented must not only cover those that caused the taxpayer to change its functional profile, but also any event that led the company to change its legal form.
• As part of the general description of the MNE’s overall strategy for the development, ownership, and exploitation of intangibles, the report must document all subcontracted activities, even those performed by third-party R&D service providers. In doing so, the French tax authority seeks to gain a complete understanding of the operational and decision-taking process.
• In addition to the list of important agreements related to intangibles, the guidance requires taxpayers to provide indications of the transfer pricing methodology applied in the course of these agreements. As such, this section goes beyond the initial content of revised Article L13 AA. Yet, it matches with what the OECD recommended in its guidelines. It is interesting to note, though, that neither the guidance or the Finance Bill defines what intangibles are. In this respect, we believe it is fair (not to say wise) to solely refer to those intangible assets that are recorded on the asset side of the balance sheet.

 Local file content

The guidance makes the following clarifications to aid in the preparation of the local file:

• The detailed description of business strategy in the local file must encompass indications of the objectives pursued, the choices made regarding the allocation of resources, and the financing mobilized, and the risks assumed to achieve these objectives. Despite these clarifications, this section remains subjective.
• Interestingly, changes that occur in the course of business restructurings or intangibles transfers must not only cover the fiscal year being documented but also the two previous years. This three- period echoes the statute of limitation applicable in most instances in France and shall hence provide indications to the French tax authority to conduct a tax audit on a full three-year period.
• The most significant clarifications concern the materiality threshold applied for controlled transactions. In this regard, the guidance specifies that material categories of transactions are intercompany purchases or sales that exceed Euro 100,000 per category. Yet, within a single category, a distinction must made between those transactions that are recorded on the profit side of the P&L and those that generate a cost. To reach this threshold, the profits and losses are not Instead, the categories meeting the threshold are those (all services, all sales of products, all transfer of assets, etc. ) that either derive a profit above 100,000 or represent a cost exceeding this amount.
• Although the materiality threshold is the most important aspect of the guidance, it fails to solve two material questions: first, the guidance does not provide any information on the date at which this threshold must be considered. If transactions are denominated in a currency other than Euros, this may have an impact, as the volatility of the exchange rates may or may not lead to exceeding the 100,000 threshold. In this regard, we are of the opinion that the date to be looked at is the closing date of the fiscal year. The guidance also does not address the question of whether domestic transactions need to be considered for purposes of computing the threshold. In this respect, our opinion is that only cross-border transactions should be considered to be consistent other French transfer pricing requirements that explicitly reject domestic transactions.
• In doing so, the guidance replicates the currently applicable threshold which requires spontaneous filing of a transfer pricing return within six months after filing the tax return (Article 223 quinquies B of the French Tax Code).
• All figures provided must be taken from and reconciled with French statutory accounts.
• The amount of intra-group payments and receipts for each category of controlled transactions involving the local entity, broken down by tax jurisdiction of the foreign payor or recipient, can be presented in a table. This should ease the preparation of this section. The tax jurisdiction of the counterparties must be identified by use of the ISO 3166 codes corresponding to each country.
• Another table can be provided to explain the most appropriate transfer pricing method applied for the categories of transactions. This table shall present, in rows, the categories of transactions and, in columns, indicate the transfer pricing method or methods applied and explain of the reasons for the choice of method. This table, however, must be supplemented by narrative and literal add-ons.

The new guidance provides very exhaustive guidance on how to properly prepare French transfer pricing documentation.

 Only time will tell however if the master file reports prepared in other jurisdictions will be as zealous as the French newly revised version. If not, it might be that French taxpayers falling within the ambit of such requirements will suffer compliance penalties for not providing a report perfectly fitting the French format. 

–Terence Wilhelm is an Attorney at Law, Ph.D., and the managing partner of CARA Avocats, a law firm dedicated to tax and transfer pricing in France. He can be reached at [email protected] or +33 4 72 20 12 88.