SNA Europe France was a French distributor within the SNA group. It bought DIY, tools and gardening products from a Swedish related company, SNA Europe Services AB, which sourced the goods from manufacturers. The goods were stored in Spain and the Netherlands and shipped directly to customers of SNA Europe France in France. The French company invoiced French retailers and earned a margin as a reseller. Its internal transfer pricing policy was designed to give it a profit margin of about 3 percent of turnover. To support the pricing of the controlled transactions, it relied on a set of 22 external comparable companies and used a gross margin based approach.
The tax administration challenged the pricing. It accepted the external comparables from 2010 onwards but argued that the way SNA Europe France calculated its gross margin was incorrect because it excluded large discounts it granted to customers. Once those discounts were taken into account, the administration found that the French company was loss making over several years, while comparable distributors earned positive margins. The tax authority concluded that the French company was not being remunerated at arm’s length and that part of its profits had been transferred to the Swedish related company.
SNA Europe France argued that the tax authority was wrong to challenge its pricing because its low or negative profitability was explained by the risks it assumed and by commercial conditions in the French market. It also disputed the inclusion of the customer discounts in the gross margin calculation and contested the resulting corporation tax adjustments.
Judgment
The Administrative Court of Appeal held that the tax authority was entitled to compare the French company’s margins with those of independent distributors and to treat unexplained deviations as a profit transfer. It found that SNA Europe France had not proved that its losses and low margins were justified by risks or functions that would warrant a lower return. It also accepted that the discounts had to be included in the analysis. As a result, the court largely upheld the transfer pricing adjustments. However, it granted the company partial relief in relation to the 2012 year and ordered the State to pay €1,500 in legal costs.
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