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Transactions carried out within international groups are governed by strict rules and must be precisely documented. In the event of breach of these rules, the tax administration systematically corrects the companies.
What is this?
Transfer prices are the prices of transactions within international groups. It’s not just about prices on goods. Also concerned are services or intra-group loans, for example. Be aware that transfer prices are systematically examined by the tax authorities as part of tax audits. The adjustments are also sometimes very heavy. In this context, the documentation of these transfer prices is important. It consists of explaining how transfer prices are calculated and justifying the method used. The challenge is to show that transfer prices are market prices, and therefore that the company’s results are not undervalued.
Distribution of profits and appropriate documentation
First of all, the distribution of transfer prices must be balanced within the group. The company considered must have a correct level of profit, according to three criteria: functions, risks, and assets. For example, a subcontractor whose functions, risks and assets would be limited, will have a limited level of profit. If the transfer pricing policy is not good, their documentation will increase the risk of recovery, since it will highlight a method that can be challenged. A good inventory is necessary to ensure that a good method is put in place. If this is not the case, it would be appropriate to document past practices and then consider modifying this transfer pricing policy.
Start from existing documentation
To be both effective and coherent, it is better to start by checking whether there is already documentation abroad, which would constitute a starting point for producing documentation in France. If the documentation only exists in France, it should be ensured that its content complies with the new rules. If this is not the case, it is necessary to adapt it.
Assemble the right team
The team must be multidisciplinary and include the tax function directly concerned; the legal function that will formalize the contracts; the accounting function which will calculate the prices and issue the invoices; and the finance function that will collect the financial data.
A project manager will coordinate the different members of the team, and will define a schedule of the different tasks to be accomplished. The documentation must therefore be managed like a real project.
Follow-up
Once the team is formed, it will produce the documentation and ensure its follow-up. The documentation must indeed be updated each year to reflect changes in the company. It will be necessary to establish a timetable for reviewing and updating the documentation relating in particular to the company’s financial data.
Involve internal control
All these provisions are useless if the transfer pricing policy is not effectively applied. Internal control must therefore ensure this, by means of a suitable IT tool enabling invoices to be issued in accordance with the transfer pricing policy. Finally, internal control must ensure that the roles and various responsibilities are clearly established within the company, in order to carry out this new transfer pricing policy.
DAMY Law Firm , Nice, Corporate taxation-Transfer pricing, Update 2022
