Transfer Pricing Glossary
Transfer pricing relies on a precise technical vocabulary. This glossary brings together the key concepts relevant to multinational groups and their advisors, providing for each a concise definition and the applicable legal sources (2022 OECD Principles, General Tax Code, Book of Tax Procedures, BOFIP).
Preliminary Price Agreement (APA)
A procedure whereby a company and a tax authority agree in advance, for a specified period, on the pricing method applicable to one or more intra-group transactions. An APA may be unilateral (involving a single tax authority), bilateral, or multilateral (involving multiple countries). Once concluded, it precludes any challenge to the covered transactions, provided that its terms are complied with and there is no significant change in circumstances (OECD Principles 2022, Chapter IV; BOI-BIC-BASE-80-20).
Intangible Assets
Intangible assets (patents, trademarks, know-how, technology, customer lists) that may be owned or controlled for commercial purposes and for which the use between related entities must be compensated on an arm’s-length basis. Their treatment is based on the DEMPE analysis (see this term), which allocates compensation to the entities that actually perform the key functions (OECD Principles 2022, Chapter VI).
Correlative adjustment
An adjustment whereby the tax authority of a second State reduces a company’s tax liability to eliminate double taxation resulting from a primary adjustment made in the first State. It is generally achieved through mutual agreement procedures (OECD Principles 2022, Chapter IV; Article 25 of the OECD Model Tax Convention).
Primary Adjustment
An adjustment made by a tax authority when it determines that the terms of an intra-group transaction do not comply with the arm’s-length principle; in France, this is based onArticle 57 of the General Tax Code (CGI). The effect of this adjustment is to increase the taxable income of the controlled entity.
Secondary adjustment
Tax consequences of a primary adjustment intended to bring the actual situation into line with the adjustment, for example by reclassifying a transfer of profits as a distribution of income (and possibly applying a withholding tax). Not all jurisdictions apply secondary adjustments (OECD Principles 2022, Chapter IV).
Comparability Analysis (Benchmark)
A study that compares the compensation or margin of an intra-group transaction with those observed between independent companies engaged in comparable activities, using specialized databases. It is used to establish an arm’s-length range to justify the transfer pricing policy. It is a central element of the documentation and defense in the event of an audit (OECD Principles 2022, Chapter III).
Functional Analysis
A review of the functions performed, the assets used, and the risks assumed by each entity involved in an intra-group transaction. This review is a prerequisite for selecting the transfer pricing method and identifying the party under review (OECD Principles 2022, Chapter I).
Article 57 of the CGI
Legal basis for transfer pricing audits in France. It allows the tax authorities to include in taxable income profits indirectly transferred to related companies established outside France, whether through price markups or markdowns, or by any other means. It enshrines the arm’s-length principle in domestic law.
Article L. 13 AA of the LPF
A provision requiring large companies to maintain comprehensive transfer pricing documentation (Master File and Local File). Since the 2024 Finance Act (Art. 116), this requirement applies to companies whose revenue excluding tax or gross assets is 150 million euros or more (compared to 400 M€ previously), or that belong to a group exceeding this threshold. The documentation must be submitted to the tax authorities within 30 days of a request (BOI-BIC-BASE-80-10-40).
Cash pooling (cash centralization)
A mechanism whereby the cash balances of a group’s entities are centralized at a hub entity in order to optimize financial management. In transfer pricing, the remuneration of debit and credit positions, as well as the allocation of synergy gains, must comply with the arm’s length principle (OECD Principles 2022, Chapter X).
Comparable
A transaction between independent enterprises (external comparable) or between a group entity and a third party (internal comparable) used as a benchmark to assess whether an intra-group transaction is conducted on an arm’s-length basis. Its relevance depends on the degree of comparability of the products, functions, and economic circumstances (OECD Principles 2022, Chapter III).
Cost-Plus
A traditional method that involves applying an appropriate gross margin to the direct and indirect costs of producing a good or service within the group. It is assessed in terms of gross margin and differs from Net Cost Plus, which is based on net margin (see that term). It is frequently used for contract manufacturing and certain service provision (OECD Principles 2022, Chapter II).
Shareholder Costs
Expenses incurred by the parent company solely in its own interest as a shareholder (group governance, consolidated reporting to investors, costs related to the holding company structure). These expenses do not correspond to any services rendered to the subsidiaries and must therefore be excluded from the billable base (OECD Principles 2022, Chapter VII).
Statement 2257-SD
A simplified annual transfer pricing return to be filed by companies established in France whose revenue or gross assets exceed 50 million euros (or that belong to a group exceeding this threshold) and that engage in transactions with related entities abroad. It must be filed within six months of the filing of the tax return (Article 223 quinquies B of the General Tax Code). Any inconsistency with the Local File constitutes a risk indicator.
Country-by-Country Reporting (CbCR / 2258-SD)
Country-by-Country Reporting, which requires groups with consolidated revenue of 750 million euros or more to disclose a country-by-country breakdown of their profits, taxes, and activities. It stems fromAction 13 of the OECD’sBEPS project and is provided for in France underArticle 223 quinquies C of the General Tax Code (CGI).
DEMPE
An acronym referring to the functions of Development, Enhancement, Maintenance, Protection, and Exploitation of intangible assets. The DEMPE analysis makes it possible to allocate the profits associated with an intangible asset to the entities that actually perform these functions and bear the associated risks, rather than solely to the legal owner (OECD Principles 2022, Chapter VI).
Transfer pricing documentation
All information demonstrating that intra-group transactions comply with the arm’s-length principle. It consists of a Master File prepared at the group level and a Local File specific to each entity (Art. L. 13 AA of the LPF; OECD Principles 2022, Chapter V, Annexes I and II).
Double taxation
A situation in which the same profit is taxed in two countries, typically as a result of a transfer pricing adjustment that is not followed by a corresponding adjustment. This situation can be resolved through bilateral tax treaties, the mutual agreement procedure, or the European Arbitration Convention.
Associated Companies (Related Entities)
Companies linked by a relationship of dependence, whether de jure or de facto (ownership of capital, control over decisions). It is this dependence that justifies the scrutiny of their transfer prices under Article 57 of the General Tax Code and Article 9 of the OECD Model Tax Convention.
Local File
A section of the documentation specific to each entity, describing the entity, its intra-group transactions, and—for each transaction—the functional analysis, the transfer pricing method selected, and its implementation. It is intended to demonstrate that the transactions comply with the arm’s-length principle (OECD Principles 2022, Chapter V, Annex II; Art. L. 13 AA of the LPF).
Master File
A section of the documentation prepared at the group level, describing the group’s organization, activities, intangible assets, intragroup financing, and general transfer pricing policy. It provides a coherent overview of the group (OECD Principles 2022, Chapter V, Annex I; Art. L. 13 AA of the LPF).
Intragroup Financing
Financial transactions between related parties: loans, advances, guarantees, and cash pooling. The terms of such transactions (interest rates, guarantee fees) must be consistent with those that would have been agreed upon by independent parties, taking into account, in particular, the borrower’s credit rating (OECD Principles 2022, Chapter X; Article 212 of the French General Tax Code on the deductibility of interest).
Full Competition Range
A range of prices or margins resulting from the application of the multiple comparable method. A price falling within this range is presumed to be in accordance with the arm’s length principle; otherwise, the tax authority may make an adjustment, often to the midpoint (interquartile range) (OECD Principles 2022, Chapter III).
Fees de gestion
Support services (management, human resources, accounting, legal, and IT) billed by a group entity to its subsidiaries. Their deductibility requires that the service be genuine, that it be beneficial to the subsidiary (benefit test), that the cost basis be accurate, and that the margin be justified (OECD Principles 2022, Chapter VII; Art. 57 of the CGI; BOI-BIC-BASE-80-10-40).
Profit-Split Method
A transactional method that allocates the combined profit from a transaction among related entities according to a formula that reflects their respective contributions. It is particularly well-suited to highly integrated transactions or those involving unique and valuable intangible assets (OECD Principles 2022, Chapter II).
Comparable Uncontrolled Price (CUP) Method
Traditional method (Comparable Uncontrolled Price), which directly compares the price of an intra-group transaction to that of a comparable transaction between independent parties. This is the most direct method when reliable comparables are available (OECD Guidelines 2022, Chapter II).
Resale Price Method (Resale Minus)
A traditional method based on the resale price to an independent customer, from which an appropriate gross margin is subtracted to arrive at the arm’s-length price for the intra-group purchase. It is particularly suitable for distribution activities (OECD Principles 2022, Chapter II).
Transactional Net Margin Method (TNMM)
Method (Transactional Net Margin Method) that examines the net margin an entity realizes on an intra-group transaction relative to an appropriate basis (costs, sales, assets), compared to that of independent companies. It is the most widely used method in practice due to its flexibility. Depending on the business activity, the indicator used may be a sales margin, a return on assets, or a Net Cost Plus (see this term) (OECD Principles 2022, Chapter II).
Net Cost Plus (NCP)
A net margin metric used in the transaction-based net margin method (TNMM), representing the ratio of net operating income to the cost base (most often full costs). Unlike the Cost-Plus method, which applies a gross margin, the Net Cost-Plus method includes operating expenses and measures net profitability. It is frequently used to determine the remuneration of intragroup service providers and contract manufacturers (OECD Principles 2022, Chapter II).
Penalties for Failure to Maintain Records (Article 1735 ter of the CGI)
Penalty applicable in the event of missing or insufficient transfer pricing documentation. The fine is equal to the greater of the following two amounts: 0.5% of the amount of the transactions covered by the missing documentation, or 5% of the transferred profits, with a minimum increased to €50,000 per audited fiscal year under the 2024 Finance Act (up from €10,000 previously).
Arm's-length principle
The arm’s length principle, according to which transactions between related entities must be valued as if they were conducted between independent enterprises under comparable conditions. It is established byArticle 9 of the OECD Model Tax Convention and incorporated into French law by Article 57 of the General Tax Code (CGI).
OECD Principles
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, most recently updated in January 2022. These guidelines serve as the international benchmark for the interpretation and application of the arm’s-length principle and are widely followed by the French tax authorities.
Alternative Dispute Resolution (ADR)
A mechanism (Mutual Agreement Procedure) that allows the tax authorities of two countries to consult with each other to eliminate double taxation resulting from a transfer pricing adjustment. It is provided for in bilateral tax treaties (Article 25 of the OECD Model) and, within the European Union, by the Arbitration Convention and Directive (EU) 2017/1852.
Corporate Restructuring
Cross-border reorganization of functions, assets, or risks within a group (transfer of business, conversion of a full-service distributor into a commission agent, centralization of intangible assets). This may give rise to arm’s-length compensation and is subject to particular scrutiny by the tax authorities (OECD Principles 2022, Chapter IX).
Low value-added services
Support services that do not fall within the group’s core business, do not generate significant intangible assets, and do not expose the service provider to significant risks (HR, accounting, day-to-day legal matters, IT). The OECD Principles provide for a simplified approach allowing the application of a deemed margin of 5% on costs, as accepted by the French tax authorities (OECD Principles 2022, Chapter VII).
Benefit Test
A test to determine whether an intra-group service provides a real economic or commercial benefit to the entity paying for it. The key question is: Would an independent company have agreed to pay for this service? If not, the service should not be billed to that entity (OECD Principles 2022, Chapter VII).
Does any of these concepts apply to you?
TeaPea assists international groups with all of these matters: due diligence, policy, documentation, tax audits, and tax settlements. Contact the firm.
Sources: OECD Transfer Pricing Guidelines, 2022 edition; Articles 57, 212, 223 quinquies B, 223 quinquies C, and 1735 ter of the General Tax Code (CGI); Article L. 13 AA of the Public Finance Act (LPF); BOI-BIC-BASE-80-10-40; the 2024 Finance Act (Art. 116).