The administration released earlier this year a statement on the new documentation requirements for transfer pricing (Instruction of 23 December 2010, four A-10-10) introduced by Article L 13aa of the LPF.
The requirements apply to fiscal years beginning on 1 st January 2010, but in the context of tax audits related to these exercises, which will start this year after filing the tax return in 2010, they will be taken into account by auditors for the first time.
Documentation required for that?
It should first be noted that all businesses, whether they are or not in the scope of the new rules, must prepare documentation.This is made clear when the investigation indicates that companies are not affected by the new rules fall under Article L 13 B of the LPF.This means that the administration may request such undertakings, as in the past, documentation of their transfer pricing.They will be subject to production delays of less stringent documentation, and the maximum penalty of 5% for failure of documentation they will not apply.
The documentation, however, retains his interest in these companies as those in the field of new rules: for all businesses, it is to prevent the administration, in the absence of documentation, requires its own approach without have to challenge that of the taxpayer.In this sense, the documentation shifts the burden of proof to the administration and protects the taxpayer and it should not be seen solely as a constraint.
What information for?
A thoughtful selection of general information about the group.
As for the content of the documentation, the circular states that the general information about the group should allow the administration to understand the economic, legal, financial and tax group.It is, insofar as these data have an impact on the audited company and its transfer prices they must appear in the documentation.The economic environment will, for example, to explain the results of an entity that bears the market risk, which depends on the situation, the description will, however, less interest in a company whose earnings are predetermined and is independent and not the vagaries of the market, as, for example, a contractor paid by a method of cost plus.
In the same vein, the results of the group or associated companies are not relevant for the assessment of transfer pricing where the method of fixing them takes into account that financial data specific to the company verified, as in the example above of a French subcontractor paid by a method of cost plus.
Furthermore, the description of the group as a whole will not be relevant in the case where the company operates verified in one of the divisions of the group, only the description of the division and possible intersections with other divisions (eg existence common services to all divisions) in this case must be documented.
This means that general information on the group to be included in the documentation do not cover all the elements that are contained in a “master file” documenting generically for all subsidiaries of the group, intra-group transactions.When a “Master File” exists, it is therefore necessary to extract the elements that are necessary for the establishment of the French documentation that is not the juxtaposition of a “master file” and a local documentation or “Country File” one document must include two levels of information about the group, on the one hand, to the extent that they impact on the audited company, and specific to the audited company, on the other.
Information specific to the audited company
Regarding the second type of information specific to the audited company, this is the first description of the work done, including changes in the audited financial year.The documentation will thus enable the administration to know the reorganizations that have affected the audited company, such as conversions or closures.The questions raised by these reorganizations (possible compensation, the entity to bear the expenses arising from the reorganization) are transfer pricing, even if they are topical issues: transfer pricing are not limited to current transactions and recurring.
The documentation must then present intra-group transactions with an indication of the nature of the flow and amount.The circular states that this description will focus on global flows by type of transaction.This means in practice that the company has not confirmed to present and justify the price of each group transactions, the administration seeks rather to understand the principles of calculation of transfer prices for different types of transactions.
The statement also mentions the transactions with “related”.A frequently asked question is whether the documentation should cover transactions with associates French, to the extent that these transactions can be controlled and adjusted by applying the concept of “abnormal act of management”.In practice, these transactions will be covered by a separate document prepared with less formality that will not be governed by the rules on transfer pricing.In the case of a French tax consolidation issues are less important and the rationale flows may be even more succinct.
A demonstration of the relevance of the transfer pricing policy adopted
The documentation should include elements and related general and specific group in society that we have just seen comment.The instruction does not specify how they must form them.The documentation should not be conceived in our view, as a juxtaposition of chapters that would give the administration of the raw information it would be the analysis to form an opinion on transfer pricing.Rather, it should stand as a demonstration to conclude whether the arm’s length transfer pricing, it is important to establish links between these different elements to make the documentation a strong and consistent:
– The presentation of intra-group flows define the scope of the documentation: transfer pricing related to each category of flows will be explained and justified, an indication of the amount of flow will affect the degree of detail required, even if is no threshold below which there is no requirement to document the transaction in question, the documentation may be lighter in practice for transactions not significant;
– The presentation of the market in which the company operates and the context will understand the evolution of the company’s results verified when it bears the market risk.The financial analysis will refer to it;
– Description of associates will be compared with that of the company verified.This will determine what the company “tested”, that is to say the one whose level of income must be justified on the basis of comparable.It should therefore, following the description of the activities of the audited company and associates, to characterize whether these are mere service providers or contractors supporting the market risk;
– Choose the method of transfer prices must be justified from the analysis against which to understand the contribution of the audited company and companies associated with the group’s results in terms of functions, risks and assets;
– The comparables will define the rules for applying the method of transfer pricing.A link will then be made between financial analysis with the results of the tested entity and the economic analysis with comparable results in the form of a fork.