Transfer pricing documentation

Transfer pricing documentation is no longer merely a formal obligation for very large groups. It has become a central element in the management of the tax risk of companies carrying out transactions with related companies established abroad.

In the case of tax controls, this documentation is usually the first document reviewed by the administration. It shall explain the organisation of the group, describe intra-group transactions and demonstrate that the remunerations performed comply with the arm's length principle.

Lately prepared documentation, too general or disconnected from actual transactions, may weaken the overall transfer pricing policy. Conversely, accurate documentation, consistent with accounting and regularly updated, is an essential tool for prevention and defence.

What is transfer pricing documentation?

The purpose of the transfer pricing documentation is to demonstrate that transactions between associated undertakings are remunerated under conditions comparable to those agreed between independent undertakings.

It includes:

• sales and purchases of goods;
• provision of intra-group services;
• management fees;
• IT, administrative or financial services;
• Loans and cash advances ;
• intra-group guarantees;
• cash pooling devices;
• licenses of trademarks, patents or software;
• intellectual property royalties;
• transfers of intangible assets ;
• international restructuring;
• cost allocation agreements.

The documentation should not only describe these operations. It must establish the consistency between contracts, accounting flows, the functions actually performed and the method used to determine the remuneration of each entity.

Which companies are subject to the documentary obligation?

Article L. 13 AA of the Book of Tax Procedures imposes a complete documentation on legal persons established in France whose annual turnover excluding taxes or gross assets on the balance sheet is greater than or equal to EUR 150 million.

The obligation also applies to a French undertaking where:

• it owns, directly or indirectly, more than half of the capital or voting rights of an entity meeting that threshold;
• more than half of its capital or voting rights is held by an entity meeting this threshold;
• it belongs to an integrated tax group comprising an undertaking fulfilling one of these conditions.

The EUR 150 million threshold applies to financial years opened since 1 January 2024. It was previously set at EUR 400 million. Its reduction has brought many intermediate-sized companies into the field of the documentary obligation.

French permanent establishments of foreign companies may also be concerned.

Are companies below the EUR 150 million threshold exempt?

A company that does not meet the threshold of Article L. 13 AA of the LPF is not necessarily exempt from justifying its transfer pricing.

Where the administration finds evidence suggesting an indirect transfer of profits abroad, it may use the procedure provided for in Article L. 13B of the GPA. It can then ask the company for information on:

• relations with foreign related companies;
• the nature and amount of the operations carried out;
• the method of determining prices;
• the activities of the foreign companies concerned;
• the tax treatment of such transactions abroad.

All SMEs with international intra-group flows therefore have an interest in maintaining documentation commensurate with their size, the complexity of their operations and the level of tax risk identified.

In particular, an SME charging for management fees, royalties or intra-group interests must be able to demonstrate the reality of the operations, the usefulness of the services and the normal nature of the remuneration applied.

Master File and Local File: both components of documentation

The documentation provided for in section L. 13 AA of the FPA consists of two parts:

• the main file, commonly called « Master File » ;
• the local file, or « Local File ».

These two documents are complementary. The Master File presents the group as a whole, while the Local File analyses the situation of the French company and its transactions with foreign related entities.

What should the Master File contain?

The Master File provides a global vision of the organization and the transfer pricing policy of the group.

In particular, it must present:

Group structure

The document includes a diagram of the group's legal and capital structure and the geographical location of its main operational entities.

Activities and the value chain

The Master File describes the group's main sources of profit, its geographic markets and the supply chain for its main goods and services.

It should help to understand where value-creating functions are performed and how results are distributed among different jurisdictions.

Intra-group services

Key service delivery agreements need to be identified. The documentation presents the entities providing the services, cost allocation policies and the manner in which the fees are calculated.

Intangible assets

The Master File must identify the main intangible assets of the group: trademarks, patents, software, technologies, know-how or customer bases.

It also describes the entities that develop, improve, maintain, protect and exploit these assets. This analysis, commonly referred to as DEMPE, assesses whether the remuneration for intangibles is allocated to entities that actually create their value.

Intra-group financing

The documentation outlines how the group is financed, agreements with independent lenders, the organization of treasury functions and the policy applied to intra-group loans, guarantees and other financial transactions.

The financial and fiscal situation

The Master File includes the group's consolidated financial statements as well as a presentation of advance price agreements and tax decisions on the international distribution of profits.

What should the Local File contain?

The Local File is dedicated to the French company. It should enable the administration to verify that each significant transaction category complies with the arm's length principle.

It consists mainly of the following elements.

A presentation of the French company

The Local File describes:

• its management structure;
• its organizational chart;
• its activity;
• its strategy;
• its economic environment;
• any restructuring that may take place;
• transfers of intangible assets which affected it.

A mapping of intra-group transactions

Each transaction category must be identified and quantified:

• purchases or sales of goods;
• provision of services;
• management fees;
• loans and interest;
• guarantees;
• fees;
• licences;
• transfers of assets;
• other financial or commercial transactions.

The amounts must be broken down by type of transaction and by jurisdiction of the foreign payer or beneficiary.

Intra-group agreements

The Local File must include a copy of the main intra-group agreements concluded by the French company.

Contracts must be consistent with actual operations. An agreement providing for certain functions or risks is not sufficient if the facts demonstrate that those functions are performed or that those risks are controlled by another entity.

Functional analysis

The functional analysis identifies, for each entity concerned:

• the functions performed;
• the assets used ;
• the risks assumed and effectively controlled;
• human and financial resources mobilized;
• contributions to value creation.

This analysis allows the economic profile of entities to be determined: full-function distributor, limited-risk distributor, manufacturer, moulder, service provider, financing centre or owner of intangible assets.

Transfer pricing method

The documentation should explain the methodology used for each transaction category and the reasons for this choice.

The main recognized methods are:

• the comparable price method on the free market;
• the resale price method;
• the cost plus method;
• the transactional method of net margin;
• the profit-sharing method.

The choice of a method must not be presented in an abstract manner. It must result from functional analysis, the nature of the transaction and the availability of reliable comparable data.

Economic analysis and comparables

Where the chosen method so requires, the Local File presents the search for comparables, selection criteria, any adjustments and the arm's length interval obtained.

Economic data must be sufficiently recent and adapted:

• the sector of activity;
• the geographical market;
• the functional profile of the entity tested;
• the characteristics of the transaction;
• economic risks.

Reconciliation with the Accounts

The data used to apply the method must be able to be reconciled with the company's annual accounts and accounts.

This reconciliation is essential. Economic analysis based on figures that cannot be linked to accounting loses much of its probative value.

When should the documentation be prepared?

Documentation must be available on the date of the accounting audit commitment.

The 30 days often mentioned are therefore not the normal time for preparation. It only intervenes when the administration finds that the documentation has not been delivered or is incomplete and addresses a formal notice.

Preparing the Master File and the Local File after opening the control presents several risks:

• lack of time to perform functional analyses;
• difficulties in collecting historical data;
• inconsistencies between documentation, contracts and accounting;
• use of economic analyses too fast;
• impossible to correct practices already implemented;
• risk of penalty for late or partial documentation.

The documentation must be compiled and updated as the transfer pricing policy is implemented.

In what format should the documentation be submitted?

The documentation shall be kept in an electronic form allowing the exchange, search and reading of information.

In particular, it can be delivered in the form of usable PDF files. A document consisting only of scanned images, without the possibility of searching the text, is not adapted to administrative expectations.

Financial tables, margin calculations and economic analyses must also be able to be monitored and reconciled with accounting data.

Should the documentation be updated annually?

The Master File and the Local File must be reviewed annually.

Some parts may remain relatively stable, but the following elements need to be systematically updated:

• amounts of transactions;
• financial data;
• results of the tested entity;
• development of activities;
• new transactions;
• reorganizations;
• contractual changes;
• Change of method;
• year-end adjustments;
• economic and comparable analyses;
• changes in intangible assets ;
• change in risk control or allocation.

Documentation reproduced identically during several exercises may be considered disconnected from operational reality.

Complete documentation and declaration 2257-SD: what difference?

The complete documentation should not be confused with the simplified annual return provided for in section 223dB of the CGI, generally filed on Form 2257-SD.

This declaration concerns in particular undertakings whose annual turnover excluding taxes or gross assets is greater than or equal to EUR 50 million, as well as certain undertakings linked to an entity exceeding this threshold.

It must be submitted electronically within six months of the filing date of the statement of results. It includes:

• Group activity;
• its main intangible assets ;
• its general transfer pricing policy;
• categories of intra-group transactions;
• the amounts concerned;
• the courts of the associated undertakings;
• the main methods used.

Declaration 2257-SD is a summary. It does not replace the Master File or the Local File.

The reported information must be consistent with the full documentation, annual accounts and actual transactions.

What are the penalties for missing or incomplete documentation?

Where the documentation is not remitted or remains partial after formal notice, section 1735 ter of the CGI provides, for each audited fiscal year, a fine of up to the greater of:

• 0.5% of the amount of transactions involved in missing documents;
• 5 % of the correction of the result based on Article 57 of the CGI relating to undocumented transactions.

The amount of the fine may not be less than EUR 50 000 per financial year audited.

This penalty may apply even in the absence of a correction where certain transactions have not been documented after the notice of formal notice.

Beyond the fine, the lack of documentation places the company in a difficult defensive situation. The administration can reconstruct the results from the information available to it and develop its own analysis of functions, risks and comparables.

Is the documentation enforceable against the company?

Since the financial years opened from 1 January 2024, the consistency between the documented method and the actual method is of particular importance.

Where the method used by the company deviates from that presented in the documentation and this difference affects its result, the difference shall be presumed to constitute a profit indirectly transferred abroad.

The company can reverse this presumption, but it must demonstrate the absence of a profit transfer.

Documentation should therefore never present a theoretical policy that would not be effectively applied. It commits the company to a description of its organization, transactions and method of remuneration.

The most common errors found

Several weaknesses considerably reduce the value of documentation:

• too general description of the group;
• lack of complete flow mapping;
• Standardised functional analysis;
• contracts incompatible with actual transactions;
• lack of justification for management fees;
• studies of old or insufficiently documented comparables;
• method chosen without explanation;
• financial data that cannot be reconciled with accounting;
• lack of analysis of recurring losses;
• year-end adjustments not explained;
• inconsistencies with Declaration 2257-SD;
• no update after restructuring;
• inadequate treatment of intangible assets and DEMPE functions.

Large documentation is not necessarily robust documentation. The quality of the analysis and its consistency with the facts are more important than the number of pages.

How to prepare defensible documentation?

An effective approach generally involves the following steps:

1. identify all related entities and relevant jurisdictions;
2. mapping intra-group transactions;
3. bring the flows of accounts and tax returns closer together;
4. examine intra-group conventions;
5. conduct interviews with operational teams;
6. perform functional analysis;
7. select the most appropriate method;
8. carry out the necessary economic analyses;
9. documenting adjustments and results achieved;
10. check consistency with the Master File, Form 2257-SD and other group reports;
11. organise an annual updating and validation procedure.

Documentation should be conceived as the result of a process involving the tax, financial, legal, accounting and operational branches.

Accompaniment of a lawyer in transfer pricing documentation

The preparation of transfer pricing documentation does not consist of completing a standard model. It requires a legal, economic and operational analysis of the organisation of the group.

The Cabinet Édouard Pruvost supports French companies and international groups in:

• audit of their existing documentation;
• preparation of the Master File and Local File;
• mapping intra-group transactions;
• carrying out functional analyses;
• selection and justification of methods;
• Review of intra-group conventions;
• secure management fees, financing and fees;
• consistency of documentation with accounting;
• preparation for tax controls;
• the protection of transfer pricing policy in case of rectification.

The intervention of a lawyer makes it possible to integrate from the documentary stage legal and litigation risks that may arise in the course of tax control.

Accurate, up-to-date documentation that is consistent with actual transactions is thus much more than a regulatory obligation: it is the first instrument to defend the company's transfer pricing policy.

Reference texts:

• Article L. 13 AA of the Book of Tax Procedures
• Article 57 of the General Tax Code
• Article 1735b of the General Tax Code
• Article 223dB of the General Tax Code
• Administrative Doctrine on Documentary Obligation