The Alstom Group is active in the transportation sector where it produces trains, metros, services, infrastructure, signalling etc.
Following an audit, the French tax authorities found that Alstrom Transport SA had deducted costs that it was not contractually obliged to assume.
In addition, the tax authorities found that services provided by Alstrom Transport SA to related parties – at costs – under a cost-sharing agreement had not been priced at arm’s length and applied a mark-up of 5%.
Alstom appealed to the Administrative Court and subsequently to the Administrative Court of Appeal.
Judgment
The Administrative Court of Appeal ruled partly in favour of Alstom and partly in favour of the tax authorities. According to the court, the tax authorities were right to deny the deduction of costs related to a contract entered into by another related party in 2008. However, the court sided with Alstrom with regard to the additional surcharge on the cost of services provided to related parties.
Excerpts in English
“On July 3, 2008, Alstom Brésil Transport (hereinafter ABET) signed a contract with the State of Sao Paulo and the Sao Paulo Metropolitan Company (CSMP) to modernize the metro’s signaling and telecommunications systems without interrupting service, for an initial amount of 220 million euros, including 40 million euros for the installation of “Alstom” products. This contract was the subject of three amendments, signed successively on September 11, 2009, April 14, 2011 and October 12, 2012. ATSA deducted from its income for the year ended March 31, 2013 a charge of 15 million euros corresponding to the payment of an invoice issued in December 2012 by ABET for late payment penalties and additional costs incurred by ABET in connection with the performance of the July 3, 2008 contract. The tax authorities questioned the deductibility of this sum, considering, on the basis of Article 57 of the French General Tax Code, that it constituted an indirect transfer of profits to ABET, and reinstated the amount of this sum in ATSA’s taxable income for the year ended March 31, 2013.”
“8. Secondly, in order to establish the presumption of an indirect transfer of profits, the Minister maintains that the sum in dispute represents an undue expense for ATSA, which has thus granted an advantage to ABET for which there is no quid pro quo. It argues that ATSA was not contractually bound to ABET, since it was not a signatory to the July 3, 2008 contract, and that ATSA could not therefore be held responsible for any malfunctions linked to the execution of this contract. While the applicant company points out that appendix 5 of the contract of July 3, 2008 designates ATSA as one of the approved subcontractors, the internal purchase orders sent by ABET to ATSA, within the framework of this contract, in order to supply the signalling system for which ATSA is responsible, evidence the existence of a subcontracting agreement between the two companies, and that the shortcomings of the signalling system supplied by ATSA are at the root of the additional costs at issue, without being seriously challenged, that ATSA was not a signatory to the main contract of July 3, 2008, which, in addition to the production of control software, includes the extension of a metro line, the delivery of carriages and maintenance, although the Group’s transfer pricing policy stipulates that the entity signing a contract may contractually transfer all risks and rewards to the subcontractor via a subcontracting agreement, the purchase orders sent to ATSA by ABET did not formalize such a transfer of risks and rewards, that it was only when ABET found itself in difficulty in the performance of the main contract, which in principle was due to be completed in 2012, that ATSA and ABET signed a settlement agreement on December 10, 2012, in which ATSA indicated a posteriori that it was a party, with ABET, of a consortium vis-à-vis the end customer and that, as such, it would bear 50% of the additional costs incurred by ABET, which, according to the terms of this agreement, included penalties corresponding to the delay in the execution of civil engineering work linked to the extension of a metro line, Finally, before the arbitration tribunal set up by the International Chamber of Commerce to resolve the dispute between ABET, the State of Sao Paulo and CMSP, ABET asserted that the delays in the execution of the July 3, 2008 contract were caused by CMSP, whose recurrent requests to modify the functionalities of the regulation software led to the creation of new versions of the software, and that they were also the result of delays in the civil engineering work. Moreover, the documents produced by the appellant company, both on appeal and at first instance, and in particular the table drawn up by the appellant company listing the technical failures observed by the CMSP, do not show that these failures are actually attributable to ATSA, nor, moreover, do they show that ATSA was responsible for the failures, that the sum of 15 million euros in dispute does not correspond to additional costs unrelated to the malfunctions of the signalling system supplied by ATSA, the Minister also pointing out that this amount of 15 million euros is disproportionate to ATSA’s market share of 10 million euros.
9. Consequently, the tax authorities were right to consider that the sum in dispute constituted an indirect transfer of profits within the meaning and for the application of article 57 of the French General Tax Code, since the applicant company did not establish, nor did it allege that the benefit granted to ABET would have had at least an equivalent counterpart for ATSA, and reintegrated the amount of the sum in question into ATSA’s taxable income for the year ended March 31, 2013.”
“However, for the same reasons as those set out above, the Minister states that the future expenses relied on by the applicant company to justify the establishment of the provisions in dispute are not deductible, since ATSA cannot be considered to be contractually responsible for the difficulties encountered by ABET, rightly or wrongly, in the performance of the July 3, 2008 contract. Furthermore, as the Minister argues in the alternative, at the close of the 2013 and 2014 financial years, ATSA’s risk of having to commit the sums in question to meet the additional costs resulting from the late payment penalties claimed and the arbitration findings must be regarded as purely contingent, since in 2013 and 2014 there were no written claims, proceedings or legal actions involving ATSA. In these circumstances, and given that ATSA was unable to set aside provisions for the risk of loss in respect of the financial years ended March 31, 2013 and 2014 for the amounts in dispute, the tax authorities were right to challenge these provisions on the basis of the provisions of Article 39 of the French General Tax Code, and to reinstate their amount in ATSA’s taxable income for the same financial years.”
“With regard to the reinstatement of a 5% profit margin on services invoiced at cost by ATSA to foreign subsidiaries under cost-sharing agreements:
17. On April 1, 2008, Alstom Holdings, the holding company of the Alstom Group, entered into a cost-sharing agreement (hereinafter referred to as level 1 CSA) with the three holding companies of the Alstom Group’s divisions, including ATSA, the holding company of the Group’s transport division. The purpose of this level 1 ARC is to pool the provision of accounting, IT, financial, legal and personnel management services between these four companies, with each of the holding companies acting as service provider to the others. Within the framework of the level 1 ARC, each of the branch holding companies has entered into an ARC with its own subsidiaries (hereafter referred to as level 2 ARC), under which the three branch holding companies provide services to the subsidiaries concerned on a cost-plus basis. Under this level 1 and level 2 CSA scheme, each of the holding companies pools its resources to provide services to its own subsidiaries and those of the other holding companies, while the other holding companies provide services for which they have the necessary expertise.
18. On the basis of Article 57 of the French General Tax Code, the tax authorities have added back to ATSA’s taxable income for the years ended March 31, 2011, 2012, 2013 and 2014, a 5% margin applied to services invoiced at cost by ATSA to its foreign subsidiaries under level 2 ARCs. In order to establish the presumption of an indirect transfer of profits, which can be invoked under the conditions described in point 5 above, it is up to the tax authorities to demonstrate that the prices charged by ATSA to its foreign affiliates were insufficient in relation to those charged between similar businesses operating normally, i.e. at arm’s length. However, it is clear from the investigation that no such comparisons were made in order to establish that ATSA had undercut the prices charged for the services in question. If, in the absence of comparative data, the Minister maintains, relying in particular on the principles of the Organisation for Economic Co-operation and Development (OECD) applicable to transfer pricing, that invoicing at cost is part of abnormal management in that the absence of an invoiced margin constitutes a renunciation of profit, However, such a practice does not constitute an advantage in kind, since invoicing at cost does not economically amount to granting a service at a loss, and no provision of the General Tax Code requires a commercial company to make a profit, nor prohibits sales at cost. Nor does the tax authority establish the existence of an unjustified difference between the agreed price and the market value of the services rendered, it being further noted that, within the framework of the ARC scheme described in the previous point, while it is true that ATSA does not charge a margin to the other companies in the scheme, neither do the latter.”
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