new transfer pricing requirements major groups dqgb60(v · new transfer pricing requirements major...

Pocket Guide

New transfer pricing requirements

Major groups and SMEs

Landwell & AssociésSociété d’avocats

Is your company’s transfer pricing policy at risk in the event of a tax audit?

New transfer pricing requirements – 3

Contents

New transfer pricing documentation requirements 5

Which documentation rules have been applicable since 2010 ? 7

How have documentation requirements been stepped up since 2013 ? 9

How can the documentation requirements be managed efficiently and cost-effectively ? 11

How do the requirements affect internal control procedures ? 13

What will the impact be in terms of tax adjustments ? 15

What precautions can be taken ? A risk analysis and a sound transfer pricing policy… 17

Act now in preparation for a future tax audit ! 19


New transfer pricing documentation requirements

Intra-group transactions account for 60 % of world trade.

However, States – unlike multinational groups – have borders, and governments actively seek to tax their fair share of the consolidated profits of such groups.

Accordingly, in most countries a transfer pricing analysis is now part and parcel of the tax examiner's duties.

To assist them in the performance of transfer pricing audits, tax authorities generally require that transfer pricing policies be backed up by detailed and extensive documentation. Since 2010, France is no longer the exception to the rule.

And in 2013, France introduced even stricter documentation requirements for taxpayers !

The aim of this Pocket Guide is:• to explain how to prepare adequate documentation so as to

avoid being placed at an immediate disadvantage – and having to pay penalties – in the event of a tax audit ; but also

• to encourage you to take this opportunity to analyse your risk areas and review your transfer pricing policy.

Pierre Escaut


Heavy penaltiesSince the start of 2010, transfer pricing documentation requirements have become increasingly burdensome. French companies must be able to provide the tax authorities, as of the first day of the tax audit, with detailed and extensive transfer pricing documentation, as defined by law. Unusually, failure to comply with requirements leads to an up to 5 % specific penalty calculated on the basis of the profits deemed to have been transferred abroad, rather than on the amount of the corporate income tax adjustment ! Loss-making companies are therefore not be spared…

Extensive documentation on the company and the groupTwo sets of information are required, guaranteeing a high level of transparency:• general information about the group, in particular about

business activities and transactions between group entities and the transfer pricing policy ; as well as

• specific information about the audited company explaining its business activity and, on this basis, justifying its selected transfer pricing method.

The documentation must also include financial information on comparable uncontrolled companies in order to substantiate that the transfer prices applied or the profit margins generated are arm’s length.

Which documentation rules have been applicable since 2010 ?

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Which documentation rules have been applicable since 2010?

Why have such measures been imposed ?The documentation requirement meets four major objectives, namely to:• increase the transparency of the transfer pricing policies of

multinational groups ;• officially place transfer pricing among the main concerns of

tax authorities ;• smooth the tax audit process ;• bring French documentation practices into line with

European Union and OECD recommendations.

And it’s not just major multinationals that are in the line of fire !The measures target companies that:• have a gross annual turnover or gross assets equal to or

exceeding €400 million ;• directly or indirectly own more than 50 % of the capital or

voting rights of a company meeting the €400 million criterion ; or

• have more than 50 % of their capital or voting rights directly or indirectly owned by a company meeting the €400 million criterion.

SMEs are therefore not spared in the event that they belong to a French or foreign group targeted by the measures !


New documentation filing rulesFor fiscal years in respect of which the due date for filing the income tax return fell on or after December 8, 2013, French companies within the scope of the transfer pricing documentation requirements must also submit simplified transfer pricing documentation. This simplified documentation must be submitted every year, within six months of the due date for filing the income tax return.

Companies must submit simplified documentation every year and not only when they are subject to a tax audit. This simplified documentation is an additional requirement and companies must still keep full transfer pricing documentation in the event of a tax audit.

Targeted requests…In its simplified documentation, the company must essentially:• provide a brief description of the group ;• describe its activity ;• indicate any changes that have occurred during the year ;• list the group’s main intangible assets ;• list in detail its intra-group flows where the aggregated

amount by type of transaction exceeds €100,000, and the transfer pricing methods that have been used.

How have documentation requirements been stepped up since 2013 ?

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How have documentation requirements been stepped up since 2013 ?

… to enable the French tax authorities to identify companies to be audited !The French tax authorities will use the content of the simplified documentation as a strategic tool for targeting their tax audits. If the simplified documentation is not submitted or reveals inconsistencies, a tax audit may be notified immediately after the six-month filing period, together with a request for full documentation. Penalties may also be applied !


How can the documentation requirements be managed efficiently and cost-effectively ?

Four key recommendations to streamline the documentation process.

1. Don't delay !Remember that transfer pricing documentation takes more than a couple of days to compile, so leave sufficient time before the filing due date to prepare documentation for the past year and don’t wait until you receive notice of a tax audit to complete it !

Revise your organisation and agenda for preparing the documentation to meet the new six-month time limit:• anticipate the production of the full documentation well in

advance ;• use it as a basis to prepare the simplified documentation so

as to only communicate the information required by law.

A word of advice: to avoid duplicating costs, compile comprehensive documentation including all the information you are likely to need to be prepared for any situation. You can then draw on this documentation to prepare summary reports, as and when needed, without having to do any additional research.

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How can the documentation requirements be managed efficiently

2. Put together a cross-disciplinary teamTransfer pricing is at the crossroads of international taxation, management, management control, economics, finance and contract law. Professionals from several departments should therefore be involved in drafting the transfer pricing policy, as well as in monitoring its application and ensuring that the necessary documentation is in place

3. Strike the right balanceEnsuring that the necessary documentation is in place can be a particularly onerous task. Don't hesitate to adapt the structure and content of your documentation to the size of your company and to the volume and complexity of its transactions.

4. Capitalise on work already carried out by the group in other countries

The documentation requirement is widespread in other OECD member countries, under very similar conditions. Therefore, the chances are that general information (the Masterfile) has already been prepared by the group, so why not reuse it by simply adapting it to your company ? This will reduce costs and ensure that documentation is consistent throughout the group.


How do the requirements affect internal control procedures ?

Internal control and top-quality transfer pricing documentation go hand in hand !

What is the role of internal control ?• mapping intra-group flows (products, services, intangible

assets, financial flows) ;• formally documenting the control points that

substantiate invoiced amounts. The IT tool (ERP for example) must be configured in such a way that transfer pricing data can be easily sourced and monitored ;

• defining and providing information on roles and responsibilities with respect to transfer pricing (identifying the departments responsible for ensuring that the transfer pricing policy is correctly applied and the documentation correctly prepared) ;

• setting up procedures for identifying and reporting any instances of non-compliance with internal control processes relating to transfer pricing ;

• organising any revision of or adjustment to the transfer pricing policy and/or documentation in the event of a change in the business model (restructuring, acquisitions, etc.) or when there are any significant changes in the company's environment.

Don't forget to include the updating and monitoring of transfer pricing documentation in your general internal control procedures !

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What will the impact be in terms of tax adjustments ?

The French tax authorities use transfer pricing documentation to step up the amount, quality and pertinence of their tax audits. The documentation requirements provide them with an excellent source of information:

A systematic and targeted approach to transfer pricing risksThis is one of the primary objectives of the simplified annual documentation: transactions that pose particular risks or are particularly strategic from a tax perspective are more likely to be identified, targeted and examined.

Better knowledge of your business sector…The sheer quantity of information collected based on the documentation, and the fact that the information is more consistent, should make it easier for tax examiners to pool knowledge (knowledge of markets, main international issues, compensation for functions performed and significant assets used, etc.).

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What will the impact be in terms of tax adjustments ?

... but above all, of your company !A wealth of information for tax audit departments. The documentation – when it complies with legal requirements – makes for a clearer understanding of the audited company's transfer pricing policy. This increased transparency makes it much easier for the tax authorities to spot the slightest flaw or inconsistency in the company's policy. This is all the more true since the recent enactment of many rules that allow the French tax authorities to corroborate the content of transfer pricing documentation (access to management reporting and consolidated accounts, access to foreign rulings, compulsory electronic submission of accounting entries).


What precautions can be taken ? A risk analysis and a sound transfer pricing policy…Documenting your transfer pricing policy means first addressing the two following issues:

Does my transfer pricing policy adequately take into account my risk profile ?The documentation requirement is an opportunity for companies to conduct an overall assessment of their transfer pricing risks. The tax authorities focus particularly on companies that:

• carry out most of their transactions with related parties ;• report operating losses over several consecutive years ;• pay management fees to other companies within the same

group ;• perform transactions with entities located in countries

having preferential tax regimes. Each risk identified should be analysed and an appropriate solution implemented prior to drafting the documentation.

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What precautions can be taken ?

Do I have an optimal transfer pricing policy ? Planning for the documentation requirements and rallying all the necessary resources to draft the documentation is essential, but it is not enough. Your transfer pricing policy can only be properly documented if it is of sterling quality. But What exactly is a "sound" transfer pricing policy ?

It has been thought out in advance, ideally when the intra-group transactions were structured. Companies should define their transfer pricing methods at the time when they decide to buy or sell goods, supply services, license an intangible asset, etc. Similarly, when a business activity is being restructured, what better precaution than to include a thought process on transfer pricing in the decision-making process ?

It is in line with the functions performed and risks assumed by the company. A prior analysis of functions and risks is the cornerstone of an appropriate transfer pricing policy. The choice of policy will be based on the functional profile of the entity concerned, enabling fair compensation for the functions performed and the risks assumed by each entity.


What precautions can be taken ?

It is consistently applied, across the board. Intra-group transactions having the same characteristics in terms of functions and risks should be treated in the same way. Any difference in the way the transfer pricing policy is applied should be backed up by functional, contractual or economic arguments. An appropriate policy should also be consistently applied to all parties to the transactions. Any inconsistency might come to light through an exchange of information between the tax authorities !

It is simple to apply. If the policy is too complicated to implement it probably needs to be reworked.

It is regularly updated. Like the transactions that it documents, and the economic and structural context in which they take place, a transfer pricing policy should be updated in line with any major structural or functional changes. In the absence of any such changes, the policy should be reviewed on a regular basis to ensure that the company's results are compliant with any changes in the open market.

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Act now in preparation for a future tax audit !

Anticipation is the key to successfully meeting these new challenges:

1. Conduct a self-audit !

Identify and assess risks and requirements. Carry out a critical analysis of your transfer pricing situation – from the tax examiner's point of view.

2. Mitigate your risk exposure

Where possible, mitigate your exposure to risk by rethinking certain structures or adapting them to business models, and amending certain flows.

3. Fine-tune your arguments

Where risk is unavoidable, fine-tune your arguments !

Start to gather the relevant supporting documents, such as contracts, quantified data and comparable data. Doing so will leave you well-equipped to defend your case should the need arise.

4. Consider the advantages of an APA !

Having an advance pricing arrangement (APA) means obtaining approval of your documented transfer pricing policy from the tax authorities in one or more countries. Then, a tax audit simply involves verifying that the arrangement has been properly applied. This procedure is particularly recommended for companies with complex, unusual or highly-integrated business activities or transactions.

Contacts

This publication (and any extract from it) must not be copied, redistributed or placed on any website, without Landwell & Associés’ prior written consent.

© 2014 Landwell & Associés, member of the PricewaterhouseCoopers' network.

‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

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Thierry LOUZIERTax advisor, DirectorTel. +33 (0)1 56 57 44 [email protected]

Florent RICHARDTax lawyer, DirectorTel. +33 (0)1 56 57 43 [email protected]

Myriam ELLETax lawyer, DirectorTel. +33 (0) 1 56 57 40 [email protected]

Xavier SOTILLOS JAIMETax advisor, PartnerTel ; + 33 (0) 1 56 57 41 [email protected]

Pierre ESCAUTTax lawyer, PartnerTel. +33 (0)1 56 57 42 [email protected]

Eric BONNEAUDTax lawyer, PartnerTel. +33 (0)1 56 57 41 [email protected]

Marie-Laure HUBLOTTax lawyer, PartnerTel. +33 (0)5 62 27 57 78 [email protected]

Gilles VINCENT DU LAURIERTax lawyer, DirectorTel. +33 (0)1 56 57 46 [email protected]

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