In a bid to combat tax erosion arising from improper transfer pricing, the French government has unveiled a comprehensive roadmap against all forms of fraud. The centerpiece of this initiative lies within the 2024 Draft Finance Bill (Projet de Loi de Finances or PLF), which introduces a series of measures aimed at bolstering the tax authorities’ capacity to detect and tackle transfer pricing irregularities effectively. Designed to instill accountability and confidence among taxpayers, these measures are set to have a significant impact on transfer pricing practices in France. In this article, we delve into the key aspects of the new measures and their implications for businesses.
More Demanding Transfer Pricing Documentation:
One of the fundamental changes proposed in the 2024 PLF pertains to transfer pricing documentation requirements. The threshold for mandatory transfer pricing documentation will be significantly reduced, dropping from €400 million to €150 million in gross income or gross assets. This decrease in the threshold applies to both French companies and other entities within the group.
Notably, the penalties for inadequate transfer pricing documentation will be heightened under the new provisions. Additionally, a noteworthy shift is expected in the burden of proof when the implemented transfer pricing policy deviates from the documented approach. Presently, tax authorities often face difficulties in obtaining sufficient evidence to challenge taxpayers’ transfer pricing practices. However, under the new legislation, taxpayers will bear the responsibility of substantiating their transfer pricing arrangements, which is a notable departure from the current case law.
Extended Statute of Limitation for Hard-to-Value Intangible Assets (HTVI):
Another significant aspect of the proposed measures pertains to the statute of limitation for hard-to-value intangible assets (HTVI) transfers to foreign related parties. In such cases, the statute of limitation will be extended to allow for a review of the terms and conditions several years after the transfer. This “ex post approach” seeks to account for actual financial flows to ensure that the associated enterprises’ actions align with the foundational rule of transfer pricing – similar to that of independent enterprises.
However, concerns have been raised regarding the use of pure ex post analysis by the tax authorities, as it may not fully align with economic reality. The Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines stress that ex post elements should only be considered if they could reasonably have been taken into account at the time of the transaction’s conclusion. This emphasizes the importance of considering the circumstances prevailing at the time of the HTVI transfer to arrive at a fair and balanced analysis.
The OECD also advocates for early identification and action on HTVI transactions by tax administrations to provide certainty to taxpayers and avoid any unfair conditions that may arise from the retrospective approach.
As the 2024 Draft Finance Bill approaches its release date at the end of September, businesses and tax professionals eagerly await its implementation. The proposed transfer pricing measures are poised to reshape the landscape of tax compliance in France. By lowering the threshold for transfer pricing documentation and shifting the burden of proof to taxpayers, the government aims to enhance transparency and accountability. Simultaneously, the extended statute of limitation for HTVI transactions seeks to ensure a balanced assessment of actual financial flows. While these measures indicate the government’s commitment to curbing tax erosion and bolstering tax compliance, businesses must prepare themselves for the potential impact on their transfer pricing practices. By staying informed and seeking expert advice, taxpayers can navigate the changing regulatory landscape and build a robust transfer pricing framework that aligns with the latest requirements. The 2024 PLF represents a pivotal step towards ensuring fair and equitable taxation practices for businesses operating in France.