Judgment summary
SAS Roger Vivier Paris (RVP) operated a shop distributing Roger Vivier brand shoes and luxury goods, of which it was not the owner. Following an audit of the 2012 to 2014 financial years, the tax authorities considered that, from 2003, RVP had indirectly transferred profits to companies located outside France with which it was not dealing at arm's length, within the meaning of Article 57 of the French General Tax Code (paragraph 1).
The tax authorities corrected RVP's tax loss carryforwards, increased its reported profits for 2013 and 2014, and assessed additional corporation tax, withholding tax and business VAT, together with interest for late payment and 40% penalties for deliberate non-compliance under Article 1729, as well as 10% penalties under Article 1728 in respect of withholding tax treated as distributions under Article 119 bis 2 (paragraph 2).
The Paris Administrative Court found there was no need to rule on part of the withholding tax claim (following partial relief) and dismissed the remainder of RVP's claim by judgment of 17 January 2023. RVP appealed to the Cour Administrative d'Appel de Paris, seeking discharge of the remaining taxes and surcharges (paragraph 3).
The Court dismissed RVP's appeal in full, upholding the tax authority's findings on dependency links, indirect transfer of profits, correction of losses carried forward, and the validity of the 40% penalties (paragraphs 22, 26, 30, 31).
Background
RVP operated a shop at 29, rue du Faubourg-Saint-Honoré in Paris, distributing Roger Vivier brand shoes and luxury goods, without owning the brand (paragraph 1).
RVP's shares were wholly owned successively by Gousson Consultadoria E Marketing (Portugal), then from 2008 by Dorint Holding (Luxembourg), then from 2012 by Gousson (Italy), all three companies being wholly owned by C.A.B and Co (Italy), of which Mr C.A.B, sole director, held 70% of the shares (paragraph 6).
Mr C.A.B was also majority shareholder and sole director of DI.VI. Finanziara, the majority shareholder in Tod's, an Italian company in which Mr C.A.B also directly held shares and chaired the Board of Directors (paragraph 7).
RVP purchased all Roger Vivier products entirely from Tod's, whose administrative and financial director, a board member, was also the manager of RVP. RVP had no choice as to the products it distributed (paragraph 8).
Pursuant to a service provision contract with Gousson, amended by rider on 27 December 2004 to remove the ceiling on rebilling, RVP was responsible for product development, advertising and promotion of the Roger Vivier brand, incurring significant expenses including rent for prestigious premises, qualified staff costs, gifts, representation, travel, promotional events and brand ambassador fees (paragraph 11).
Core dispute
The dispute concerned whether RVP was dependent on Dorint Holding, Gousson and Tod's within the meaning of Article 57 of the General Tax Code, and whether RVP had indirectly transferred profits to these foreign companies through insufficient re-invoicing of brand promotion and development costs, absence of a margin on re-invoiced services, and an average 65% discount applied to unsold products returned to Tod's against only a 4% purchase discount.
RVP argued that the transactional net margin method used by the tax authorities was inappropriate, that the resale price method should have applied instead, that the comparables selected (forty-three companies over an eleven-year period) were not genuinely comparable, and that the median net margin rate of 4.12% should have been used rather than the average rate of 6.76%.
RVP also disputed the correction of loss carryforwards for financial years 2006 to 2011 (time-barred years), arguing it was in a start-up and market penetration phase until 2006, and challenged the 40% penalties for deliberate non-compliance under Article 1729 of the General Tax Code, denying any deliberate intention to evade tax.
Court findings
The Court found that RVP was dependent on Dorint Holding, Gousson and Tod's, all controlled by Mr C.A.B, from its first financial year, notwithstanding that Tod's was listed on the stock exchange and subject to banking supervision (paragraph 9).
The Court held that RVP re-invoiced only a portion (30% to 75%) of its brand promotion and development expenses using an unjustified flat rate, without applying any margin, while its results from 2006 to 2012 were consistently in deficit (paragraph 13).
The Court found RVP's 65% average discount on unsold products returned to Tod's unjustified, given RVP's average gross margin rate of 28.77% over 2003-2014 compared with a median of 44.65% and average of 44.75% for forty-three comparable independent companies (paragraph 15).
The Court held the transactional net margin method was correctly applied, comparing RVP's net margin to turnover ratio against forty-three comparable companies in the same sector, and that RVP had not shown this method inappropriate or identified a better alternative (paragraph 18).
The Court found no requirement to use the median rather than average net margin rate, noting neither the OECD Transfer Pricing Guidelines (2022 version, point 3.62) nor tax authority guidance required use of a median (paragraph 20).
The Court upheld correction of loss carryforwards for 2006 to 2011, finding RVP had not shown it remained in a start-up phase until 2006, given net sales of EUR 1,868,829 in 2004 and EUR 2,474,518 in 2005 (paragraph 27).
The Court confirmed the tax authorities had proven RVP's deliberate intention to evade tax under Article L. 195 A of the Book of Tax Procedures, citing the nature, extent and repetition of reporting deficiencies, absence of transfer pricing documentation, and failure to correct structurally deteriorated results despite awareness of the dependency links (paragraph 30).
Outcome
The Court dismissed RVP's application in full, upholding the additional corporation tax, withholding tax, business VAT and corresponding 40% penalties for deliberate non-compliance for the financial years 2012 to 2014 (Article 1 of the decision).
The Court rejected RVP's claim under Article L. 761-1 of the Code of Administrative Justice (paragraph 31).
Tp method highlighted
The tax authorities applied the transactional net margin method, comparing RVP's net margin rate on turnover with the average net margin rate of a selection of forty-three independent companies operating in the high-end clothing sector, determined over the financial years 2005 to 2014 (paragraphs 16, 17).
The average net margin rate of the comparables was 6.76% (first quartile 2.03%, median 4.12%, third quartile 12.46%), applied to RVP's reported turnover for financial years 2006 to 2012 to assess arm's length operating results, with adjusted results for 2013 and 2014 not increased as they exceeded the benchmark (paragraphs 10, 17).
For gross margin comparison relating to the discount on unsold goods, RVP's average gross margin rate of 28.77% over 2003-2014 was compared with the comparables' first quartile of 38.03%, median of 44.65%, third quartile of 55.89% and average of 44.75% (paragraph 15).
The Court rejected RVP's argument that the resale price method was more appropriate, and found RVP had provided no evidence that the transactional net margin method was unsuitable or that another method was better suited to its situation (paragraph 18).
Major issues / areas of contention
- Whether RVP was in a relationship of dependence with Dorint Holding, Gousson and Tod's within the meaning of Article 57 of the General Tax Code
- Whether RVP indirectly transferred profits through insufficient re-invoicing of brand promotion and development costs without any margin
- Whether the 65% average discount applied to unsold products returned to Tod's, against only a 4% purchase discount, evidenced insufficient remuneration
- Whether the transactional net margin method, rather than the resale price method, was the appropriate transfer pricing method
- Whether the forty-three companies selected as comparables, and the eleven-year period used, were appropriate
- Whether the average net margin rate of 6.76%, rather than the median rate of 4.12%, should have been applied
- Whether the tax authorities could correct loss carryforwards declared in respect of time-barred financial years 2006 to 2011
- Whether RVP was in a start-up and market penetration phase until 2006 such that losses for that period could not be corrected
- Whether the 40% penalties for deliberate failure to comply under Article 1729 of the General Tax Code were validly imposed
- Whether RVP could rely on Article L. 80 A of the Book of Tax Procedures based on administrative doctrine (BOI-BIC-BASE-80-10-10, BOI-BIC-DEF-20-10, BOI-IS-DEF-10-20)