In 2011/2012, Engie SA (Engie) provided services to two affiliates in Luxembourg and in the US who purchased and sold Liquid Natural Gas. Engie SA was contractually authorized by its affiliates to act on their behalf to make spot (as opposed to term) sales. Engie SA compared its functional profile to that of a broker, and noting that it incurred no significant risks in providing these services, concluded that it acted as a routine services provider and applied the Cost Plus method, with a 10% mark-up on full costs (supported by a benchmarking study). It also provided shipping and scheduling services to the affiliates in Luxembourg and the US to assist them with the actual deliveries of gas.
The French Tax Administration challenged this approach: for them, the fact that Engie SA could set up a spot sale on behalf of its affiliates without receiving any instructions from them, combined with the fact that it was also involved in the later steps of the sale (scheduling and shipping), meant that its functional profile far exceeded that of a simple services provider. Moreover, the French Tax Administration considered that the Master Sales and Purchases Agreements signed with clients constituted valuable intangible assets. As a result, the French Tax Administration considered Engie SA and both affiliates in Luxembourg and the US to be co-entrepreneurs, meaning Engie SA should not be remunerated via a Cost Plus, but via a profit split (50% to Engie SA, 50% to its affiliates).
Engie SA challenged these assertions, for example highlighting that Master Sales and Purchases Agreements are in fact standard industry documents with little inherent worth, however the court sided with the French Tax Administration and approved the profit split method.
This case is notable in that the French Tax Administration has shown a new and ambitious approach in which it did not hesitate to conduct its own counter functional analysis to challenge the taxpayer’s approach, going so far as to even provide comparables to substantiate the 50-50 profit split.
This is an interesting development because in French transfer pricing jurisprudence, barring limited exceptions, the burden of proof lies with the French Tax Administration. Whether it actually met this burden, and if so whether the tax payer successfully challenged the French Tax Administration’s arguments, is still a matter of debate, yet to be resolved in appeals: the first judgment, in favour of the French Tax Administration, may be seen as somewhat debatable, insofar as, per the rapporteur public’s2 own admission, there are strong arguments both ways.
The French Tax Administration has grown bolder and has deployed new, ambitious approaches both proposing a different Transfer Pricing method and providing an economic analysis to support the profit allocation. Whereas in the past it would mostly only perform basic reassessments – e.g. if a Limited Risk Distributor is outside of the arm’s-length range – it no longer balks at more advanced ones such as challenging functional profiles. It highlights more in-depth analyses by the French Tax Administration and a desire to see profit splits. With facts still uncertain and other debatable elements, it will fall to the court of appeal to clarify what the French Tax Administration must provide in order to meet the burden of proof, and what arguments from the taxpayer may overturn it. In any case, it is more advisable than ever before for companies to have an in-depth Transfer Pricing documentation in case of a tax audit in France.
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