SAS Cooper Capri’s belongs to the American group Cooper Industries. The Group carries out a parts production and sales activity in the context of two branches, a “construction” branch and an “industry” branch which produces, in particular, cable glands
Cooper Capri was subject to an audit at the end of which the administration considered that it had indirectly transferred part of its profits to companies belonging to the same group located outside France and, consequently, incorporated the profits thus transferred into the result charged to the accounts for FY 2007
The company asked the Administrative Court to discharge the additional taxes. In November 2014 the request of Cooper Capri was rejected and the assessment of the tax authorities upheld.
Cooper Capri then filed an appeal with the Court of Appeal.
According to Cooper Capri, the tax administration had not demonstrated the granting of an advantage to related companies located abroad; in fact, if the ratio between the gross margin and sales is lower than that observed for comparable unrelated transactions, this is due, on the one hand, to the fact that the related companies bear distribution costs that normally accrue to them and, on the other hand, to the fact that these companies operate on markets with specific characteristics.
Furthermore, according to Cooper Capri the tax administration could not base the disputed taxes on Article 57 of the general tax code since it had not identified with sufficient precision the companies benefiting from this advantage;
Finally, the tax administration did not demonstrate that these companies were established in a foreign State or in a territory outside France with a privileged tax regime.
Judgement of the Court of Appeal
The court dismissed the appeal of Cooper Capri and upheld the decision of the administrative court.
Excerpts
“4. Considering, on the one hand, that it is common knowledge that SAS Cooper Capri was dependent on the American company Cooper Industries, a company located outside of France; that it is clear from the investigation that it manufactures goods sold on the French market and for export, either through independent distributors or through Cooper Shanghai located in China and Cooper Crouse Hinds located in Germany, Norway, Spain, the United Arab Emirates and South Korea; that all these companies were also dependent on the American company Cooper Industries; that the administration thus established the existence, which was not formally contested, of a link of dependence between the company located in France and these companies located outside France and which belonged to the same group; that the company cannot therefore usefully maintain that the administration could not apply Article 57 of the General Tax Code on the grounds that it had not established the privileged nature of the tax regimes applicable to the companies located abroad;
5. Considering, on the other hand, that it results from the investigation that, to determine the price of the products that it manufactures and that it intends to sell, the company used the method of the production cost increased by a margin; that this method, known as the “cost +”, was not disputed by the administration; that, however, and in the first place, the administration noted during the audit that, with regard to transactions concerning these products and carried out with the companies mentioned in point 4, the ratio between the gross margin and the amount of sales was 25.3% for the financial year ending in 2007, whereas, with regard to transactions concerning the same products carried out with other customers not belonging to the group, this ratio was 38.5%; that secondly, it is not disputed that the setting of prices is the responsibility of the company for all transactions carried out outside the group and of the American parent company for all intra-group transactions; that in this respect the prices are established on the basis of a “cost+” calculated on the basis of a margin of 27% and are revised continuously to take account of the valuation of raw materials; that, given the method used by the company, the finding of a lower margin results from the application of lower selling prices; that the administration was thus able to validly base itself on the margin differences found without having to analyse comparable markets and comparable functions, since it referred only to the company’s own data and did not compare them with the prices charged by other companies; that the company cannot reproach the administration for not having carried out a more detailed analysis and established a transfer of profits by company since, in response to the department’s request for documents specifying the method of determining prices by product and by client company, it confined itself, even though it was the only one to hold the documents, to providing it with overall data for the year under review without supporting documents; that, under these conditions, the differences in rates highlighted by the administration reveal that the prices invoiced by SAS Cooper Capri to companies established outside France and belonging to the same group were significantly lower than those it charged to its other clients;”
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