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This chapter is not exhaustive and is limited to broadly outline the tax consequences of the main events occurring when doing business in France. It does not constitute a tax advice or a client - attorney relationship. Materials are not suitable for tax analysis. Visitors are invited to consult a tax lawyer before taking any decision.
 Arm's length principle
Comparable uncontrolled price method or “CUP”
Cost plus method
Resale minus method
Transactional net margin method or “TNMM”
Comparable profit margin or “CPM”
Profit split method
Formulary method
French tax rules comply with OECD guidelines and most of the methods listed by the OECD are acceptable by French tax authorities as long as they are in accordance with the arm's length principle.
 Arm's length principle
OECD countries including France along with a lot of non OECD members developed transfer pricing rules in line with OECD transfer pricing guidelines published in 1995.
According to OECD principles, multinational companies "MNC" must comply with arm's length principle i.e in comparable circumstances MNC must charge the same prices, fees and/or royalties for a transaction between associated enterprises of the MNC and for a transaction between a member of the MNC and unrelated parties. However it is common that unfinished products, intra-group services and intan
gibles sold between related parties within a MNC have no comparable on the market. Therefore it is often impossible to find a similar transaction between unrelated parties. This is why the OECD developed several methods to calculate transfer prices.
Comparable uncontrolled price method or “CUP”
- The "CUP" determines the arm's length price by reference to the profit level realized by unrelated parties engaged in a similar business under similar circumstances. If there is no very similar transaction, it is possible to make adjustment should these changes be reliable.
- CUP is advisable when the same product, service or intangible is sold both to associated parties and unrelated parties. In such a case it is possible to make relevant and accurate adjustment according to the volumes, term of payment and allocation of the risks.
Cost plus method
- The cost plus method determines the arm's length price by reference to the gross margin existing between unrelated parties in a similar transaction. This gross margin is added to the cost of providing the service or producing the product or the intangible.
- The production costs are determined by the business accounting. Appropriate adjustments are made to allow comparison between related and unrelated transactions.
- The cost plus method is commonly used for contract manufacturing.
Resale minus method
- The resale minus method determines the arm's length price by reference to the resale price margin realized on the sale of identical or similar products, intangible or services between unrelated parties in a comparable transaction. The resale price margin is deducted from the resale price of the related party to determine the arm's length purchase price.
- The difficulty is to find a comparable transaction and to make the proper adjustment to allow comparison between related and unrelated transactions (Sharing of the risk, exclusivity, training, term of payment...).
- The resale minus method is used for the resale business.
Transactional net margin method or “TNMM”
- The transactional net margin determines the arm's length price by reference to the net margin realized on similar transactions between unrelated parties. The method did not compare prices but the margin. This method is both complex and expensive to manage for a result which may be easily challenged by tax authorities.
Comparable profit margin or “CPM”
- The comparable profit margin was initially developed by the USA. This method determines the arm's length price by reference to the objective level of growth margin realized between unrelated parties engaged in similar business activities under comparable circumstances. If the growth margin used for controlled transactions is statistically too far from the growth margin used for similar uncontrolled transactions in similar circumstances, the related transfer prices are adjusted accordingly. This method is not mentioned by the OECD guidelines. This method requires the access to a data base providing the ratio of operating profits and gross profits used between unrelated parties. CPM is both complex and expensive to manage for a result which may be easily challenged by tax authorities.
Profit split methods
- The profit split methods determine the arm's length price by allocating the integrated or "consolidated" growth margin realized on a product or services within a multinational company, from discovery to market, in the same proportion this margin would be divided between unrelated parties engaged in a similar transaction. The margin is allocated between the parties, in accordance with their role in the production and the marketing of the goods or the delivery of the services and the risk they assume. The functions performed by each taxpayer is evidenced through a functional analysis.
- Although this method is considered as marginal and often ignored, we consider that it is the best strategy to negotiate with French tax authorities and if needed the tax court. The profit split methods refer mainly to the figures and the data of the multinational company and few adjustments are necessary. The main advantage of the profit split methods is that it shows the total profit across a multinational company and how it is allocated between the different jurisdictions.
Formulary method
- Several methods are based on the allocation of the worldwide consolidated profit before tax to each of the related entities of a multinational company wherever they are tax resident. The profit is allocated according to an activity indicator (Sales, number of employees, value of assets etc.).
- OECD is very reluctant to validate such methods because they are totally disconnected from the history of the multinational companies and how they operate on the different markets. In addition the formulary method would tax the multinational companies with rules totally different from the rules used for unrelated parties, in contradiction with the arm's length principle.
As explained above, the determination of transfer prices is not rocket science and is often the ground for long and costly conflicts with tax authorities.
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