The French 2024 Finance Bill, now adopted by the parliament, contains several provisions to strengthen the means available to the French tax authorities to audit transfer pricing policies within international groups.
The provisions relate to the transfer pricing documentation that must be provided to the tax authority, and transactions related to hard-to-value intangible assets.
Companies must consider these new provisions as of the start of 2024.
New Documentation Requirements
Transfer pricing documentation must be provided to the tax authorities in a tax audit. The bill aims at extending and enhancing the scope of this legal rule so companies have exhaustive documentation.
Medium-sized companies must be ready to prepare transfer pricing documentation. As of 2024, the turnover or gross asset threshold from which companies must provide transfer pricing documentation is set at 150 million euros ($162 million), instead of 400 million euros. The lowering of the turnover or gross asset threshold to 150 million euros will bring many more companies within the scope of transfer pricing documentation requirements.
In practice, this obligation may lead to additional compliance costs for companies that will have to provide the required documentation.
Transfer pricing documentation is now enforceable against companies. From 2024, if the transfer pricing method used to determine transfer prices deviates from that provided for in the documentation provided to the tax authority, the difference between the result reported in the corporate accounting and the result that would have been reported if the documentation had been strictly applied is deemed to be transferred profit.
Consequently, the tax authority may carry out a tax reassessment.
This presumption may be challenged if the company demonstrates that there has been no transfer of profits by increasing or decreasing purchase or selling prices.
These provisions mean that the transfer pricing documentation provided to the tax authority is enforceable against the company. Therefore, for transfer pricing documentation that will cover fiscal years from 2024, companies must be very attentive to ensure there is no mistake in their transfer pricing description, which must match the reality of the situation.
The amount of penalties is increased five-fold. Where a company fails to produce the required transfer pricing documentation or provides partial documentation, the tax authority will send a formal notice to provide or complete the documentation within 30 days.
If the transfer pricing documentation still isn’t provided or completed, the company will be liable to a fine equal to 0.5% of the amount of the undocumented transactions or 5% of the profits transferred in respect of such transactions. The fine may not be less than the amount set in the finance bill 2024, which was raised from 10,000 euros to 50,000 euros.
For transfer pricing documentation that covers fiscal years from 2024, the fine amount is therefore multiplied by five.
The tax bill 2024 gives the tax authorities new means of auditing intragroup transactions on intangible assets that are hard to value. It provides that the value of such transferred intangible asset or right may be adjusted based on results after the financial year in which the intragroup transaction took place.
These provisions are directly inspired by the report on Action 8 of the OECD base erosion and profit shifting package, which aims at ensuring that tax administrations can examine “ex-post” results as presumptive evidence of the validity of “ex-ante” price-fixing agreements.
The new rule provides that for transactions as of 2024, the tax authorities will be able to use results after the financial year in which the intangible asset was transferred to presume that the item was undervalued or overvalued at the time of transfer.
Assets in the scope of the new provisions are intangible assets or rights for which—at the time of the intragroup transfers—there are no reliable comparable or sufficiently certain forecasts of future cash flows or income, or the level of ultimate success.
The tax authority isn’t allowed to make a tax adjustment in some cases. This applies where the taxpayer provides evidence of the validity of the valuation. To do this, the taxpayer must provide detailed information on the forecasts used at the time of the transfer to determine the price, in particular how risks and reasonably foreseeable events have been taken into account and the likelihood of their occurrence.
The taxpayer must also establish that the significant difference between these forecasts and the actual results is due either to the occurrence of unforeseeable events at the time of determining the price, or the occurrence of foreseeable events if their probability wasn’t significantly underestimated or overestimated at the time of the transaction.
The tax authority also isn’t allowed to make a tax adjustment where:
- The transfer of the intangible asset or right is covered by an advance pricing arrangement in force for the relevant period, between the jurisdictions of the transferee and the transferor.
- The difference between the valuation resulting from forecasts made at the time of the transaction and the valuation based on actual results is less than 20%.
- A commercialization period of five years has elapsed after the tax year in which the asset or right first generated income from an entity unrelated to the transferee, and during this period the difference between the forecasts made at the time of the transaction and actual results was less than 20%.
Extending the statute of limitations. The general French statute of limitations regarding income tax is three years. This period may be extended to 10 years in certain cases (such as undeclared activities).
For transactions of hard-to-value intangible assets, the statute of limitations is extended to six years. Therefore, if an intragroup transaction related to a hard-to-value intangible asset occurs in 2024, the tax authority may make a tax adjustment until Dec. 31, 2030.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Thierry Viu is counsel with CMS France.
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