SAS Weg France is owned by the Spanish company Weg Iberia, which in turn is wholly owned by the head company of the Weg Equipamentos Electricos SA group, based in Brazil. At the end of an audit covering the financial years 2010, 2011 and 2012, the tax authorities noted that SAS Weg France, which had not provided any documentation justifying the transfer pricing policy within the group, paid its suppliers, who were members of the group, within a maximum of 30 days of shipment of the goods, whereas delivery times averaged two months from Brazil and three months from China, and that its customers paid its invoices between 45 and 90 days after invoicing. According to the tax authorities SAS Weg France thus performed a gratuitous financial function which constituted an indirect transfer of profits within the meaning of Article 57 of the General Tax Code. The tax authorities adjusted the company’s operating profit to the median of a benchmark study of fourteen comparable companies. As a result, the tax authorities reduced the losses declared by SAS Weg France for the financial year 2009, made it liable for additional corporate tax contributions for the financial years 2011 and 2012 and subjected the amounts transferred abroad to withholding tax. These taxes were subject to a 10% surcharge for failure to file a tax return pursuant to Article 1728 of the French General Tax Code. SAS Weg France was also fined for failing to provide transfer pricing documentation as required by the French General Tax Code. Dissatisfied with the assessment, SAS Weg France appealed to the Administrative Court, which dismissed the appeal in 2021. SAS Weg France then appealed against the decision of the Administrative Court to the Court of Administrative Appeals. Judgment of the Court The Appeals Court overturned the decision of the Administrative Court and ruled in favour of SAS Weg France. Excerpts: “4. In order to consider that the service provided by Weg France constituted an unjustified advantage that was not part of normal commercial management for the benefit of the group’s suppliers, the department compared the net margin rate of SAS Weg France, calculated after elimination of financial charges, with that of independent companies that did not have a specific financial function. The tax authorities selected a sample of fourteen independent companies that had adopted the same NAF code as SAS Weg France, i.e. wholesale of electrical equipment and wholesale of miscellaneous industrial supplies and equipment, with sales in excess of €5 million for 2010 and 2011 and whose sales amounted to less than 90% of sales, and that were positioned as wholesalers/dealers. 5. Weg France maintains, without being challenged on this point either at first instance or on appeal, that the products it distributes are intended solely for the industrial sector, whereas the sample of comparable companies used by the tax authorities includes companies that sell to individuals and companies that distribute household equipment, In this respect, the differences in margins noted by the department can be explained by the difference in situation between it and nine of the companies on the panel. In addition, the applicant company argued that, although five of the companies on the panel selected by the authorities could be considered comparable, their operating margins appeared to be consistent with the margins it had itself achieved during the period under review. In the absence of any challenge by the tax authorities to the arguments put forward by the applicant company in support of its plea, the tax authorities cannot be regarded as establishing the existence of a practice falling within the scope of Article 57 of the General Tax Code. It follows that Weg France is entitled to argue that the tax authorities were wrong to call into question the loss carried forward for 2009, to reinstate the sums considered as profit transfers in its taxable income for the financial years 2011 and 2012 and to consider that the benefits granted to the companies in the group constituted distributed income within the meaning of c. of Article 111 of the French General Tax Code subject to withholding tax.” Click here for English translation Click here for other translation ...

The French company Issey Miyake Europe is owned by the Japanese company, Issey Miyake Inc, which is active in the fashion industry. Following an audit covering the FY 2006 – 2012, the tax authorities issued an assessment of additional income. According to the tax authorities the pricing of controlled transactions was not at arm’s length, resulting in an indirect transfer of profits within the meaning of Article 57 of the General Tax Code. In order to determine the arm’s length results, the tax authorities applied the transactional net margin method. After searching for comparables on the basis of a database and selecting seven companies for the retail business and nine companies for the wholesale business, and then examining the net operating margins, it adjusted the result to the median. It concluded that Issey Miyake Europe’s results as a wholesaler were within the arm’s length range, but that its results as a retailer were not, with the exception of the financial year ending in 2012, and adopted a rate for this activity corresponding to the median (3,82% for FY 2005, 2.39% for FY 2006, 2.06% for FY 2007, 1.43% for FY 2008, 1.70% for FY 2009, 1.58% for FY 2010 and 2.07% for FY 2011. Not satisfied with the assessment, Issey Miyake Europe appealed to the Administrative Court, which dismissed the appeal. Issey Miyake Europe then appealed to the Court of Administrative Appeals. Judgment of the Court The Court of Administrative Appeals udheld the decision of the Administrative Court and ruled in favour of the tax authorities. Excerpts: “6. In these circumstances, the tax authorities have established that Issey Miyake Inc sells its products to all its subsidiaries worldwide at cost price, to which a margin is added without taking into account the specific nature of local markets, Maintaining the loss-making business in France enabled this company to benefit from a showcase to display and develop the brand’s reputation and to have a commercial outlet in a market with international influence in the luxury goods sector, while Issey Miyake Europe incurred rent expenses that were excessive in relation to its activity with a view to developing the brand. It thus provides evidence that Issey Miyake Europe’s operating result was structurally in deficit for the period under review due to its retail sales activity, as a result of the additional costs incurred by the marketing strategy, which had the effect of having Issey Miyake Inc’s intangible assets valued by its subsidiary.” (…) 10. Thirdly, it is clear from the investigation, in particular from the terms of the rectification proposal and the response to the taxpayer’s observations, which are not seriously contested, that Issey Miyake Europe, although questioned on this point and even though it was not bound by detailed documentary obligations, did not produce any sufficiently precise evidence during the accounting audit to justify transfer prices, contrary to what it maintains. On the other hand, it submitted a study carried out in June 2015 by Grant Thornton during the taxation procedure, which analysed transactions involving inventories for the period between the financial year ending in 2012 and that ending in 2014 and found, after carrying out an analysis of the functions and risks of Issey Miyake Inc and Issey Miyake Europe alone, the cost-plus method, on the grounds that Issey Miyake Inc also sells wholesale to independent companies in the Asia-Oceania region and that these transactions are similar to those carried out with Issey Miyake Europe. However, this study, which notes that the markets analysed are different and relate to a period other than the period audited, compares the margins achieved by Issey Miyake Inc in its sales to independent distributors with the margins achieved in sales to Issey Miyake Europe, making adjustments to take account of the length of the distribution channel and differences in exchange rate risks, without providing any specific information concerning the products sold, as the study merely refers in general terms to the types of products, the volumes of transactions compared and the contractual stipulations governing these transactions. In these circumstances, the tax authorities were right to reject the method proposed by Issey Miyake Europe. 11. Furthermore, although Issey Miyake Europe contests the principle of the administration’s use of the transactional net margin method, the investigation does not show that the administration had sufficient information, internal to the group, on transfer pricing to enable it to use a method based on transactions, and the applicant does not provide any evidence to support its allegations that the analysis of functions and risks carried out on the basis of its own replies was erroneous. Nor does it provide any evidence in support of its allegations that the method used by the tax authorities would, as a matter of principle, result in over-taxation that did not take commercial factors into account. In these circumstances, Issey Miyake Europe is not entitled to argue that the tax authorities could not have used the transactional net margin method. 12. Fourthly, Issey Miyake Europe maintains that the comparables used by the tax authorities for the retail business are not relevant, since the companies in question are engaged in distribution in the clothing sector and not in the luxury goods sector, which has its own specific requirements, as confirmed by the aesthetics of the windows, the quality of the shops, the locations, the type of staff and the price of the products sold. However, the purpose of the transactional net margin method is to compare the results of controlled transactions with those of third-party companies performing comparable functions and assuming comparable risks, unlike price-based methods, which require the products sold to be similar. In this case, Issey Miyake Europe simply refutes the comparables on the sole grounds that they are not independent French companies distributing luxury ready-to-wear clothing similar to that which it distributes and under the same conditions, whereas the administration, which excluded the companies initially retained whose functions were likely to present substantial differences, such as those performing manufacturing and production functions, appended ...