Transfer pricing documentation
According to the OECD, transfer prices are defined as “the prices at which a company transfers tangible property, intangible assets, or renders services to associated enterprises”.
The French tax authorities define them more simply as “the prices of transactions between companies of the same group and residents in different states involving intra-group transactions and the crossing of a border”.
These transfer prices are strictly regulated by a basic principle: the Arm’s Length Principle.
Thus, in the context of intra-group transactions, the price charged between the dependent enterprises must be the same as the price that would normally have been charged on the free market between two independent enterprises.
Compliance with this principle is verified by the French tax authorities and requires specific documentation.
This documentation requirement was recently made more stringent by an OECD report.
- The companies concerned
The transfer pricing documentation concerns legal entities established in France:
– whose annual turnover excluding tax or gross assets on the balance sheet is equal to or greater than 400 million euros
– Or holding at the end of the financial year, directly or indirectly, more than half of the capital or voting rights of a legal entity that reaches the threshold of 400 million
– Or more than half of whose capital or voting rights are held at the end of the financial year, directly or indirectly, by a legal entity that reaches the same threshold of 400 million
– Or belonging to a tax consolidation group
- Documentation to be provided
This compulsory documentation must be updated every time to respect the Arm’s Length Principle.
It consists of two documents: the master file and the local file.
Some companies are also required to provide country by country reporting.
- a) The master file
The master file must contain the following elements:
– the organisational structure of the group,
– a description of the group’s field(s) of activity,
– the intangible assets of the group,
– the intercompany financial activities of the group;
– the financial and tax position of the group.
- b) The local file
The local file must include the following elements:
– A description of the business of the audited company,
– A functional analysis,
– A description of the main international transactions with the company concerned,
– Economic studies justifying the transfer pricing policy.
– A copy of the intra-group agreements concluded by the company concerned,
– A breakdown of financial data.
- c) Country by country reporting
Country by country reporting must be provided by any company with a consolidated turnover of at least 750 million euros.
It must summarise, country by country, the economic, accounting and tax results of the companies in the group.
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