1. What are the main sources of transfer pricing controversy (transfer pricing audits and disputes) in your jurisdiction – e.g., characterization, choice of method, choice of comparables, comparability adjustments, related party agreements and re-characterization, operation of the transfer pricing policies? Do auditors receive instruction to focus on these areas, or are they main sources of controversy because auditors focus on them by themselves? 2. Do transfer pricing controversies arise more often in certain businesses or industries than in others; and if so, do you see this as being related to the industry’s treatment of the main sources you outlined above, or for some other reason? 3. Are any recent or proposed changes in national statute, case law or guidance (perhaps as a reaction to the BEPS project) generating or expected to generate new transfer pricing controversy? 4. What do you see as the best ways of avoiding controversy – e.g., doing more thorough functional analysis, benchmarking, making comparability adjustments, ensuring that there are detailed transfer pricing agreements or other documentation, or formal or informal agreement with the tax administration? 5. What are the options for achieving a successful outcome of controversy – e.g., settlement through negotiation, alternative dispute resolution, litigation, invoking MAP at an early stage, PA with a roll-back? In your jurisdiction, what are the practical advantages or drawbacks from any of these? 6. How can greater certainty be achieved about the future treatment of transfer pricing arrangements – e.g., APAs, improving the documentation, changing the policies, improving the ways the policies are operated?

1. Reproduced with permission from Transfer Pricing Forum,
07 TPTPFU 82, 12/22/16. Copyright ஽ 2016 by The Bureau
of National Affairs, Inc. (800-372-1033) http://www.bna.com
DECEMBER 2016
Transfer
Pricing Forum
Transfer Pricing for the International Practitioner

2. France
Julien Monsenego
Gowling WLG LLP, France
1. What are the main sources of transfer pricing
controversy (transfer pricing audits and disputes)
in your jurisdiction – e.g., characterization, choice
of method, choice of comparables, comparability
adjustments, related party agreements and
re-characterization, operation of the transfer
pricing policies? Do auditors receive instruction to
focus on these areas, or are they main sources of
controversy because auditors focus on them by
themselves?
T
here are various sources of transfer pricing
controversy in France. While it is difficult to
quantify the usual elements of dispute be-
tween the French Tax Authorities (FTA) and taxpayers
due to the lack of public information on companies’
tax matters, experience has shown that elements are
usually dependent on the type of company being au-
dited:
s French-headquartered Multinational Entities
(MNEs) - these types of companies will be under
strict scrutiny regarding their intragroup outbound
flows (for instance, the intragroup expenses charged
from related companies providing services or goods
that would be expected to be provided directly by
the French headquarters, such as, financing, man-
agement, purchase, sourcing etc.), as well as their
intragroup income (review of the consistency in the
profitability of the various foreign subsidiaries de-
pending on their respective location and the appli-
cable corporate income tax rate). Any spin-off of
activities and/or assets out of France (particularly IP
assets such as patents, trademarks, clientele etc.)
will be under tight review as well, to ensure an exit
charge has been correctly computed.
s French subsidiaries of MNEs - the French Tax Au-
thorities may challenge the choice of method for
pricing certain intragroup transactions and achieve
a certain level of profitability in France (for instance,
they may rely on a Transactional Net Margin
Method (TNMM) rather than a cost plus method).
Also, to achieve a similar objective, the profile of a
French subsidiary may be challenged and re-
characterized, to determine whether it bears more
functions and risks than what the taxpayer initially
considered (this may be an alternative to character-
izing a French permanent establishment of a MNE
within said French subsidiary, in complex situa-
tions).
s French Small and Medium-sized Enterprises
(SME) - for these smaller companies, most of the
controversy will generally revolve around a review
of all their intragroup flows, using internal compa-
rables to discuss the appropriate level of the profit
indicator that was used. Even in a purely French in-
tragroup situation, the French Tax Authorities may
use a transfer pricing approach to price appropri-
ately certain transactions (except if a tax consolida-
tion is in place between the parties).
On the second question, there may be non-public
instructions given by the French specialized office at
the International Central Tax Audit Brigade (DVNI),
notably for audits targeting French MNEs. Previous
tax audits and their conclusions are used by most, if
not all, of the tax auditors to determine whether stated
positions have been complied with for the unaudited
period, and if not, which elements could substantiate
the changes. For smaller companies, while there are
no precise instructions as such, transfer pricing has
become, over the years, a typical area of review for
local tax auditors, who can get support from the cen-
tral authorities, especially in obtaining contradictory
economic analyses or studies. A French subsidiary of
a foreign group will almost systematically be audited
on these aspects, at least on the contractual side and
more likely on the economic / transfer pricing docu-
mentation side.
2. Do transfer pricing controversies arise more
often in certain businesses or industries than
in others; and if so, do you see this as being
related to the industry’s treatment of the main
sources you outlined above, or for some other
reason?
Traditionally, IP-rich industries have been at the fore-
front of the transfer pricing controversy, notably the
Pharma / Life Sciences industry. Other industries such
as consumer electronics have been under scrutiny
from the French Tax Authorities for decades as well.
The importance of IP valuation and licenses in and
out of related companies can easily explain why these
industries are the focus of attention in the first place.
30 12/16 Copyright ஽ 2016 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760

3. More recently, and unsurprisingly, given the media
coverage, the ‘‘GAFA’’1
companies and their satellite
entities have been on the radar of the French and the
OECD’s countries tax Authorities. A few weeks ago,
the Budget State Secretary Christian Eckert men-
tioned that the GAFA MNEs have been re-assessed by
2.5 billion euros, including penalties, and that audits
for the FYs 2013 to 2015 on these companies were on-
going.2
Same applies to the e-commerce / ‘‘Uber-like’’ – par-
ticipative business model. As mentioned above, trans-
fer pricing can be seen as an alternative to the
characterization of a permanent establishment in
France, or even of the application of the French CFC
rules, as it enables the French Tax Authorities to repa-
triate / locate what was initially non-French income in
France.
3. Are any recent or proposed changes in national
statute, case law or guidance (perhaps as a
reaction to the BEPS project) generating or
expected to generate new transfer pricing
controversy?
While the BEPS project has generated a lot of atten-
tion and raised the awareness of the tax authorities on
certain of the key concerns targeted by said project,
there has been limited legislation issued in France on
these matters to date. This is mostly due to the fact
that the current French legal arsenal is already able to
challenge most of the unjustified situations listed in
the BEPS project, notably the abuse of law or the ab-
normal act of management concepts.
On the case law front, it is too soon to estimate the
impact of BEPS, and generally, transfer pricing case
law has remained rather limited over the years, nota-
bly given the development of alternative procedures to
achieve resolutions (Mutual Agreement Procedure
(‘‘MAP’’, arbitration) in controversy or to avoid said
controversy (Advance Pricing Agreements (’’APAs‘‘)).
That being said, with the introduction of a contem-
poraneous TP documentation requirement in France
six years ago (article L 13 AA of the French Tax Proce-
dure Code), the French Tax Authorities now have
access to much more information than in the past.
This now creates opportunities for the authorities to
raise questions on specific transfer pricing points (no-
tably when the documentation shows a structural
change or a sharp evolution in the profit / loss position
of the company), or even to start a full tax audit. The
same can be said regarding the new requirement
under article 223 quinquies B of the French Tax Code
requiring the filing of an annual TP form (No 2257-
SD) since 2014.
Also, France is among the first countries of the
OECD to have implemented a mandatory country-by-
country reporting norm in its own domestic legisla-
tion. This provision (article 223 quinquies C of the
French Tax Code) provides for some specific measures
which will be effective from fiscal years that begin on
or after January 1, 2016. Again, this disclosure of in-
formation will in itself generate questions, audits and
possible controversies even beyond France, as it is
currently planned to have such information made
public, which would enable the tax authorities from
other countries to access certain data to justify re-
assessments of non-French subsidiaries of a French
parent company (making this information public is
severely challenged and contested by the representa-
tives of the French companies as we write this article).
Finally, now that the electronic accounting files (so-
called ‘‘FEC’’) have to be remitted to the tax inspector
at the start of a tax audit, the French tax inspectors
have another tool to extract data and possibly chal-
lenge transfer pricing positions.
N.B. French Parliament members have introduced a
so-called ‘‘Google Tax’’ provision in the Draft Tax Bill for
2017, with a view of supplying an alternative weapon to
permanent establishment, in order to allocate and tax
profits deriving from e-commerce. However, this draft
provision could potentially infringe the content of tax
treaties signed by France, and may not be included in
the final version of the Bill.
4. What do you see as the best ways of avoiding
controversy – e.g., doing more thorough functional
analysis, benchmarking, making comparability
adjustments, ensuring that there are detailed
transfer pricing agreements or other
documentation, or formal or informal agreement
with the tax administration?
Obviously, the more developed a transfer pricing is,
the better, when it comes to avoiding controversy. This
means having the most quantitative and qualitative
data when the market enables to do so, and refresh
this data at least every three years, or even more fre-
quently if any restructuring creates a notable change
in the group. In addition, applying true-ups to trans-
fer prices at year-end allows generally having the most
precise measure of the effects of a transfer pricing
policy and rapidly identifying any issues or inconsis-
tencies when they arise, rather than waiting an entire
financial year to discover them.
Taking advantage of strong IT systems to support
analytical data in a consistent way within an interna-
tional group is also a key component when it comes to
defending a transfer pricing position and extracting
relevant information in the course of a tax audit. This
will enable the French taxpayer to make any adjust-
ments in-house rather than having the tax inspector
make his own adjustments, which could lead to severe
divergences that may be hard to reconcile in a tax
audit situation.
Finally, it is important to align the legal documenta-
tion and agreements with the operational facts and
principles set-out from an economic perspective. This
means amending in a timely manner the documenta-
tion upon any significant changes, and avoid stating
within the body of the agreements fixed amounts or
percentages or even certain principles of remunera-
tion but rather using appendixes which can be
amended from time to time. Indeed, French Tax Au-
thorities may rely on agreements which are still in
force and have not been updated to require a certain
1
‘‘GAFA’’ is an acronym used to describe US Tech com-
panies. It puts together the first letters of the four biggest
tech giants – Google, Apple, Facebook, and Amazon.
2
Le Monde article: http://www.lemonde.fr/economie/
article/2016/11/24/le-fisc-francais-reclamerait-400-
millions-d-euros-a-apple_5037144_3234.html
12/16 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 31

4. level of remuneration as provided by said agreements,
even if the situation may have changed in the mean-
time.
When it comes to relationships and ‘‘agreements’’
with the French Tax Authorities in relation with a
transfer pricing position or policy, there is hardly any
‘‘informal’’ agreement to be made, except if the tax-
payer agrees to a certain position in the course of a tax
audit and decides to apply it consistently post-audit.
The usual formal agreement will be in the form of an
APA, but this is still a procedure rarely seen in prac-
tice, and the practice of issuing tax ruling for transfer
pricing purposes is even rarer in France. That being
said, alternative procedures are currently being tested
by the Central Authorities, such as the ‘‘confidence re-
lationship’’ (‘‘relation de confiance’’). Under this rather
informal procedure, a taxpayer may share all or parts
of its transfer pricing policy and agree to certain posi-
tions with the French Tax Authorities, but this re-
mains experimental at this stage.
5. What are the options for achieving a successful
outcome of controversy – e.g., settlement through
negotiation, alternative dispute resolution,
litigation, invoking MAP at an early stage, APA
with a roll-back? In your jurisdiction, what are the
practical advantages or drawbacks from any of
these?
In practice, there are some categories of cases
whereby a possible settlement or, on the contrary, a
high likelihood of tax litigation exists.
Settlement on transfer pricing cases will certainly
be worth pursuing if certain aspects of the cases have
been commonly agreed upon with the Authorities
(e.g. nature of the flows, functional analysis, use of a
particular transfer pricing method, etc.). Cases in
which the subject involves a profit or mark-up level
can typically lead to pre-litigation arrangements with
the French Tax Authorities. In certain cases, these ar-
rangements can turn into ‘‘rulings’’ or more formal
Advance Pricing Agreements for future years, under
which the company will commit to applying consis-
tently the arrangement if the operations remain sub-
stantially the same. The key point in these situations
is ensuring these positions are consistent with the
global transfer pricing approach and the Master File,
so that if the audited company is a subsidiary of a
non-French group, the French transfer pricing posi-
tion remains consistent with the position in similar
situations of other foreign related companies, and
also consistent with the Master File of the foreign
parent company. The same can be said of settlements
by French parent companies - such taxpayers need to
anticipate whether a settled position for French pur-
poses will not generate a corresponding tax exposure
at the level of some of their foreign subsidiaries.
On the contrary, if, from the start, there is a dispute
on the nature or importance of the intra-group activ-
ity (e.g. full-fledged manufacturer versus toll manu-
facturer) or even the existence of a tax liability (e.g.,
existence of a French permanent establishment),
there will be little room for discussion and the case
will likely be brought to tax court with few or even no
possibility of settlement with the French Tax Authori-
ties. However, one needs to keep in mind that even
though the case law in transfer pricing has increas-
ingly developed over the past 10 years or so, it remains
a territory the judges are not necessarily familiar with,
and this generates more uncertainty regarding the
outcome of a transfer pricing litigation.
Also, French taxpayers can attempt to resolve issues
in relation to the application of double tax treaties
signed by France under a Mutual Agreement Proce-
dure (MAP) or an arbitration procedure, the latter
being only applicable to transfer pricing issues. MAP
is a specific procedure in order to solve double taxa-
tion issues where the competent authorities of each
state are invited to reach an agreement. It is not a ju-
risdictional procedure and competent authorities
have no other obligation than to provide best efforts
towards the elimination of the double taxation. There-
fore it is possible that the MAP would not eliminate
the legal or economic double taxation. MAP can be
carried out on the basis of the applicable tax treaty.
France has signed more than 110 double tax treaties
containing a provision for MAP. Moreover, an alterna-
tive to a MAP under a double tax treaty is the Euro-
pean Union Convention on the elimination of double
taxation in connection with the adjustment of profits
of associated enterprises 90/436/EEC dated July 23rd,
1990 (the Convention).
Finally, APA procedures are available as well and de-
scribed under section 6 below.
6. How can greater certainty be achieved about
the future treatment of transfer pricing
arrangements – e.g., APAs, improving the
documentation, changing the policies, improving
the ways the policies are operated?
The APA procedure is intended to eliminate the risk of
double taxation by establishing an agreement be-
tween two Contracting States. A taxpayer shall initiate
the procedure by contacting the office in charge of ne-
gotiating arrangements and the application must be
filed six months before the start of the first fiscal year
covered by the arrangement.
If the FTA and the foreign counterpart reach an
agreement, the APA is binding on the FTA unless facts
and circumstances disclosed by the taxpayer do not
match reality or commitments taken are not complied
with. The duration of the APA cannot be shorter than
3 years and may not exceed 5 years. However, the tax-
payer can ask for its renewal, this request should be
received by the FTA at least 6 months prior to the ex-
piration date of the APA. Besides bilateral and multi-
lateral APAs, unilateral APAs could be granted to the
taxpayer if, for example, the bilateral tax treaty
doesn’t provide for MAP or if despite the MAP pro-
vided in the bilateral tax treaty, the foreign competent
authority refuses to conclude an APA. While the APA
is per se a procedure allowing a greater certainty, it re-
mains rather exceptional in practice and limited to the
larger companies given its complexity, duration of ne-
gotiation and involved costs.
In this respect, the main elements to achieve a
greater certainty and reliability when it comes to a
transfer pricing policy remain the various items listed
under question 4 above, namely having the most
quantitative and qualitative documentation possible,
32 12/16 Copyright ஽ 2016 by The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760

5. updated regularly, supported by a strong and analyti-
cal IT system and consistent with the legal arrange-
ments in place.
Julien Monsenego is a Partner in Tax Law at Gowling WLG in
Paris.
He may be contacted at:
Julien.monsenego@gowlingwlg.com
https://gowlingwlg.com/en/global
12/16 Transfer Pricing Forum Bloomberg BNA ISSN 2043-0760 33