Case Information:
- Court: Cour Administrative d’Appel de Paris, 9th Chamber
- Case Number: 23PA01130
Applicant: SAS Roger Vivier Paris - Defendant: French Ministry for the Economy, Finance, and Industrial and Digital Sovereignty
- Judgment Date: 13 December 2024
Background
SAS Roger Vivier Paris (RVP) operates a luxury goods boutique in Paris, distributing Roger Vivier-branded footwear and accessories. The brand itself is owned by Gousson, a related entity, and the products are supplied exclusively by Tod’s, another related company. These entities, along with their parent company, are part of a multinational group controlled by an Italian shareholder.
Between 2012 and 2014, the French tax authorities audited RVP and identified concerns related to transfer pricing. They asserted that RVP had indirectly transferred profits to its parent entities by inadequately re-invoicing promotional expenses, failing to apply profit margins on re-invoiced services, and providing excessive discounts on unsold inventory returned to Tod’s. The authorities argued that these practices were not in line with the arm’s length principle under Article 57 of the French General Tax Code.
RVP disputed the adjustments, claiming that its operations during the audited period were consistent with market norms. It contended that promotional expenses were justified, the discounts on unsold products were due to the rapid obsolescence of fashion items, and the transactional net margin method (TNMM) applied by the authorities was inappropriate.
The case progressed through administrative proceedings before arriving at the Cour Administrative d’Appel de Paris, where RVP sought relief from additional corporate tax, withholding tax, and value-added tax, along with the associated penalties.
Core Dispute
The central dispute revolved around whether RVP’s transfer pricing practices were consistent with the arm’s length principle. The tax authorities alleged that RVP failed to meet this standard by:
- Insufficient Re-invoicing: RVP charged only a portion of the promotional expenses incurred for the Roger Vivier brand to its parent companies, applying no margin on these costs. This practice resulted in the indirect transfer of profits to its related entities.
- Discounted Inventory Returns: RVP applied a 65% discount on unsold inventory returned to Tod’s, which the tax authorities deemed excessive and unjustified.
Flawed Methodologies: The authorities used TNMM with a set of 43 comparable companies to benchmark RVP’s net margin. They concluded that RVP’s margins fell significantly below arm’s length levels.
RVP countered that its practices were industry-specific, justified by economic realities, and consistent with internal policies. It argued that the promotional expenses and discounts were standard for luxury retail, and TNMM was unsuitable given its operational structure and cost base. Furthermore, RVP challenged the comparability of the selected companies and the authorities’ application of the average margin instead of the median.
The court needed to determine whether RVP’s practices aligned with the arm’s length principle and whether the tax adjustments and penalties imposed were justified.
Court Findings
The Cour Administrative d’Appel de Paris largely upheld the findings of the French tax authorities, concluding that SAS Roger Vivier Paris (RVP) had not adhered to the arm’s length principle in its intercompany transactions. The court focused on three key areas:
- Dependence Relationships: The court found that RVP was financially and operationally dependent on related entities within its group structure. Gousson, the brand owner, and Tod’s, the sole supplier, exercised major influence over RVP’s operations. This relationship, coupled with the exclusive reliance on Tod’s for product supply, indicated that RVP lacked autonomy in key commercial decisions, a factor that supported the tax authorities’ claims of non-arm’s length practices.
- Transfer Pricing Adjustments: The court agreed with the application of the transactional net margin method (TNMM) to benchmark RVP’s net margins. It deemed the selected panel of forty-three comparable companies appropriate, as they operated in similar high-end retail markets under competitive conditions. RVP’s margins, significantly below the median and average of the comparables, were found to reflect insufficient remuneration for its functions, risks, and assets. The court dismissed RVP’s challenge to the methodology and data selection, noting the company’s failure to provide alternative comparables or a robust methodological critique.
- Promotional Expenses and Discounts: The court determined that RVP’s insufficient re-invoicing of promotional expenses and failure to apply margins on these recharges constituted an indirect transfer of profits to its related parties. Similarly, the 65% discount on unsold inventory was deemed excessive, as RVP did not substantiate its claim that the discount aligned with industry norms.
Overall, the court ruled that the tax authorities’ adjustments and the 40% penalty for deliberate non-compliance were justified, highlighting RVP’s lack of transfer pricing documentation and consistent underreporting of taxable income.
Outcome
The Cour Administrative d’Appel de Paris dismissed the majority of SAS Roger Vivier Paris’s (RVP) appeal, affirming the tax authorities’ adjustments and the penalties imposed. The judgment highlighted several critical outcomes:
Validation of Adjustments: The court upheld the adjustments made by the tax authorities concerning RVP’s insufficient re-invoicing of promotional expenses, failure to apply margins on these charges, and excessive discounts on unsold inventory returned to Tod’s. It confirmed that these practices constituted indirect profit transfers under Article 57 of the French General Tax Code.
Application of TNMM: The court validated the use of the transactional net margin method (TNMM) as the appropriate transfer pricing method to benchmark RVP’s operations. The selection of forty-three comparable companies operating in the luxury retail sector was deemed reasonable and representative. RVP’s consistent failure to meet the arm’s length benchmark highlighted underperformance in its reported margins.
Penalty Confirmation: The court upheld the 40% penalties for deliberate non-compliance. It concluded that RVP’s lack of transfer pricing documentation, repetitive underreporting of taxable income, and failure to address structurally inadequate results demonstrated an intentional disregard for tax obligations.
Rejected Defences: RVP’s claims, including those related to the comparability of selected companies, the appropriateness of the TNMM, and reliance on tax code provisions, were rejected. The court noted the absence of sufficient evidence or credible alternative methodologies provided by RVP to refute the tax authorities’ findings.
Implications for Future Operations: The judgment underscored the importance of comprehensive transfer pricing documentation and adherence to the arm’s length principle. It served as a warning to multinationals about the risks of inadequate internal controls and tax planning.
This decision reinforced the tax authorities’ position and imposed significant financial and procedural lessons for RVP and other multinational entities operating in similar sectors.
Transfer Pricing Method Used
The French tax authorities employed the Transactional Net Margin Method (TNMM) to evaluate the transfer pricing practices of RVP. This method compares the net profit margin relative to a specific base (e.g., sales, costs, or assets) of the tested party with the net profit margins of comparable independent companies engaged in similar activities.
Application of TNMM:
Benchmarking Process:
- A panel of forty-three independent companies operating in the luxury retail sector was selected for comparison. These companies performed similar distribution functions under competitive market conditions.
- The authorities calculated the net margin rate for each company in the panel over an 11-year period, covering financial years 2005 to 2014.
Comparability Adjustments:
- The panel’s average net margin rate was used as the benchmark. The first quartile, median, and third quartile net margins were also considered but not applied directly.
- RVP’s net margins were significantly below the average benchmark (6.76%) during the audited period, indicating inadequate profitability.
• Key Findings:
- RVP consistently reported negative net margins for the financial years 2004–2012.
- The tax authorities applied the average benchmark rate (6.76%) to RVP’s sales revenue to determine its arm’s length profitability.
- The discrepancies identified included insufficient remuneration for brand promotion activities, excessive discounts on unsold goods, and inadequate gross margins.
RVP’s Challenge
- RVP argued that TNMM was inappropriate due to its unique cost structure and reliance on related entities. It advocated for the Resale Price Method (RPM) as a more suitable alternative. However, the court dismissed this, citing the absence of detailed evidence to support the claim.
The court concluded that TNMM was appropriately applied, aligning with the OECD Guidelines and adequately capturing RVP’s operational inefficiencies and profit distortions.
Major Issues or Areas of Contention
The case of RVP highlighted several contentious issues, reflecting the complexities of transfer pricing in multinational groups. These areas of contention included:
Arm’s Length Principle Compliance:
- The central dispute revolved around whether RVP’s transactions adhered to the arm’s length principle under Article 57 of the French General Tax Code. The tax authorities asserted that RVP failed to adequately remunerate itself for brand promotion and development services and applied excessive discounts on unsold inventory, indirectly transferring profits to related entities.
Selection and Application of TNMM:
- The authorities used the TNMM to assess RVP’s profitability. The application of an 11-year period for comparison and reliance on the average margin rate of forty-three comparables was challenged by RVP, which argued that this approach ignored economic fluctuations and industry-specific challenges.
RVP also contended that the resale price method (RPM) would have been more appropriate given its cost structure and focus on distribution rather than brand development. However, the court rejected this argument due to a lack of substantiating evidence.
Justification of Promotional Expenses and Discounts:
- RVP’s partial re-invoicing of brand promotion expenses to its parent companies without applying a margin was deemed insufficient by the authorities. Similarly, the company’s claim that a 65% discount on unsold inventory reflected industry norms was rejected, as no evidence was provided to substantiate the assertion.
Penalties for Non-Compliance:
- The imposition of 40% penalties for deliberate non-compliance was highly contentious. RVP argued that its practices were consistent with industry standards and did not demonstrate intentional tax evasion. The court upheld the penalties, citing the absence of transfer pricing documentation and a pattern of underreporting taxable income.
These disputes underscore the critical need for robust transfer pricing strategies and comprehensive documentation in defending multinational tax practices.
Key Takeaways for SA
- Negative margins would need to be adequately explained as related to market factors, management inefficiencies or economic realities and not transfer pricing. Extraordinary expenses should be carved out.
- Transfer Pricing Methodology – it becomes important to support why a particular methodology is considered appropriate especially when it comes to application of either TNMM or RPM
- An interesting point which is not mentioned is whether the taxpayer argued that there should have been transfer pricing adjustments to align tested party with comparables.
- Intercompany services would command a mark-up unless it is a pure cost recovery.
- The taxpayer should have obtained evidence to support that 65% discounts for unsold returned goods is industry practice. This would need to be robust evidence based on third party and industry information that could be used as defence in a court of law
- An average of results is not frequent practice. An interquartile range (25th to 75th percentile) would be derived from a benchmarking tool. SARS would ordinarily expect a position within the interquartile range, close to the median.
- For this long duration of time (2005 to 2014), SARS would normally test year on year especially as this information would have been available.