SASU Menarini Diagnostics France (a French subsidiary in the Italian Menarini Group) buys and resells diagnostic equipment and products for self-diagnosis and laboratories. Since its creation it had recurring operating losses, despite the profitability of each business line and irrespective of sales trends, and even though it was no longer in a market penetration phase.
An audit was initiated by the tax authorities for fiscal 2011-2013, which revealed that the pricing of intra-group transactions was not at arm’s length and that overpricing of products purchased from two related parties in Italy had resulted in an indirect transfer of profits within the meaning of Article 57 of the French General Tax Code.
Menarini Diagnostics France appealed against the assessment with the Montreuil Administrative Court which rejected its request for discharge of these taxes. An appeal was then filed with the Administrative Court of Appeal.
Judgement of the Court
The Administrative Court of Appeal dismissed the appeal of Menarini Diagnostics France and upheld the decision of the Administrative Court.
“12. Firstly, with regard to the application of the comparable price method, the applicant company criticizes the single reference, namely the G-ECCH product range, used by the tax authorities, which, in its view, does not represent a representative sample of the relevant market enabling a satisfactory statistical distribution to be made in accordance with the recommendations of the Organization for Economic Cooperation and Development. It adds that the French authorities have not carried out any analysis of the factors of comparability in terms of products, volumes, functional and market analysis, nor made any adjustments to compensate for the lack of comparability, even though the specific features of the G-ECCH and G-IHCO ranges are different. However, it is common ground that the administration used only internal comparables corresponding to products acquired directly by the company from third-party suppliers. In addition, it is clear from the investigation that these two product ranges are aimed at the same clientele, in the same sector of activity, that the G-IHCO product range represents a share of sales within the G range that is sufficiently representative, that the mere fact that there is only one comparable product range does not make it any less reliable as such, and that the applicant company does not, moreover, mention any adjustments that might need to be made. Finally, the fact that another product in the range, not purchased directly from a third party and representing a very marginal share of sales, generates a lower average gross margin than the G-IHCO range does not call into question the validity of the method used by the authorities.
13. Secondly, with regard to the application of the transactional net margin method, AMDF argues first of all that the tax authorities do not validly question the resale price method used, which has been validated by an independent firm and is recommended by the Organisation for Economic Co-operation and Development. However, it follows from the investigation that the resale price method, which is certainly recommended by the Organisation for Economic Co-operation and Development, is only relevant when the margin is sufficient to cover selling costs. In this case, however, the margin is very low, or even negative, and in any case, AMDF has not provided the marketing contracts concluded at group level in order to study the breakdown of costs and margins achieved. On the other hand, the transactional method, which applies the net margin rather than the gross margin, takes into account all the expenses incurred by the company, and thus makes it possible to examine the company’s overall remuneration in relation to the functions it performs and the entirety of its operational activity. After analyzing AMDF’s distribution functions, the tax authorities were entitled to use the panel of comparable companies operating in a similar market to compare net margins on all AMDF’s activities. If, as the applicant company maintains, some of the companies on the panel have lower or, on the contrary, higher sales than its own, it does not follow from the investigation that, given the net margin rates compared, taking them into account would be unfavorable to it. Furthermore, if the two companies with the most distant activity from the applicant were excluded from the panel, the recalculated median would be higher and therefore unfavorable to the applicant company. Lastly, the applicant company does not present any alternatives, merely arguing that no external comparables are available. Consequently, AMDF has no grounds for questioning the validity of the transactional net margin method.
14. Lastly, the applicant company asks the Court, in the alternative, that instead of the median used by the administration to determine the arm’s length range, which constitutes the acceptable price range, the low interquartile range be used to calculate the increases resulting from the application of the transactional net margin method. However, on the one hand, the administration compared the company’s net margin with the panel’s interquartile median, thus eliminating extreme values and risks of error, and retained two different periods in order to take account of the economic difficulties invoked by the company. Furthermore, and in any case, the company has not justified that the application of a low interquartile range would be more appropriate for the calculation of uplifts. Under these circumstances, the low interquartile range should not be used to calculate the said increases.”
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CAA de PARIS, 21PA06233 ORG