Transfer pricing for international businesses is a crucial area of tax compliance that affects multinational companies operating across borders. For multinational companies in France, complying with transfer pricing rules in France is essential to avoid costly penalties and disputes.
This blog provides an overview of key transfer pricing concepts, explains why transfer pricing is important, and summarizes the OECD transfer pricing methods that guide multinational businesses worldwide.
What is Transfer Pricing?
Transfer pricing refers to the pricing of transactions between related entities within a multinational group. These transactions can include goods, services, intellectual property, loans, or other intercompany dealings. For multinational companies operating in France, understanding transfer pricing is critical to ensure tax compliance and avoid penalties.
France’s transfer pricing rules are closely aligned with the OECD Transfer Pricing Guidelines, which serve as a global standard for setting intercompany prices. Central to these rules is the arm’s length principle.
What is the arm’s length principle? This is a concept that requires related-party transactions to be priced as if the entities were unrelated and operating under market conditions. In simpler terms, multinational companies must structure their intra-group transactions in a way that reflects the price two independent businesses would agree upon in comparable circumstances.
Transfer pricing in France is applicable to all French-resident companies and includes branches of foreign entities operating in the country. This means international businesses with a presence in France must ensure their pricing strategies meet French and OECD standards.
Why is Transfer Pricing Important?
Non-compliance can result in significant tax adjustments, penalties, and reputational risks. Companies are allowed to make year-end transfer pricing adjustments, provided they can fully justify them. However, the French tax authority does not permit retroactive offsets between different fiscal years or between separate group entities.
Penalties of non-compliance with transfer pricing rules
Failure to comply with transfer pricing documentation requirements in France can lead to severe financial penalties. French entities falling within the scope of Article L. 13 AA of the French Tax Procedure Code (FTPC) are required to prepare and maintain detailed documentation to justify their intercompany transactions. If this obligation is not met, the penalties imposed can be significant.
For each audited year, the penalty is calculated as the higher of:
- 0.5% of the amount of intercompany transactions that were omitted or insufficiently documented, or
- 5% of the reassessed taxable base related to those transactions.
In all cases, the minimum fine is €50,000 per audited year.
In addition, if a company fails to respond adequately under Article L. 13 B of the FTPC, typically related to requests for information during a tax audit, it may face a fixed penalty of €10,000 per year.
There are also specific penalties associated with failure to file the 2257-SD transfer pricing return:
- Missing the submission deadline results in a €150 fine.
- Inaccuracies or omissions in the return (excluding cases of force majeure) incur a fine of €15 per error, with total penalties ranging from a minimum of €60 to a maximum of €10,000.
It’s important to note that when a tax audit reveals more than €100,000 in reassessed taxes and certain penalties apply, the French Tax Authority (FTA) is obligated to refer the matter to the public prosecutor, which may lead to legal proceedings beyond tax penalties.
OECD Transfer Pricing Guidelines
The OECD Transfer Pricing Guidelines serve as the international benchmark for applying the arm’s length principle in in intra-group transactions.
They provide a structured framework for evaluating how related-party transactions should be priced, as if they had occurred between independent entities under comparable conditions.
Central to the guidelines is the selection of an appropriate pricing method, tailored to each case’s circumstances, reliability of data, and comparability.
These methods fall into two main categories: traditional transaction methods and transactional profit methods.
Traditional Transaction Methods
Comparable Uncontrolled Price Method
This technique evaluates the price charged in a controlled transaction (between related entities) by comparing it to the price applied in a comparable uncontrolled transaction (between independent parties) under similar conditions. This method is considered reliable when one of the following criteria is satisfied:
- The transaction in the open market is not materially affected by any differences in the circumstances of the transaction or the characteristics of the parties involved.
- Reasonable adjustments can be made to account for those differences and eliminate their impact on pricing.
Due to its direct approach in determining the arm’s length price, the CUP method is widely regarded as one of the most commonly applied and reliable methods in transfer pricing analysis.
Resale Price Method
This is categorized as a one-sided method, primarily used when a product is purchased from a related party and then resold to an independent third party.
The transfer price is determined by taking the resale price to the third party and subtracting a gross margin that reflects the functions performed, risks assumed, and assets used by the reseller. This margin should align with what an independent distributor would earn in a comparable transaction.
Cost Plus Method
CPM is often employed when evaluating transactions involving the provision of services or the supply of tangible property, especially when such services are complex and difficult to value.
This method involves identifying all costs incurred by the service provider (including both direct and indirect costs) and then adding an appropriate markup. This markup reflects the profit that a comparable independent entity would earn for performing similar functions under similar conditions.
Transactional Profit Methods
Transactional New Margin Method
TNMM evaluates whether the amount charged in a controlled transaction is at arm’s length by comparing the net profit margin relative to an appropriate financial indicator, such as sales, assets, or costs, earned in similar uncontrolled transactions.
While TNMM is commonly used due to its flexibility and applicability in many scenarios, it tends to be less accurate in situations where both parties to a transaction make distinct and significant contributions, especially when those contributions involve unique intangibles or specialized functions.
Transactional Profit Split Method
TPSM aims to allocate the combined profits (or losses) from a controlled transaction between the related entities involved, based on a methodologically sound and economically justified basis. The profit division must reflect what independent entities would have agreed upon under similar circumstances, thus aligning with the arm’s length principle.
The OECD’s 2022 Guidelines, updated in response to BEPS Action 10, further clarify the application of TPSM. The revision emphasizes that TPSM should be used when it is the most appropriate approach, particularly in cases involving:
- Joint assumption of economically significant risks
- Separate but closely related risk responsibilities
- Contributions of unique and valuable assets or expertise by each party
- Highly integrated operations where transactional separation is impractical
Additionally, the guidelines provide flexibility, allowing multinational enterprises (MNEs) to apply alternative methods if they can demonstrate that such approaches are at least as reliable and appropriate as those recognized by the OECD.
Out of these methods the most appropriate pricing method should be selected on a transaction-by-transaction basis. This will help give the most reliable measure in each case under the arm’s length principle.
While there is no set hierarchy in the French legislation, the FTA often prefers the profit split method when it comes to a tax audit. This allows the audit to benefit from a holistic view of the transaction.
Advance Pricing Agreements
Advanced Pricing Agreements (APAs) are formal contracts established between a taxpayer and one or more tax authorities. These agreements define the transfer pricing methodology to be applied to specific transactions for a set future period, providing certainty and reducing the risk of disputes.
France benefits from a broad and comprehensive network of tax treaties. When transfer pricing adjustments result in double taxation, taxpayers can frequently resolve these issues through the Mutual Agreement Procedure (MAP), which facilitates negotiation and agreement between the involved tax authorities to eliminate or mitigate double taxation.
Digital Service Tax
The Digital Service Tax (DST) is imposed at a rate of 3% on certain revenues generated from digital services.
This tax targets the following categories of digital activities:
- The operation of a digital platform that allows users to establish contracts and interact with each other, especially for buying and selling goods or services directly between users. However, there is a specified list of services that are exempted from this tax.
- Services provided to advertisers or their representatives involve placing targeted advertising on a digital platform. These services rely on user data collected or generated through the platform’s use. Examples include activities such as purchasing, storing, and distributing ads, managing advertising effectiveness, and handling user data transmission.
The DST applies only to companies whose global revenues from these digital services exceed €750 million, with at least €25 million of those revenues attributable to France. Similarly, groups meeting these thresholds are subject to the tax for the following fiscal year.
To understand the documentation requirements for transfer pricing in France, read our dedicated blog!
In summary, transfer pricing for international businesses remains a vital aspect of global tax strategy and compliance, particularly for multinational companies in France. By carefully applying the OECD transfer pricing summary and selecting the most appropriate methods, companies can maintain compliance and foster smoother relationships with tax authorities, supporting sustainable international growth.