Transfer pricing

Ensuring compliance with the rules regarding transfer pricing

About you

You are a group with entities situated in several countries and there is a flow of goods/services/intangible assets between these entities.

You are a company that buys/sells goods/services/intangible assets to one or several entities of the group to which you belong.

You are a company wishing to create a company in another country, which would have the main purpose of providing you with goods/services/intangible assets or of acquiring them from your company.

Against this background, you are wondering what your obligations are regarding transfer pricing.

The regulation of transfer pricing in France

1) What do we mean by transfer pricing?

Transfer prices are the prices charged for the international exchange of goods, services or intangible assets between companies of the same group (i.e. companies under the direct or indirect control of the same legal or natural person) situated in different countries.

Example: the price at which company A located in France sells goods to its subsidiary B located in Brazil. In this example, the French and Brazilian tax authorities each have the right to check whether the price charged is not a cover for the transfer of an operating result (profit or loss) from company A to company B or conversely from company B to company A.

All OECD member countries as well as a large number of non-member countries, have put in place legislation to comply with the guiding principles developed by the OECD regarding transfer pricing.

These principles are regularly revised in line with the OECD’s work to take into account the evolution of the business economy and following experience gained by the tax authorities in the member countries. The last OECD publications on this subject relate to the actions of the BEPS project.

The BEPS project (base erosion and profit shifting) is a project initiated by the G20 in 2012 and implemented by the OECD. It aims to develop an international framework which will enable us to fight effectively against abusive tax optimisation strategies (particularly the artificial erosion of margins) adopted by certain international companies.

2) The analysis of transfer pricing in 3 steps

Multinational companies must establish their intra-group transfer prices in compliance with the arm’s length principle, i.e. by using prices that are comparable with those that would be charged between two independent companies in similar conditions.

The analysis of transfer pricing allows the company to make sure that the prices it is charging are based on the arm’s length principle. To do this, the analysis is broken down into 3 steps:

A functional analysis of the company must be carried out: this allows the company to position itself in the group by listing all the functions it carries out, the risks it faces, the assets/intangibles it utilises in the context of its activities.

The next step is to choose the most suitable method to determine an arm’s length price. The choice of method is an essential step because it allows you to justify the relevance of the transfer prices.

In fact, the information available, the specific features to be taken into account etc. vary from one transaction to the next. However, no single method is enough to determine effectively the arm’s length price from all the transactions subjected to the issue of transfer pricing. To overcome this problem, the OECD has developed several methods allowing companies to fix and control the transfer price and respect the arm’s length principle.

The OECD has developed five main methods allowing companies to determine transfer prices respecting the arm’s length principle. These methods are divided between so-called “traditional” methods (CUP, Cost Plus, Resale Price) and so-called “transactional” methods (TNMM, Profit Split).

Among these methods, companies need to choose the one which is the most appropriate for the transaction analysed, taking into account the advantages and inconveniences associated with each method, the existence of reliable, available and actionable information in terms of the purpose of such an analysis etc. All the criteria selected for the choice of method must be explained and justified in the transfer pricing documentation.


  • “CUP” method

Method of the comparable price in a competitive market. It aims to compare the transfer prices charged within a multinational company with the prices charged between independent companies for comparable transactions. If there isn’t an exactly comparable transaction, it is acceptable to make adjustments if they can be carried out with sufficient reliability.

  • “Cost Plus” method

This method involves calculating the cost price of property/services/intangibles and adding a mark-up comparable to that which would be charged between two independent companies. This requires determining the direct/indirect costs from the company’s cost accounting, and, if need be, the operating costs linked to the property/service/intangible. It will be necessary to make adjustments to ensure comparability between the mark-ups obtained by the group and those obtained in transactions between independent groups.

  • “Resale price” or “Resale minus” method

The “resale price” method involves establishing the market price by reference to the gross margin achieved on the sale of the property/service/ intangible between independent parties (the product and the conditions of sale being identical or similar). The margin achieved in the context of sale to independent parties is subtracted from the price of resale charged within the group to determine the purchase price that should be charged within the group.


  • “TNMM” – Transactional net margin method
    This method involves comparing the net margin achieved on a transaction within the group with net margins achieved on comparable transactions with or by independent companies. There is no comparison of prices but levels of net margin. This method is complicated to use and its reliability can be debatable.
  • “Profit Split” Method
    The method of splitting profits involves splitting the integrated gross profit achieved within a group of companies by all the companies involved in a product, from research to marketing outside the group. This overall margin is then split between the different players within the group according to their role in the development and marketing of the product. The role of the different players is defined by means of a functional analysis.

Compared to the other methods, this one is only based on the data of the group concerned, does not require adjustment and clearly indicates the margin allocated to each country.

Once the functional analysis has been carried out and the most appropriate method has been chosen, the price to be charged within the group should be compared with the price charged in a cross-section of comparable and independent companies.

The establishment of a cross-section of comparable companies or a “benchmark” is an intricate and complex task. It involves ensuring that all the companies selected carry out their transaction in a potentially comparable way within an economic environment sufficiently similar to that of the intra-group transaction being analysed. If there are differences existing in the above-mentioned environment, they must not influence the final price of the transaction; it must be possible to make adjustments. Finally, to avoid a common conflation, it should be specified that a competitor is not always a comparable.

Comparable companies for selection could be:

  • Internal: within the group, a transaction identical to that analysed and carried out with an independent company.
  • External: an independent company carries out a similar or identical transaction with another independent company.

Once the cross-section of comparable companies has been finalised, the intra-group transaction analysed will be compared to those of companies in the cross-section of comparable companies.
The analysis of transfer pricing will be complete when it can be determined if the price applied is effectively an arm’s length price or if it is necessary to make some adjustments.

3) Obligations regarding transfer pricing: annual declarations, detailed documentation

According to tax legislation currently in force in France, there are two levels of obligation regarding transfer pricing:

Obligation to provide full documentation (L13 AA of the French tax procedures handbook)

Should be able to supply documentation of transfer pricing on the first request of the tax authority, legal entities established in France:

  • Whose annual turnover before tax or gross assets listed in the balance sheet is more or equivalent to €400 million


  • Holding at the end of the financial year, either directly or indirectly, more than half the capital or voting rights of a legal entity meeting one of the two criteria mentioned in the first indent


  • For whom more than half the capital or voting rights is held at the end of the financial year, directly or indirectly, by a legal entity meeting one of the two criteria mentioned in the first indent


  • Belonging to a group of companies (according to articles 223 A and A “bis” of the French General Tax Code) where at least one of the legal entities in this group meets one of the two criteria mentioned in the first indent.

The documentation of transfer pricing under article L 13 AA of the French tax procedures handbook

The information presented in the documentation must allow the tax authority to understand the economic, legal, financial and tax environment of the group of associated companies as well as the place occupied within the group by the French company.

The company is required to produce documentation composed of a master file comprising information on the group and a local file comprising information on the subsidiary.

The documentation of the transfer pricing must justify the selection of the transfer pricing method decided upon and its application to the transactions carried out. This justification may rely not only on an analysis of relevant comparable companies but also on a functional analysis of the company.

A strong case must be made for a demonstration using other bases.

It should be noted that the finance law for 2018 has updated the content relating to the documentation on transfer pricing to reflect the standard developed by the OECD for the BEPS project. The content of the documentation is now more detailed. These new provisions are applicable to annual financial statements from 1 January 2018.

This documentation has been compulsory for financial years from 2010 onwards and must be made available to the tax authority from the date when a tax inspection is initiated. If a company fails to present documentation or presents incomplete documentation, it can be presented within 30 days of a formal notice from the tax authority, a period which can be extended to 60 days.

If this documentation is not presented, sanctions apply: either 0.5% of the amount of the transactions concerned or 5% of the corrections (minimum €10,000).

Annual declaratory obligation – shorter version of the complete documentation (article 223 “quiquies” B of the French General Tax Code)

Must make a declaration relating to their transfer prices – legal entities that meet one of the following conditions:

  • Whose annual turnover before tax or gross assets listed in the balance sheet is more or equivalent to €50 million (this threshold applies to financial years ending from 31 December 2016; before the threshold was €400 million)


  • Holding at the end of the financial year either directly or indirectly, more than half the capital or voting rights of a legal entity meeting one of the two criteria mentioned in the first indent


  • For whom more than half the capital or voting rights is owned at the end of the financial year, directly or indirectly, by a legal entity meeting one of the two criteria mentioned in the first indent


  • Belonging to a group of companies (according to articles 223 A and A “bis” of the French General Tax Code) where at least one of the legal entities in this group meets one of the two criteria mentioned in the first indent.

However, by way of derogation, the following cannot make this declaration:

  • companies that do not carry out any transaction with associated entities established abroad;
  • companies that carry out transactions with associated entities established abroad where the amount is less than €100,000 by the nature of the transaction.

The declaration must be submitted within the six months following the deadline for the reporting of the operating result.
For financial years ending on 31 December, the submission of this declaration is therefore normally November N+1.

4) The control of transfer pricing by the tax authority

Determining transfer prices is not an exact science and can lead to both long and costly litigation with the tax authorities.

The French tax authorities, as in most other countries, ask companies to be able to justify the transfer prices charged. However, the tax authority is always entitled to question a transfer pricing policy if it has any doubt.

Transfer pricing is one of the major tax risks for groups of companies operating in several countries. It is essential to anticipate these problems and to develop prior to any inspection, a genuine transfer pricing policy at group level and to support the latter with detailed and well-argued justifications.

To carry out an audit of transfer pricing in a company, the tax authority must arrange a tax inspection of the company/companies concerned in accordance with the usual procedures and guarantees. Transfer pricing is now a recurring theme in tax inspections.

We should remember that the company must be able to supply documentation on transfer pricing on first demand.

If in the context of such an inspection, the tax authority wishes to correct the transfer pricing in the group, it needs to show that the transfer prices charged translate into an indirect transfer of profits abroad.

In the case of any disputes and adjustment by the tax authority, there are several levels of appeal:

  • First of all, it is possible to contest the position adopted by the auditor with his chain of command (departmental contact)
  • It is also possible under certain conditions to submit the dispute to the Commission départementale des Impôts directs et de taxes sur le chiffre d’affaires (Departmental Committee for Direct Tax and Turnover Tax)
  • After enforcement, the adjusted fees can be contested by way of complaint, then before the Tax Court judge.
  • The decision of the trial judge (administrative tribunal) can be appealed against at the competent Administrative Court of Appeal.
  • The appeal decision can finally be put forward as a cassation complaint to the Conseil d’Etat (Council of State).
  • Finally, to avoid any double taxation of the same profits both for France and for the jurisdiction of the other associated company, it is often necessary to involve the competent authority designated by the applicable tax convention. However, you need to know that the competent authorities are not obligated to remove the double taxation resulting from an adjustment regarding transfer pricing.
  • Furthermore, certain tax conventions concluded by France provide for the possibility of arbitration.

5) Request for prior agreement regarding transfer pricing

It is possible to request the French tax authority for prior agreement regarding transfer pricing. This agreement can be unilateral, bilateral or multilateral.

This agreement allows the French tax authority and a multinational company to determine in a concerted manner and for a given period a transfer pricing method that complies with French legislation and, in the case of a bilateral or multilateral agreement, complies and is compatible with the legislation of the other countries consulted.

The agreement can only ever apply to the method of determining transfer pricing and never applies to the price itself.

The request for prior agreement is broken down into several stages, the common denominator of which is the exchange with the tax authority/ authorities: on the advisability of the request, on the elements in the file and technical points. Negotiations can be entered into with tax authorities in the case of a bilateral or multilateral request. There is not an obligation to deliver a result: the tax authority can decide not to deliver the prior agreement if it thinks that the conditions have not been met.

If a prior agreement is obtained, its terms are defined in a precise manner (company, transactions concerned, method, duration, retention/revision/invalidity of the agreement etc.). The agreement shall be valid for a period of 3 to 5 years. Any request for renewal must be submitted in the 6 months preceding the end of the validity of the initial agreement. An annual report must be supplied to justify retaining the conditions of issuing the agreement.

However, it should be noted that there is no obligation for the services to provide a result when a company requests a prior agreement.

If this procedure does result in an agreement, it is of considerable advantage for the company which implements it. It is, however, a project requiring a lot of preparation beforehand.

Our support

The support offered by Altexis covers all the stages of analysis, the preparation and defence of the transfer price policy to ensure your company’s/ your group’s compliance with regard to its obligations concerning transfer pricing and justifying its relevance.

We can particularly help you in:

  • Carrying out an internal audit of the transfer prices charged between the different entities
  • Determining transfer prices that respect the arm’s length principle
  • Developing and editing your documentation on transfer pricing
  • Meeting your annual reporting requirements
  • Defending your company in the case of a tax inspection of the transfer prices charged
  • Initiating arbitration procedures in the case of double taxation resulting from a tax inspection regarding transfer pricing
  • Initiating, preparing and following a request for prior agreement regarding transfer pricing