In a very dense decision issued this summer, the Supreme Court upheld the transfer pricing adjustments made against ST Dupont, on the grounds that it could not produce sufficient evidence to demonstrate that the selling prices charged vis-à-vis its subsidiary located in Hong Kong were arm's length (EC 05/07/2023, 464928, St Dupont).

ST Dupont sells its products abroad through subsidiaries, authorized distributors, and duty-free shops. In Asia, it sells its products to its subsidiary located in Hong Kong.

By highlighting (i) the recurring losses recorded by ST Dupont and (ii) the profits recorded over the same period by the Hong Kong subsidiary, the service fulfilled the presumption of indirect profit transfer referred to in Article 57 of the CGI.

The judge confirms that "recurring losses constitute a sufficient indication" to shift the burden of proof on the taxpayer. In this, the Council of State weakens a little more the previous jurisprudential trend according to which operating losses are not a sufficient indicator to demonstrate a donation within the meaning of Article 57. To support the prices it charged vis-à-vis its subsidiary, ST Dupont produced an economic analysis testing the subsidiary's margins.

However, in the absence of having produced "a quantification of the various costs related to the functions performed by the subsidiaries", "the gross and net margins by distinguishing the different families of products", and specifying "the discount rate for each product and each subsidiary", the judge considers that the method initially presented by the company (the resale price method) was not sufficiently substantiated. Consequently, the administration was entitled to substitute an alternative method.

By choosing the comparable price method on the open market, however, the service was able to retain average prices, and an arbitrary discount of 50% without the judge opposing it the same speed. However, it must be kept in mind that in tax law, must prove the one who can, and not the one who alleges. By insisting only on recurring losses, the administration had every opportunity to ask the taxpayer to produce detailed, targeted analyses and data relating to foreign companies.

The judgment recalls that it is essential to carry out a comprehensive functional analysis in order to identify precisely the financial consequences arising from the functions and risks attributed to each party, in order to have them reflected in a subsequent economic benchmark analysis. Do not hesitate to contact us on these topics or contact us on #actualitésprixdetransfert