Worldwide transfer pricing reference guide 2014

France (continued)
Frequency of tax audit and transfer pricing scrutiny by the tax authority
The risk of a general tax audit is high, as is the risk that transfer pricing issues will be scrutinized during the audit. Similarly, if transfer
pricing is reviewed as part of the audit, the likelihood that the transfer pricing methodology will be challenged is high. The number of tax
audits in transfer pricing is increasing considerably, and the FTA are becoming more extensive and accurate in its queries, since they now
use economic bases, as well as legal bases.
Transfer pricing issues that receive the greatest scrutiny are.
• Business restructurings (e.g., transfer of intangibles and of clientele, indemnity) or a sudden decrease into the operating margin likely to
hide a change in the transfer pricing policy applied
• Product sale prices (under or overestimated prices), especially, but not only, in case of losses
• Management fees
• Agents and commissionaire operations (e.g., conversion of a distributor into an agent)
• Permanent establishments
• Closure/conversion costs
• Intangibles and economic ownership (including questions about royalties)
• Benchmarking exercises (the FTA expect a search made on French databases when the tested party is French and usually reject
pan-European searches)
As an alternative to transfer pricing dispute, the FTA today are keen on making a permanent establishment characterization and do not
hesitate to resort to judicial searches in instances where the FTA feel that auditors cannot access information via normal investigative
procedures.
Other tax audit trends:
• Huge increase in the implementation of police tax raids lead by the FTA (based on Article L16B FPTC)
• Development of computerized tax audits
• For certain taxpayers: New obligation to provide a file detailing all the accounting entries (article L 47 A 1), i.e., accounting records in
the form of an accounting entry file (AEF). This obligation includes the provision of 18 compulsory fields. The non-disclosure of the AEF
complying with French requirements may imply the application of penalty of EUR1,500.
Communication of the analytical and consolidated accounts in case of a tax audit: After enactment of the French 2014 Finance Bill
(i.e., 31 December 2013), companies in the scope of L13AA of the FPTC or with a turnover exceeding €152.4m or €76.2m depending
on their business activity will have to communicate their management accounting in case of an audit. The precise definition of the
management accounting should be further clarified in future additional regulatory guidance. French holdings will also have to disclose
details of their consolidated accounts, allowing the FTA to identify, for instance, the tax provisions. Currently, the penalty for a failure to
comply with these provisions will be limited to €1,500.
There are rather few court decisions in France going into detailed transfer pricing issues. One of the main questions relates to the burden
of proof, which is usually said to rest with the tax inspectors.
APA opportunity
Bilateral and, under certain circumstances, unilateral, APAs are available (Article L 80 B 7° of the FPTC). No fees are required.
This section was provided by the Finance Amendment Act for 2004 and came into force as of 1 January 2005. It incorporates existing
procedures as described by the French administrative guideline #4 A-8-99, dated 7 September 1999. A specific procedure also exists for
certain activities (e.g., headquarter profile).
On 28 November 2006, the tax authorities released a new administrative guideline (former 4 A-13-06 referred under BOI-SJ-RES-20-20
from September 2012), adding a simplified APA procedure for small and medium-sized enterprises, and presenting an online guide
pertaining to transfer pricing methods.
In theory, the process requires the request to be submitted at least six months before the beginning of the first fiscal year covered.
There is no rollback possibility.
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