Taxation of international groups: a fresh start after the crisis?

2020 is and will remain marked by the Covid crisis... A health crisis that will not be without consequences on the tax situation of businesses. On their part, international groups will have to face new challenges. As they prepare to report to the tax authorities, this exercise may prove more complex than usual… But it could also initiate new virtuous dynamics. Explanation with Cécile Guyot, Corporate and Tax Law Specialist at RSM France.

How has the crisis impacted the prices set by international groups?

In an emergency, businesses had to react quickly to cope with the halt or forced slowdown of their activities. The consequences varied from one sector and country to another, but overall, international groups had no choice but to find short-term solutions aligned with the economic, social, legal, and financial situation specific to each country. This manifested, among other things, through changes in transfer prices (prices set between entities of the same group in multiple countries), as well as changes in functions and risk transfers within the groups… However, soon, it will be time to assess the decisions made in recent months and face the future despite the ongoing uncertain context. It is at this point that the true impact of the crisis will become evident.

What consequences has the situation had on transfer prices?

In the rush, international companies had to adapt to the economic slowdown by relying heavily on local support measures in terms of social policies, such as partial activity schemes in France, widespread teleworking, and financial and fiscal aid measures put in place. Thus, many transfer pricing policies were modified on the fly, with no possibility for long-term projections... These are decisions typically made outside of a crisis context, after consultation and reflection.

How does the French tax administration position itself on this issue?

In France, the tax administration largely applies the guidelines issued by the OECD, which it quickly transposes into national law. Companies must reflect their actual activities in each jurisdiction's taxable bases.

It is certain that the tax administration will take into account the Covid context for its audits of the 2020 year. However, the challenge for businesses will remain to justify or document precisely the impact of the crisis on their international activities, especially as the administration will review the decisions made in the heat of the moment.

Normally, the prices set within an international group must be compared with those practiced between independent businesses carrying out similar activities, with similar functions and risks. However, for 2020, the task promises to be truly challenging since there will be no true comparison data. The last economic crisis dates back to 2008, and the data and reference points are too outdated. Thus, the exercise will be more complex than in previous years.

To what extent is the crisis an opportunity for businesses to engage in intragroup reflections?

One could certainly view this period as a unique opportunity to question the philosophy of these groups. Ideally, businesses will see it as an opportunity to initiate significant strategic repositioning work in the long term. The goal will be for them to be able to anticipate and react calmly to crisis situations: rethink transfer pricing policies, anticipate risks, find sustainable solutions to group and protect their assets, rethink key functions, etc. At the state level, one can also hope that the situation will take a positive turn by accelerating the implementation of agreements aimed at combating tax erosion in areas such as the digital economy.