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Strengthening of the french tax authorities' arsenal to control transfer pricing

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​​​​​​​​​​​​​​​​​​​​​​​​​​​​​published on 2 April 2024 | reading time approx. 6 minutes


For several years now, transfer pricing has been a major cause of tax reassessments in France, and the trend seems to continue. ​
  


New measures strengthening the powers of the French tax authorities to control transfer prices have been adopted in the Finance Act for 2024.​​[1]

The French legislator's explanatory memorandum clearly states that the aim is, in line with the announcements in the plan to combat all forms of public finance fraud, "to strengthen the administration's ability to detect and punish abusive use of transfer pricing rules".[2]

Two types of measures have been taken: 
  • Those relating to the obligation to document the transfer pricing policy in writing​ (1)
  • Those relating to the transfers of intangible assets that are difficult to value (2) 


​​Transfer pricing policy documentation will be enforceable against taxpayers and is now mandatory for a larger number of companies​

First measure:

Lowering of the threshold from 400 million euros to 150 million euros for the obligation to produce transfer pricing documentation.[3]​
 
For financial years beginning on or after 1 January 2024, legal entities established in France that meet one of the following four criteria are now required to provide the tax authorities with full transfer pricing documentation (Masterfile and Localfile): ​
  1. Annual sales excluding tax or gross balance sheet assets of at least 150 million euros
  2. ​Hold directly or indirectly, at the end of the financial year, more than half of the capital or voting rights of a legal entity with annual sales excluding tax or gross balance sheet assets of at least 150 million euros
  3. More than half of its capital or voting rights at the end of the financial year are held, directly or indirectly, by a legal entity with annual sales excluding tax or gross balance sheet assets of at least 150 million euros
  4. Belong to a tax consolidation group in France within which at least one legal entity fulfils the criteria  ​mentioned in 1., 2. or 3..

The written obligation to document transfer prices is therefore no longer the only concern of multinationals and other large groups. 

Medium-sized groups are now also affected and will therefore need to prepare this documentation once their 2024 accounts will have been closed. 

Second measure: 

Presumption of transfer of profits abroad in the event of non-compliance with the policy described in the transfer pricing documentation.[4]

For financial years beginning on or after 1 January 2024, where the transfer pricing method applied by the taxpayer deviates from that provided for in its written documentation (Masterfile and Localfile), the difference between the result and the amount that would have been reached if the method provided for in this documentation had been complied with is deemed to constitute an indirectly transferred profit. 

The measure is very important because it reverses the burden of proof: if the transfer pricing policy applied is not in line with that described in the documentation, it is no longer up to the tax authorities to demonstrate that a transfer of profits abroad has taken place, but up to the taxpayer to demonstrate that there has been no transfer of profits abroad. 

The practical consequences for taxpayers are likely to be serious, since it is not uncommon to find discrepancies between the written pricing policy and the flows actually recorded in local accounting (French GAAP). 

Taxpayers will therefore need to pay particular attention to their written transfer pricing policy documentation relating to 2024 and subsequent years and anticipate any discrepancies between the method described and its actual application to the prices charged. 

Third measure:

Increase to 50,000 euros (from 10,000 euros) of the minimum penalty applicable in the event of failure to produce transfer pricing documentation.​[5]

As a reminder, failure to respond or to partially respond to a formal request from the tax authorities to produce transfer pricing documentation results in a fine of up to the higher of the following two amounts being imposed for each financial year audited, depending on the gravity of the failings:
  • 0.5 percent of the amount of the transactions concerned by the documents which have not been made available to the administration after formal notice;
  • 5 percent of income adjustments based on transfer pricing controls and relating to transactions covered by documents or additional information that have not been made available to the tax authorities following formal notice.

The fine can now be no less than 50,000 euros, instead of the previous 10,000 euros.

​Facilitating controls on transfers of intangible assets that are difficult to value 

Difficult-to-value intangible assets are intangible assets or rights on intangible assets for which, at the time of their transfer between associated companies :
  • There are no reliable comparatives and
  • At the time the transaction was entered, the projections of future cash flows or revenues expected from the intangible asset transferred, or the assumptions used to value the intangible asset, are highly uncertain, and it is therefore difficult to predict the extent to which the intangible asset will ultimately be successful at the time of transfer.[6]

First measure: 

Possibility for the administration to revalue the sale price on the basis of results subsequent to the financial year in which the transfer took place.[7]

For financial years beginning on or after 1 January 2024, the tax authorities are entitled to adjust the value of an intangible asset that is difficult to value on the basis of results subsequent to the financial year in which the transaction took place.

However, this possibility of rectification on the basis of subsequent results is not applicable in the following cases: ​
  • The taxpayer, on the one hand, provides detailed information on the forecasts used, at the time of the transfer, to determine the prices and, on the other hand, establishes 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 to the realization of foreseeable events, provided that their probability of occurrence was not significantly underestimated or overestimated at the time of the transaction.
  • The transfer in question is covered by a prior bilateral or multilateral price agreement, in force for the period concerned, between the jurisdictions of the transferee and the transferor.
  • The difference between the valuation resulting from the forecasts made at the time of the transaction and the valuation based on actual results is less than 20 percent.
  • A marketing period of five years has elapsed after the 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 the actual results is less than 20 percent.

Second measure: 

Extension of the administration's audit period from three to six years for the possibility of revaluing the sale price on the basis of results subsequent to the financial year in which the transfer took place.[8]

The possibility of adjusting the sale price on the basis of results subsequent to the financial year in which the transfer took place is open to the tax authorities until the end of the sixth year (instead of the third year under ordinary law) following the year in respect of which the tax is due.

This means that if an intangible asset that is difficult to value is transferred in 2025, the tax authorities will have until 31 December 2031 to reassess the sale price. ​

Third measure: 

Possibility for the tax authorities to revalue the sale price on the basis of results subsequent to the financial year in which the transfer took place, even if the financial year in which the transfer took place has already been the subject of a full tax audit.[9]

The legislator has introduced a new exception to the guarantee of non-renewal of an full tax audit in order to allow the tax authorities to verify the sale price applied to transfers of intangible assets that are difficult to value, even though the financial year in which the transfer took place has already been the subject of a full tax audit.

As a result, taxpayers now need even more robust documentation of valuation reports to justify the price they apply to transfers of intangible assets that are difficult to value. 


[1] Article 116 of the Finance Act 2023-1322 of 29 December 2023 for 2024
[2] Article 22 of the Finance Bill 1680 for 2024
[3] Measure transposed into article L. 13 AA of the Livre des Procédures Fiscales (French Book of Tax Procedures)
[4] Measure transposed into article 57 of the Code Général des Impôts (French General Tax Code)
[5] Measure transposed into article 1735 ter of the Code Général des Impôts (French General Tax Code)
[6] Cf. the definition given in 2° of E of II of article 1649 AH of the Code Général des Impôts (French General Tax Code)
[7] Measure transposed into article 238 bis-0 İ ter of the Code Général des Impôts (French General Tax Code)
[8] Measure transposed into article L. 171 B of the Livre des Procédures Fiscales (French Book of Tax Procedures)
[9] Measure transposed into article L. 51 8° of the Livre des Procédures Fiscales (French Book of Tax Procedures)
​​Go to the article in French​ ​​»​​

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