Comments on 3 rulings in transfer pricing
Ferragamo Loses French Transfer Pricing Case on Trademark Costs
According to a French court in this long running and highly publicized transfer pricing case, Ferragamo France's negative margin would have been caused by efforts related to the building of the brand and thus would have required a service charge for the Italian parent company. The Paris Administrative Court of Appeal (CAA), one of France's eight administrative courts of appeal, in its June 30 ruling in the case of SAS Ferragamo France versus the Minister of the Economy, Finance and Recovery (no. 20PA03601), ruled in favor of the tax authorities, authorizing the attribution of a presumptive profit to Ferragamo France's income of 2.3 million euros for 2009 and 2.2 million for 2010.
“This is the first time that French courts say that the retailer and distributor provides value to the trademark and [intellectual property] owner and should be remunerated for that. Before, that argument was only used to reduce a royalty fee. We don’t learn anything in the facts of the decisions on the gross margin and range. This is typical for French transfer pricing judgments. Benchmarking is key in the audit but is of minor importance in the litigation. The courts will not go into a deep economic analysis.”
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SAP’s Cash Pool Agreement Is Arm’s Length, French Court Says
Thanks to SAP's cash pool agreement, the interest received by SAP France on a cash loan to SAP Germany should be considered in combination with the other benefits obtained under this agreement. The Conseil d'Etat, France's highest administrative court, in its September 20 rulings in the case of SAP France S.A. versus the Minister of the Economy (no. 461639 and no. 461642), ruled in favor of the taxpayer by overturning the decisions of two lower administrative courts.
“This spread between lending and borrowing is very usual. It’s the compensation for the cash pool management. Basically, the Conseil d’Etat states that the lower courts didn’t consider the overall context in which the agreement was concluded. Transfer pricing should not look at a moment in time. It appears that the Conseil d’Etat considers the potential borrowing capacity important. That could mean that a hypothetical situation would have more relevance than the actual one.”
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Tropicana’s Supply Agreement Is Arm’s Length, French Court Says
According to a French court, Tropicana France is independent of Frito-Lay Switzerland and their supply agreement does not violate the arm's length principle.
In its August 25 judgment in Tropicana Europe SA v. Ministre de l’action et des comptes publics, the Cour Administrative d’Appel de Douai (CAA), one of eight administrative courts of appeal in France, confirmed the previous unpublished ruling (Nos. 1701945 and 1701946) of the administrative court of Amiens, which had already held for the taxpayer in 2020. An additional undisclosed amount of corporate income tax and withholding tax had been assessed by the tax authorities, together with a surcharge on the value of the company in respect of the discrete years 2010-2013 in two audits.
“Those are the years when the French tax authorities have become serious about transfer pricing. The court cannot ascertain the facts itself but is limited to the facts presented by the parties,” Sardou explained. This concept of abnormal management has been created by case law, and it is unusual that the tax administration has not raised it at the lower court, and probably not during the audit either.”
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