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French Supreme Court Recognizes the Significance of the Functional Analysis in Line with the OECD TPG
Observations of the SKF Holding Case
The case discusses the importance of the functional analysis which, despite being probably the most subjective and thus challenging part when applying transfer pricing rules, constitutes the core of any transfer pricing analysis. Understanding the activities that parties perform, the assets that they utilize, and the risks that they assume, as well as the relative importance of each in establishing the transfer price (i.e., payment) is a challenging undertaking that provides unique problems for both MNEs and tax authorities.
1. Overview
Last October, the French Supreme Court determined in the SKF Holding case that the functional analysis is decisive in any group’s transfer pricing policy, namely for the determination of the risks assumed by a group’s entity. In this regard, the French Supreme Court reinforced the approach embedded in the OECD TPG to the extent that it was made clear that a company must have effective control and mitigation functions over that risk, as well as the financial capacity to assume to be entitled to the profits/losses associated.
What is relevant about this case is the importance and implications it will have in future cases as tribunals, namely in this case...