A French company, part of a Swiss-based MNE, transferred its treasury activity to a related Swiss entity, and received no consideration in return for the transfer of this function.
The French tax authorities considered that, absent payment received by the French company, this transaction qualified as an indirect transfer of profits and was therefore subject to the transfer pricing provisions, article 57, of France’s general tax code.
Accordingly, the French tax authorities reassessed tax against the French company, by adjusting for the consideration that it would have received on the transfer.
In order to determine the intrinsic value of the treasury function, the French tax authorities looked to the average profit that would have been generated over the relevant year, applying a gross margin rate of 0.5% to the balance of accounts.
The lower court agreed with the reassessment.
Administrative Court of Appeal, Paris
The Paris Administrative Court of Appeal reversed the lower court’s decision, and rejected the tax reassessment.
The appellate court concluded that the information provided by the French tax authorities in respect of the alleged comparables was insufficient for it to make a determination as to whether these were truly comparable. The appellate court also reached the following findings in respect of the comparables used by the tax authorities:
- No details were provided with respect to the identity of the three comparables, or with respect to the workings of their respective treasury functions.
- There was no indication that the comparables benefitted from a guaranty on borrowings similar to that provided to the French company by one of its Swiss affiliates.
The appellate court thus rejected the valuation method adopted by the French tax authorities, and held that the tax authorities had failed to establish the presumption of an indirect transfer of earnings—a prerequisite for applying article 57 of the French tax code.
Tax professionals note that there is one important aspect of the appellate court’s decision to keep in mind—the appellate court did not decide whether, in principle, the transfer of a function (such as a treasury function) fell within the ambit of the French transfer pricing rules.
While the appellate court presented its reasoning based on an assumption—in fact, the court used the words “en admettant meme” which would translate as “even admitting that”—that this transfer could be subject to article 57 of the tax code, the court did not specifically agree or disagree with that assumption.
Consequently, because the Paris Administrative Court of Appeal did not specifically rule out application of article 57 of the French tax code to the facts of this case, it might still be possible that the transfer of functions outside of France but within a MNE group could constitute an indirect transfer of profits that would be subject article 57. Accordingly, any intercompany cross-border transfer of functions may need to be carefully examined.
In a related decision (also issued in early February 2013), the Paris Administrative Court of Appeal rejected withholding tax imposed by the French tax authorities as a secondary adjustment, i.e., treating the amount transferred as deemed dividends distributed to the Swiss entity. Tax professionals believe this result was only logical, given that the primary adjustment had been reversed (described above), the secondary adjustment would also fail.
Contact a tax professional with KPMG's Global Transfer Pricing Services.