French Tax Authorities release unofficial draft of Transfer Pricing Statement required to be filed with 2013 tax return

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1 24 June 2014 Global Tax Alert News from Transfer Pricing EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date French Tax Authorities release unofficial draft of Transfer Pricing Statement required to be filed with 2013 tax return Executive summary On 8 December, 2013, the French Government adopted a new, additional transfer pricing documentation requirement, codified under Article 223 quinquies B of the French General Tax Code, obliging certain taxpayers to file a reduced transfer pricing documentation within six months of the official deadline for filing their tax return. This new law applies to all tax returns filed after 8 December, 2013 and thus in practice applies to taxpayers that meet the requirements and that have a financial year ending 30 September 2013 or thereafter. Great uncertainty surrounded this new law as no official tax return form nor any formal guidance has been issued by the French Tax Authorities (FTA) to inform taxpayers how to comply with this new law. In June 2014, the FTA released an unofficial and draft version of this new tax return form (Transfer Pricing Statement), to professional organizations with the stated objective to seek comments from industry. This draft form is therefore very likely subject to change, but does provide insight into the FTA s continuing efforts to collect standardized information related to transfer pricing for risk assessment purposes. For reference purposes, this Tax Alert also briefly summarizes the transfer pricing related changes to French tax law that were enacted in the past 12 months.

2 Detailed discussion The Fight Against Tax Evasion and Financial Criminality Bill that entered into force on 8 December 2013 introduced Article 223 quinquies B in the French General Tax Code (FGTC), which substantially reinforces existing French transfer pricing documentation requirements. Taxpayers filing their Corporate Income Tax (CIT) return as from this date that are subject to the provisions of Article L13AA of the French Procedural Tax Code (FPTC) must, in addition to the preparation of a full transfer pricing report, file reduced transfer pricing documentation, within six months of the filing deadline for their CIT return. According to Article 223 quinquies B of the FGTC, the reduced transfer pricing documentation should provide the following information: General description of the group (activities undertaken, main intangible assets owned in connection with the French taxpayer, transfer pricing policy applied, changes that occurred in the last FY). Specific information regarding the French entity (activities carried out, changes in the last FY, list of the intercompany transactions if the aggregated amount per type of transaction exceeds 100,000, presentation of the transfer pricing methods used for determining arm s length transfer prices, changes that occurred in the last FY). As such, no detailed functional analyses or economic analyses are required to be filed by means of this reduced transfer pricing documentation. This new law applies to all tax returns filed after 8 December, 2013 and thus in practice applies to MNEs eligible to Article L13AA of the FPTC (with notably the 400 million thresholds of total net sales before taxes, or total gross assets) and that have a financial year ending 30 September 2013 or thereafter. Great uncertainty surrounded this new law as no official tax return form nor any formal guidance has been issued by the French Tax Authorities (FTA) to inform taxpayers how to comply with this new law. In June 2014, the FTA released an unofficial and draft version of this new tax return form (Transfer Pricing Statement), to professional organizations with the stated objective to seek comments from industry. It is a certainty that this draft Transfer Pricing Statement will give rise to numerous comments from business representatives and it should therefore not be considered as a final version, but the following points merit attention nevertheless: Most MNEs retain their transfer pricing documentation in the English language and doing so does not expose the MNEs in question to transfer pricing documentation penalties. The draft Transfer Pricing Statement issued by the FTA, however, specifically states that the information needs to be submitted in the French language. Although all the information that needs to be filed under this new obligation can be found in the full transfer pricing documentation, taxpayers therefore appear to being forced to incur additional compliance costs, i.e., translation costs, in addition to the administrative costs this new obligation creates. Administrative guidance currently specifies that any omission or inaccuracy in filing tax return information is punishable with a fine of 150, or with a penalty of 15 per breach with a maximum of 10,000. It could therefore be argued that failure to file the Transfer Pricing Statement would incur a fine of 150. However, the draft form issued by the FTA explains that any omission or inaccuracy in the form will incur a penalty of 15 per breach with a maximum of 10,000. It is unclear whether submitting in English when copying or pasting information from the existing transfer pricing report would be regarded as (potentially) subject to a 150 penalty, or whether each information element submitted in English would be subject to a 15 penalty (with a maximum of 10,000). The draft Transfer Pricing Statement provides for a specific box to be ticked if any change in the business and/or the transfer pricing methods occurred during the year. It is generally expected that this information in particular will be used as a risk assessment tool by the FTA. 2 Global Tax Alert Transfer pricing

3 As previously stated, this draft Transfer Pricing Statement will be subject to change, but demonstrates the ongoing efforts of the FTA to standardize transfer pricing-related information, which can in turn be processed for risk assessment purposes. This new reduced transfer pricing documentation obligation should also be viewed in the overall context of transfer pricing enforcement efforts by the FTA, as explained below. Summary of other French transfer pricing related changes enacted into law in the past 12 months This new Transfer Pricing Statement comes at a time when the FTA have been endowed with new powers and tools to scrutinize transfer pricing information during a tax audit. Such additional tools that were made available to the FTA in the past 12 months are summarized below: Requirement to communicate computerized accounting for all tax audits initiated as from 1 January 2014 Certain taxpayers must provide a file detailing all the accounting entries (article L 47 A 1 of the FPTC), i.e., accounting records in the form of an accounting entry file (AEF). This requirement includes the provision of 18 compulsory fields in a predetermined format imposed by the FTA. The non-disclosure of the AEF compliant with French requirements will currently give rise to a 1,500 penalty. Requirement to disclose foreign rulings in the full transfer pricing documentation Taxpayers that fall within the scope of Article L13AA of the FPTC (see above) are required to include in their transfer pricing documentation, tax rulings (as defined by French tax law) obtained by all related parties from foreign tax authorities, as from 31 December However, the requirement does not cover rulings obtained from foreign tax authorities that would not be available to the French taxpayer. Communication of the analytical and consolidated accounts in the event of a tax audit From 31 December 2013, companies in the scope of L13AA (see above) or with a turnover exceeding 152.4m or 76.2m depending on their business activity, will have to communicate their management accounts in the event of an audit. The precise definition of management accounts should be further clarified in future regulatory guidelines. Besides, French companies will also have to disclose the detail of their consolidated accounts, allowing the FTA to identify the tax reserves for instance. Currently, the penalty for failure to comply with these provisions is limited to 1,500. Implications The introduction of this reduced transfer pricing contemporaneous documentation requirement should be regarded as a new risk assessment tool being rolled out by the FTA. In addition, as tax returns can be filed three years (or more) before they are subject to audit, taxpayers are well advised to consider the link that will be made by the FTA between this new Transfer Pricing Statement, which is submitted with or shortly after the tax return, and the Transfer Pricing Report, which is handed over in case of tax audit only. Global Tax Alert Transfer pricing 3

4 For additional information with respect to this Alert, please contact the following: EY, Société d Avocats, Paris Franck Berger franck.berger@ey-avocats.com Jan Martens jan.martens@fr.ey.com Patrice Jan patrice.jan@ey-avocats.com Karen Chauveau karen.chauveau@ey-avocats.com 4 Global Tax Alert Transfer pricing

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