Abnormal management and transfer pricing: information on the burden of proof
- An explanation of abnormal management:
First of all, it should be remembered that freedom of management takes precedence, which means non-interference by the administration in the management of a company.
For example, a manager may, without their auditor being able to criticise their choice, decide to finance an investment by borrowing (which generates financial charges) rather than using their own funds.
However, this principle of non-involvement of the administration in the management of companies does not, according to case law, prevent the auditor from rectifying the consequences of “abnormal management acts” in the area of income tax.
An abnormal act of management is an act contrary to the interests of the company which results in an impoverishment of the company.
- The burden of proof in the context of an abnormal act of management:
In disputes relating to income tax (BIC category) or corporation tax, the party that bears the burden of proof, depending on the course of the proceedings, is judged based on the following:
- the taxpayer proves the accuracy of the accounting entries relating to the disputed act. In the absence of such justification, the administration is deemed to provide proof of the abnormal nature of the management act;
- it is up to the administration, in all other cases (in particular in the case of entries showing the evolution of fixed assets before depreciation or provisions), to establish the facts on which it relies to invoke the abnormal nature of the management act.
- In the context of transfer pricing:
The absence of a trading margin is not sufficient to prove the existence of an abnormal management act.
It was judged that the fact that a subsidiary invoiced its parent company for the launch and promotion costs it had incurred, without charging a commercial margin, cannot, on its own, give rise to a presumption that the invoicing was abnormal. Hence, by deducting from the absence of a commercial margin abnormal management, because the company failed to justify its counterpart, the Court disregards the rules governing the burden of proof. Thus, the absence of commercial margin is not sufficient to prove abnormal management.
The lack of margin is often used by the administration as the main argument in transfer pricing adjustments, and this judgment provides a serious argument against the administration.
Maupard remains at your disposal to explain the implications of this case law. For more information, please email [email protected]