Transfer Pricing

The regulatory framework for transfer pricing has tightened considerably in recent years: through the OECD BEPS report requiring more transparency and economic substance, extended documentation obligations (local documentation, Master File, Country-by-Country Reporting), automatic exchange of information between tax authorities and tougher audits and penalties.

This context requires multinational groups to manage their transfer pricing rigorously in order to control tax and reputational risks.

Transfer pricing involves multiple challenges: tax structuring of the group and efficient allocation of the tax burden between countries, regulatory compliance and prevention of tax adjustments, management of the risk of double taxation, alignment with economic reality and the operational reality of the group and preservation of reputation in the face of requirements for transparency and tax ethics.

Proactive and documented transfer pricing management protects the group against major tax risks and optimises its overall tax position.

General management needs a clear vision of tax risks related to transfer pricing. We provide you with concrete solutions in the analysis and management of transfer pricing risks by carrying out:

• comprehensive mapping of the group’s transfer pricing risks (by country, by type of flow),
• quantification of potential tax exposures,
• analysis of vulnerability areas (under-documented transactions, fragile methods, etc.),
• and recommendations for corrective actions.

This risk analysis enables management bodies to make informed decisions on transfer pricing compliance actions and to arbitrate between optimisation and securing.

Beyond compliance, transfer pricing constitutes a strategic optimisation lever. We support you in structuring an efficient transfer pricing policy that is in line with your group’s organisation and challenges:

• mapping of all intra-group transactions,
• carrying out functional analysis (allocation of functions, risks and assets within the group),
• determination of the most appropriate transfer pricing methods,
• carrying out comparability studies aimed at defining prices or margin levels.

This transfer pricing policy is intended to align taxation and operational organisation, support your international development and optimise your overall effective tax rate.

Multinational groups face increasing transparency requirements. We assist you in managing communication related to these requirements and managing reputational risk by preparing:

• external communication on your tax strategy and transfer pricing practices,
• responses to questionnaires from ESG rating agencies on taxation,
• key messages for annual reports and reference documents,
• preparation for any challenges from NGOs or the media on your tax practices.

This proactive communication protects your reputation and demonstrates your commitment to responsible taxation, an element increasingly valued by investors and stakeholders.

Defining a robust transfer pricing policy forms the foundation of compliance. We support you in structuring a transfer pricing policy that respects the arm’s length principle by carrying out:

• an analysis of your organisation,
• an inventory of intra-group transactions and related issues,
• detailed functional analysis,
• selection of the most appropriate transfer pricing methods (CUP, resale price, cost plus, TNMM, profit split, etc.),
• comparability studies,
• documentation of assumptions and decisions made.

This technical structuring enables you to defend your policy before tax authorities and limit the risk of adjustment.

Documentation obligations have become central to transfer pricing. We support you in preparing this documentation at three levels:

Local File (by country): detailed description of intra-group transactions, comparability analyses, justification of prices practised.

Master File: overview of the group, organisational structure, business model, global transfer pricing policy.

Country-by-Country Reporting (CbCR): country-by-country declaration of profits, taxes and activities.

This tripartite documentation, required by Action 13 of the BEPS report and adopted by the OECD transfer pricing principles, must be consistent and kept up to date annually. We manage and automate its production and guarantee its compliance with OECD and local standards.

A transfer pricing policy is only effective if it is correctly applied in practice. We assist you in validating the proper application of the transfer pricing policy by implementing:

• internal control procedures (review of transactions, validation of prices),
• monitoring tools (dashboards, compliance indicators),
• training of operational teams (purchasing, sales, treasury),
• periodic transfer pricing compliance audits.

This control system detects deviations and prevents drift before they generate tax risks.

Tax audits focusing on transfer pricing are increasingly frequent and thorough. We ensure preparation and assistance in the context of the audit by organising:

• upstream preparation (white audit, identification of points of vigilance, team preparation),
• assistance during the audit (responses to requests for information, dialogue with auditors),
• analysis of the proposed adjustment and development of the defence strategy,
• negotiation with the tax authority to limit reassessments.

Our technical expertise and knowledge of tax authority practices optimise the audit outcome and minimise adjustments.

If a disagreement persists after the audit, we support you in pre-litigation and litigation phases by managing: hierarchical appeals, submission of disputes to tax commissions, contentious claims, and appeals before the courts.

This litigation defence is based on solid legal and tax expertise, mobilised with determination to preserve your interests.

In the event of double taxation resulting from transfer pricing adjustments, mutual agreement and/or arbitration procedures offer resolution pathways. We manage these procedures by conducting: analysis of eligibility and the appropriateness of the procedure, preparation of the file and referral to the competent authorities, monitoring of the negotiation between the tax authorities concerned, with a view to obtaining an agreement eliminating or reducing double taxation.

These procedures, provided for by bilateral tax treaties and European texts, constitute a solution for resolving transfer pricing disputes between countries.

Transfer pricing directly influences the results of legal entities and therefore variable remuneration. We assist you in the analysis and management of the impact of the transfer pricing policy on employee remuneration by addressing: the impact on bonuses and performance-related benefits (if the entity’s result is affected by transfer pricing), consistency between transfer pricing policy and profit-sharing and participation systems, communication to employees on the effects of transfer pricing on results and possible adjustment of performance criteria to neutralise transfer pricing effects.

This analysis prevents the tax policy from having negative effects on remuneration and undermining team motivation.

Transfer pricing adjustments can have significant social consequences. We support you in the analysis and management of social risks related to the transfer pricing policy, specific operations and tax adjustments by managing: the impact on the calculation bases for profit-sharing and participation (increase in tax profit), possible adjustments to these schemes following the adjustment, potential disputes with employee representatives and HR communication on the social implications of tax adjustments.

This anticipation protects social relations and prevents tax issues from degrading the social climate.

The international mobility policy interacts with transfer pricing: secondment/expatriation of employees and recharged costs, risk of permanent establishment created by employees abroad, and consistency between invoicing flows and personnel flows.

We analyse these interactions to ensure consistency between HR policy and transfer pricing policy.

Intra-group contracts must reflect economic reality and be consistent with the transfer pricing policy. We help you in reviewing existing contracts: intra-group service agreements (technical assistance, administrative services, R&D, etc.), intellectual property licence agreements (trademarks, patents, know-how), production and distribution contracts, intra-group financing agreements, and other agreements related to intra-group transactions.

This review identifies any inconsistencies between contractual documentation and transfer pricing documentation, which could create vulnerabilities in the event of a tax audit.

For new transactions or the overhaul of existing contracts, we handle the drafting of contracts taking into account transfer pricing constraints: precise description of the functions and responsibilities of each party (contractualised functional analysis), methods for determining prices, price adjustment clauses, and clauses relating to intellectual property and risk sharing.

These “transfer pricing proof” contracts legally secure your transfer pricing and demonstrate their arm’s length nature.

Advance Pricing Agreements (APA) allow the transfer pricing determination method to be secured in advance with the tax authority. We support you in: analysing the opportunity to request such an agreement (significant transactions, high risks, novelties), preparing the application file, negotiating with the tax authority (unilateral agreement) or authorities (bilateral/multilateral agreement), and monitoring the application of the agreement.

Advance Pricing Agreements offer maximum legal certainty for a specified period (generally five years, renewable) and avoid future disputes.

The valuation and remuneration of intellectual property constitute a major transfer pricing issue. We legally and fiscally secure: intra-group intellectual property transfers (valuation, documentation), intellectual property licences and sub-licences (royalty rates compliant with the arm’s length principle), joint development and rights-sharing agreements, and restructurings involving intellectual property assets.

This cross-cutting expertise in intellectual property and transfer pricing is essential for groups whose value is based on intangible assets.

The arm’s length principle is the international standard in transfer pricing. It stipulates that the financial conditions (prices, remuneration, margins) of transactions between entities belonging to the same multinational group must correspond to those that would have been practised between independent enterprises in comparable circumstances. This principle, enshrined in Article 9 of the OECD Model Tax Convention and by Article 57 of the French General Tax Code, aims to prevent multinational groups from artificially transferring profits to low-tax jurisdictions and to ensure that profits and value creation are aligned. Compliance with this principle requires an in-depth comparability analysis and solid documentation.

In France, companies with turnover or gross assets of at least €150M, or controlled (directly or indirectly) by a company reaching this threshold, must produce transfer pricing documentation at the request of the tax authority within 30 days. This documentation includes: (1) Local File: description of the organisation and activities of the French company, description of intra-group transactions, functional analysis, transfer pricing methods, comparability analysis. (2) Master File: group structure, business model, global transfer pricing policy, significant intangible assets, financing. (3) Country-by-Country Reporting: for groups with consolidated turnover >€750M, breakdown by country of profits, taxes and activities.

The OECD recognises five main transfer pricing methods: (1) Comparable Uncontrolled Price (CUP) method: compare with prices practised in similar transactions between independent parties. (2) Resale Price method: start from the final resale price and deduct an appropriate margin. (3) Cost Plus method: start from costs and add an appropriate margin. (4) Transactional Net Margin Method (TNMM): compare the net margin achieved on transactions with that of comparables. (5) Profit Split method: allocate profits according to each party’s contribution. The choice of method depends on the circumstances and available data. TNMM is the most frequently used in practice.

A transfer pricing adjustment occurs when the tax authority considers that the conditions of intra-group transactions do not comply with the arm’s length principle. The tax authority then adjusts the taxable profit in France by reintegrating profits it considers to have been artificially transferred. Consequences: increase in taxable profit and corporate tax recovery, late payment interest (0.20% per month), penalty of 40% (or even 80%) and risk of double taxation if the other country does not make a correlative adjustment. The amounts can be very significant (several million euros). Hence the importance of a robust and well-documented transfer pricing policy and a solid defence in the event of a tax audit.

The Mutual Agreement Procedure (MAP) is a mechanism provided for by bilateral tax treaties allowing the resolution of cases of double taxation resulting from transfer pricing adjustments. When one State adjusts a company’s profits to comply with the arm’s length principle, the other State must make a correlative adjustment to avoid double taxation. How it works: the company refers the matter to the competent authority of its country of residence, which negotiates with the authority of the other country to reach an agreement. Time frame: generally 2-3 years. Advantages: elimination of double taxation, negotiation between States (no litigation). The mutual agreement procedure is strongly recommended in the event of a significant transfer pricing adjustment being maintained.

An Advance Pricing Agreement (APA) is an agreement concluded between a group and one or more tax authorities setting in advance the method for determining transfer pricing for certain transactions, for a specified period (generally five years). Types: unilateral agreement (with one country), bilateral (with two countries) or multilateral (with several countries). Advantages: total legal certainty during the term of the agreement, elimination of the risk of adjustment and double taxation on the covered transactions, and time saving during tax audits. Disadvantages: lengthy procedure (12-24 months), costs of preparing the file and disclosure of sensitive information. The Advance Pricing Agreement is particularly recommended for significant or complex transactions with high stakes.

An audit focusing on transfer pricing generally follows this process: (1) Notification: audit notice with request for transfer pricing documentation (30 days to produce). (2) Examination: analysis by auditors of documentation, intra-group contracts and financial data (generally 6-12 months). (3) Questionnaires: requests for additional information, sometimes very detailed. (4) Proposed adjustment: if the tax authority challenges the transfer pricing policy, notification of proposed reassessments. (5) Response to observations: 30 days to challenge and provide arguments. (6) Collection: if the disagreement persists, after any hierarchical appeals and submission of the dispute to the Tax Commission. Total duration: 12-24 months. Advice: be assisted by an expert from the start of the audit to prepare the defence and minimise reassessments.

Penalties for transfer pricing are severe: 40% penalty: if breaches are considered deliberate (very often applied in practice). 80% penalty: if breaches are considered fraudulent manoeuvres. Late payment interest: 0.20% per month on tax recoveries. Penalties for lack of documentation: minimum fine of €50,000 per financial year, or 0.5% of undocumented transactions or 5% of transfer pricing reassessments (whichever is higher).

Intellectual property (IP) is at the heart of transfer pricing issues because: IP often generates a significant part of a group’s value, IP transactions are difficult to value (few comparables) and tax authorities particularly scrutinise royalty flows and IP transfers.

Main transactions concerned: licences for trademarks, patents, know-how (royalty rates to be justified), intra-group IP transfers (valuation), R&D cost-sharing agreements (allocation of rights and costs) and restructurings involving IP transfers. Issues: location of IP in a group entity (substance required), consistency between legal ownership and actual functions/risks and in-depth documentation of any intra-group IP transaction.