France: New transfer pricing measures announced for 2024 Draft Finance Bill

The government announced new transfer pricing measures to be included in the 2024 Draft Finance Bill (Projet de Loi de Finances or PLF) aimed at strengthening the tax authorities' ability to detect and fight tax erosion resulting from improper transfer pricing.

The government's roadmap in the fight against “all forms of fraud” includes several measures relating to transfer pricing to be included in the 2024 PLF. The measures are designed to build both accountability and confidence among taxpayers. Regarding the latter, a substantial increase in the tax administration workforce likely will enhance access to advance pricing agreements. 

The threshold for transfer pricing documentation would be decreased to from €400 million to €150 million gross income or gross assets (note that this threshold is assessed at the level of the French company or other companies in the group). Higher penalties also would be imposed for insufficient documentation and, when the transfer pricing policy implemented is not in line with the documentation, the burden of proof would fall with the taxpayer instead of the tax authorities. This would be a significant change because case law shows that it is still difficult to provide convincing evidence.

Another measure would extend the statute of limitation if a French company transfers hard-to-value intangible assets to foreign related parties to allow a review of the terms and conditions some years after the transfer to take into account actual financial flows (ex post approach).

KPMG observation

In order to comply with the foundational rule of transfer pricing, which states that associated enterprises must act in a manner similar to that of independent enterprises, the OECD Transfer Pricing Guidelines also state that ex post elements should only be used if they could have reasonably been taken into account by the associated enterprises at the time the transaction was concluded (2. of Annex II to Chapter VI.). A pure ex post analysis, which is clearly favorable to the tax authorities, is not in line with economic reality. One must consider “that the probability-weighting of such an outcome requires scrutiny, taking into account what was known and could have been anticipated at the time of entering into the transaction involving the HTVI [hard-to-value intangible]” (6. of Appendix II to Chapter VI.). According to the OECD, this approach is not intended to apply if “the taxpayer provides […] details of the ex ante projections used at the time of the transfer to determine the pricing arrangements, including how risks were accounted for in calculations to determine the price” (OECD Guidelines 6.193).

With a view to providing certainty to the taxpayers, the OECD was also careful to specify that “tax administrations should identify and act upon HTVI transactions as early as possible.” (10. of Annex II to Chapter VI.).

The 2024 PLF will have to take this into account if it wants to avoid creating unfair conditions that do not reflect the situation that would prevail between independent companies.

The 2024 PLF is expected to be released at the end of September.
 

For more information, contact a KPMG tax professional in France:

Lori Whitfield | loriwhitfield@kpmgavocats.fr

Valentin Lescroart | vlescroart@kpmgavocats.fr

Olivier Kiet | okiet@kpmgavocats.fr