If the introduction of an employment protection plan can be a complicated procedure in employment law given the legal framework that this procedure benefits from, it should moreover be noted that it can also have a significant impact in the context of a transfer pricing tax audit.
In an environment where the reorganizations of international groups are more and more common, the French tax authorities are increasingly seeking to rectify French companies subject to such restructuring, on the basis that this restructuring ultimately benefits to the Group and not the French company itself.
To be justified, such an approach is generally based on a distorted interpretation of the “Book II of the PES”, so named by reference to the section of the Employment Code which codifies it and which presents the economic justification of the restructuring project. The objective is to underline the Group’s interest in undertaking such reorganization to the disadvantage of the French company. A partial reading of Chapter IX of the OECD Guidelines will then legally validate this approach. It explains that, in certain very specific circumstances, a restructuring may entitle the restructured entity to compensation. The Administration will try to have an extensive interpretation of these circumstances.
In this context, and in the absence of explicit jurisprudence on the application of transfer pricing in reorganization matters, particular consideration must be given to the preparation of a “Book II” from a tax perspective in order to avoid that this book provides arguments to tax authorities for justifying a transfer pricing adjustment. The audits following reorganizations are often long and can lead to significant adjustments; having a “Book II”, which has already anticipated such problems, constitutes a first defense basis.