The French Supreme Administrative Court Provides Useful Clarifications on the Deduction of Government Subsidies from the Cost Base in Applying Cost-Based Transfer Pricing Methods

In a decision dated 19 September 2018 (Philips France SAS), the French Supreme Administrative Court ruled that, in the context of contract R&D services provided by a French taxpayer and charged at cost-plus to a foreign associated enterprise, the deduction of government subsidies from the cost base does not by itself suffice to characterize a transfer of profits abroad. This decision, which is final, as it cannot be appealed, puts an end to the Philips France SAS litigation case that started in 2014 with a contrary decision by a French Administrative Tribunal.It provides useful clarifications on the application of the cost-plus method and clarifies the rules concerning the burden of proof in transfer pricing matters.