France vs TCL Belgium, December 2016, CAA de Versailles, Case No 14VE02126

Category: Benchmark, Range and Median, Permanent Establishments, Transfer Pricing Methods | Tag: , , , , ,
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TCL BELGIUM, established in Belgium, entered into an agreement on 18 December 2007 with TCL Macao, which sells television sets, under the terms of which TCL Belgium undertook to provide marketing services through its TCL France branch located in France;

Following an audit of TCL Belgium’s accounts for the financial years ended 31 December 2008 and 2009 relating to the activities of its French branch, the tax authorities considered that TCL Macao had, under this agreement, benefited from a transfer of profits within the meaning of Article 57 of the French General Tax Code.

In an appeal to the Administrative Court of Appeal, TCL BELGIUM sought, firstly, a discharge of the additional corporation tax and the reminders of the minimum business tax assessment and the corresponding surcharges levied against it on that account, and secondly, a discharge of the additional withholding tax assessments and the corresponding surcharges also levied against it.

Judgement of the Court

The Administrative Court of Appeal parcially upheld and parcilly set aside the decision of the Administrative Court.

It stated that

“…
19. Considering, eighthly, that, contrary to what TCL BELGIUM also maintains, the department did take into account data from comparable companies over several years and, in particular, to determine the competition margin, used an average of the median margin rates of the companies on its panel over three years; that the administration did not therefore disregard its own doctrine on this point;

20. Considering, ninthly, that the company still maintains that the administration, following the recommendations of its own doctrine, could not base its reassessment on the median value of the profit margins recorded for the companies deemed to be comparable over three years, since this data alone is not relevant for defining the arm’s length interval; that, as the applicant company maintains, the administration is only entitled to correct a company’s profit margins insofar as they do not fall within the arm’s length range resulting from data from other companies carrying on similar activities; that, in these circumstances, the median cannot, on its own, in principle, constitute a relevant reference reflecting the admissible panel of profit margins practised that may be taken into account;

21. Considering that, in the present case, the interquartile range may be used to define the arm’s length range, and extends for 2008 from 0.90% to 3.74% and for 2009 from -4.87% to 2.80%; that there are therefore grounds for confirming the adjustment notified to the applicant company only insofar as its margin rate calculated using the transactional net margin method remains lower than the lower of these two figures;

22. Considering that for 2009, insofar as the company’s margin rate, determined using the transactional net margin method, was 0.24% and therefore between the two values mentioned above of -4.87% and 2.80% defining the arm’s length interval, the company is entitled to request full discharge of the reassessment against it;

23. Considering that, for 2008, the company should be discharged in respect of the difference between the amount of the reassessments resulting from the application to its transactions of the mark-up rate of 2.20% adopted by the department on the basis of the average of the medians of the mark-up rates for the years 2006 to 2008 and the amount of the reassessments that would have resulted from the application to these same transactions of the aforementioned mark-up rate of 0.90% corresponding to the low point of the interquartile range; that, on the other hand, it is appropriate to confirm the remainder of the adjustments corresponding to the difference in the mark-up rate between 0.90% and 0.41%, i.e. the initial mark-up rate of the French branch of TCL BELGIUM determined using the transactional net margin method, since TCL BELGIUM does not claim any consideration that could explain its subsidiary’s waiver of an arm’s length margin, and the existence of a transfer of profits from TCL BELGIUM to TCL Macao within the meaning of Article 57 of the French General Tax Code is thus established;”
…

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Related Guidelines

  1. TPG2022 Chapter III paragraph 3.65Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect...
  2. TPG2022 Chapter III paragraph 3.64An independent enterprise would not continue loss-generating activities unless it had reasonable expectations of future profits. See paragraphs 1.149-1.151. Simple or low risk functions in particular are not expected to generate losses for a long period of time. This does not mean however...
  3. TPG2022 Chapter III paragraph 3.62In determining this point, where the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm’s length principle. Where comparability defects remain as discussed at paragraph 3.57, it may be appropriate...
  4. TPG2022 Chapter III paragraph 3.61If the relevant condition of the controlled transaction (e.g. price or margin) falls outside the arm’s length range asserted by the tax administration, the taxpayer should have the opportunity to present arguments that the conditions of the controlled transaction satisfy the arm’s length...
  5. TPG2022 Chapter III paragraph 3.60If the relevant condition of the controlled transaction (e.g. price or margin) is within the arm’s length range, no adjustment should be made....
  6. TPG2022 Chapter III paragraph 3.57It may also be the case that, while every effort has been made to exclude points that have a lesser degree of comparability, what is arrived at is a range of figures for which it is considered, given the process used for selecting...


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