Transfer pricing audits are one of the major challenges facing international groups operating in France. The French tax authorities have powerful legal tools at their disposal—notably Article 57 of the General Tax Code (CGI) and Article L. 13 AA of the Financial Procedures Code (LPF)—to challenge the terms of transactions between related entities. Anticipating such an audit requires rigorous preparation, both in terms of documentation and strategy. Engaging a lawyer specializing in transfer pricing allows for the structuring of this preparation and ensures the soundness of the positions taken.
The Legal Framework for Transfer Pricing in France
Under French law, Article 57 of the General Tax Code allows the tax authorities to adjust the financial results of a French company when profits have been indirectly transferred to a related foreign entity through pricing or service terms that deviate from those that would have been agreed upon between independent companies. This mechanism is based on the arm’s length principle, as defined by the OECD Transfer Pricing Guidelines (2022 edition).
Article L. 13 AA of the Book of Tax Procedures also imposes a documentation requirement on companies whose annual revenue excluding tax or gross assets is equal to or greater than 150 million euros, or that are owned by an entity exceeding these thresholds, or that own such an entity. This documentation must be submitted within thirty days of the first request by the tax authorities during an audit.
What does the tax authority check during a transfer pricing audit?
During a tax audit focusing on transfer pricing, the auditor examines several key factors. First, the auditor assesses the overall consistency of the group’s transfer pricing policy: do intra-group transactions accurately reflect the functions performed, the assets used, and the risks assumed by each entity?
The analysis then focuses on the transfer pricing method selected. The tax authorities verify that the chosen method complies with the OECD Principles and is appropriate for the nature of the transaction. The comparable uncontrolled price (CUP) method, the cost-plus method, the transactional net margin method (TNMM), and the profit-split method are the primary accepted methods.
Where applicable, the administration also reviews the quality of the external benchmark used to demonstrate that the prices charged are at arm’s length. This benchmark must be based on reliable databases, with documented selection criteria for comparables that are consistent with the functional analysis of the entity under review.
Finally, the auditor verifies the compliance of the documentation: local file, master file, Form 2257-SD, and, where applicable, country-by-country reporting (CBCR) as defined in Article 223 quinquies C of the French General Tax Code. Finally, the auditor ensures consistency between the policy described in the documentation and actual practice, particularly through accounting reconciliation.
How to Effectively Prepare for a Transfer Pricing Tax Audit
Preparing for a transfer pricing audit cannot be done on the fly. Ideally, it should begin well in advance, as soon as the group’s transfer pricing policy is established.
The first step is to ensure that the transfer pricing documentation is up to date, complete, and accurately reflects the group’s actual practices. Theoretical documentation that is disconnected from operational reality can backfire on the company during an audit. Intra-group agreements must be signed and consistent with the actual invoiced transactions.
It is also essential to verify that external benchmarks are sufficiently recent and methodologically sound. The administration regularly challenges comparability studies that are deemed too outdated, rely on insufficiently documented selection criteria, or use comparables whose operational profile differs significantly from that of the entity under review.
Preparation also involves anticipating the questions the auditor is likely to ask: Why was this particular method chosen? How were the allocation keys for intra-group service transactions determined? What is the economic rationale for the margin applied?
Finally, it is important to compile a file of supporting documentation: tangible deliverables from the services provided, meeting minutes, email correspondence, and timesheets, if applicable. These documents help demonstrate that the services were actually rendered (benefit test) and justify the cost basis used.
Risks in the Event of a Restructuring
If transfer pricing is challenged, the financial consequences can be significant. The adjustment involves the reinstatement into taxable income in France of profits considered to have been indirectly transferred. In addition to this base adjustment, late payment interest (Article 1727 of the General Tax Code) applies, and, where applicable, surcharges ranging from 40% to 80% in cases of deliberate non-compliance or fraudulent schemes.
Furthermore, the failure to provide documentation or the submission of incomplete documentation exposes the company to a specific fine provided for under Article 1735 ter of the General Tax Code, with a minimum amount of 10,000 euros, which may be increased, in the event of a tax assessment, to the greater of 10,000 euros or 5% of the transferred profits.
The risk of double taxation poses an additional challenge. When a tax reassessment is conducted in France, the group may find itself taxed twice on the same profits. The mutual agreement procedures provided for in bilateral tax treaties or the European Arbitration Convention can resolve these situations, but they are lengthy and their outcome is not guaranteed.
FAQ: Tax Audits and Transfer Pricing
Which companies are subject to transfer pricing documentation requirements?
Article L. 13 AA of the General Tax Code imposes a documentation requirement on companies whose annual revenue excluding VAT or gross assets is equal to or greater than 150 million euros, as well as on companies owned by or owning an entity that exceeds these thresholds. However, any company engaging in intragroup transactions may be subject to an audit pursuant to Article 57 of the CGI.
What is the deadline for submitting transfer pricing documentation in the event of an audit?
The documentation must be provided to the auditor within thirty days of the auditor’s initial request, in accordance with Article L. 13 AA of the LPF. This short deadline is why it is essential to prepare and keep this documentation up to date well in advance of any audit.
How do you choose the right transfer pricing method?
The choice of method depends on the nature of the transaction and the information available. The OECD Principles (Chapter II, 2022 edition) recommend selecting the method most appropriate to the circumstances. In practice, the transactional net margin method (TNMM) is frequently used for routine transactions, while the comparable uncontrolled price (CUP) method is preferred when reliable internal comparables are available.
Can a transfer pricing adjustment be challenged?
Yes. The company may submit comments in response to the proposed adjustment and then file a formal appeal with the tax authorities. If the appeal is denied, the company may file a lawsuit with the administrative court. At the same time, an informal procedure may be initiated to eliminate the double taxation resulting from the adjustment.
To learn more about the transfer pricing services offered by TeaPea, visit our dedicated page: Transfer Pricing Law Firm.
