France and the U.K. are major U.S. trading partners. Each country has made changes to its transfer pricing (TP) documentation requirements in 2023 that will be effective in 2024. The changes are outlined in the sections below.
France
In May 2023, the French government proposed a 15% increase in resources for tax audits to support its fight against tax fraud. In this context, the Finance Bill for 2024 (Finance Bill), which became law on December 30, 2023 contains a number of changes to the existing TP legislation.
The Finance Bill reduced the current threshold for a Master File and Local File from €400 million in consolidated revenue to €150 million in consolidated revenue. The minimum penalty for non-compliance increased from €10,000 to €50,000, i.e., €150,000 considering a three-year audited period.
The Finance Bill placed the burden of proof on the taxpayer when there is a difference between the TP policy described in the TP documentation, and the TP policy applied by the French Tax Authorities (FTA).
In addition, the Finance Bill gave the right to the FTA to reassess the value of intangible assets transferred in an intercompany transaction based upon subsequent results (ex post) to the fiscal year in which the transaction was carried out. It also extended the statute of limitations from three years to six years.
These new measures are applicable for fiscal years starting January 1, 2024.
Going forward, hard-to-value intangibles will be critical points during tax audits, given the extended statute of limitations and the fact that the FTA can reassess the value of the intangibles transferred in case of significant differences between forecast figures and ex post financial information.
U.K.
In December 2022, the U.K. government published a secondary draft legislation for comment (The Transfer Pricing Records Regulations 2023), which requires large multinational groups operating in the U.K. to maintain a Master File and a Local File in the prescribed and standardized format as described in the Organisation for Economic Cooperation and Development (OECD) TP guidelines and an additional requirement unique to the U.K. in the form of a supporting Summary Audit Trail (SAT).
The requirements are part of a four-tiered approach to TP documentation:
- Master File — containing standardized information relevant to all multinational group members;
- Local File — referring specifically to the material transactions of the local taxpayer;
- Country by Country Report — containing aggregate data on the global allocation of income, profit, taxes paid, and economic activity among the jurisdictions in which it operates; and
- SAT — involving the completion of a questionnaire providing evidence of the information used when preparing the Local File and Master File, in addition to providing further details on how TP policies were implemented.
The new requirement applies to U.K. businesses that are a part of multinational groups with an annual consolidated revenue exceeding €750 million. For multinational groups below this threshold but above the small and midsize enterprises threshold, i.e., with an annual turnover above the U.K. government notes that the OECD format is still considered best practice. It also recommends the OECD format for all businesses that are required to apply TP in the U.K.
The legislation is effective for accounting periods beginning on or after April 1, 2023.
The U.K. Local File and Master File will not be required to be submitted to His Majesty’s Revenue and Customs (HMRC) with the tax return; however, they must be maintained and made available to HMRC within 30 days upon request. When qualifying multinational groups fail to maintain the U.K. Local File and Master File or to produce the files on request, there will be a maximum penalty of 30% of potential lost revenue because of a presumption of carelessness, in addition to the standard fixed fee penalty of £3,000 for failure to keep or produce TP documentation. Contemporaneous documentation, i.e., TP documentation prepared before filing the tax return, is the first line of defense against these penalties.
When preparing U.K. TP documentation, particular focus should be given to substantiating the functional analysis section of the files, the intercompany transactions entered into, and the particular contributions to risk management and value creation. Consideration should also be given to whether the group has sufficient evidence to support the pricing of the intercompany transactions as arm’s-length.
How FORVIS Can Help
We recommend preparing TP documentation even if the thresholds are not met. Particular attention must be paid to existing TP documentation content. We recommend that groups undertake thorough gap analyses to identify any misalignments between their French business’ existing TP documentation and the TP policies applied and amend it if necessary. In practice, the analyses should focus on the functional analysis, the intercompany transactions, the TP methods applied, and the economic analyses.
FORVIS anticipates increased audit activities by the French and U.K. tax authorities. We advise multinational groups operating in France and the U.K. to consult with local TP experts to ensure that their TP policies comply with local regulations and to avoid any preventable penalty.