Transfer pricing: a price cannot be assessed without its economic context
Transfer pricing: a price cannot be assessed without its economic context
An apparently abnormal price may be economically rational
Transfer pricing is now at the heart of numerous tax audits. According to figures published by the Direction générale des finances publiques (DGFiP), it accounted for two-thirds of the amount of tax reassessments in 2025. This reality sometimes feeds the notion that a single, objectively determinable arm’s length price exists for every intra-group transaction, such that any deviation would be regarded as suspect — even though a price discrepancy is not, in itself, proof of a departure from arm’s length terms.
This view, however, rests on a largely questionable premise: that of the existence of a single, objectively determinable arm’s length price.
In a market economy, it is perfectly normal for the same good or service to be sold at different prices. Every consumer experiences this on a daily basis when comparing offers from different insurers, banks, telecommunications operators, or electronics retailers, for example. The very existence of price comparison platforms demonstrates that a competitive market does not lead to a single price, but to a range of prices reflecting different economic circumstances.
These discrepancies stem from numerous factors: the intensity of competition, suppliers’ commercial strategies, order volumes, contractual commitments, delivery times, the level of risk assumed by the parties, or the guarantees attached to the transaction. A supplier may accept a lower margin in order to secure a strategic contract, but may equally decide to accept a lower price where it covers direct costs and contributes to absorbing fixed costs. Conversely, a customer may accept a higher price in exchange for supply security or specific terms. A price can therefore never be analysed in isolation; it must be assessed in light of the full set of economic circumstances surrounding the transaction.
This reality, though self-evident in dealings between independent enterprises, is sometimes insufficiently taken into account in intra-group transactions. Analysis often focuses on the apparent deviation from a reference price, without adequately examining the specific circumstances that led the parties to agree on that price.
The first method of analysis consists precisely in seeking comparable transactions carried out between independent enterprises. In theory, this approach is particularly relevant: it makes it possible to understand how market participants behave in similar circumstances. In practice, truly perfect comparables are rare, and differences in context make comparisons difficult.
This difficulty does not mean the exercise is pointless. On the contrary, a detailed analysis of comparables can help identify the economic factors that explain price discrepancies.
Examples are numerous. Within a large international energy group, a subsidiary had entered into a gas purchase agreement at a price that might appear higher than observable market conditions. A purely quantitative analysis could have led to that price being regarded as abnormal. Yet the economic reality was different: the transaction responded to an emergency situation aimed at avoiding a supply disruption to an end customer. The supplier had to mobilise specific resources within very tight deadlines, while the subsidiary was exposed, in the event of failure, to potentially very significant contractual penalties. In that context, accepting a one-off higher price constituted an economically rational decision that an independent enterprise placed in a comparable situation could equally have taken.
The second major approach consists in analysing the margins achieved by enterprises considered comparable. This method makes it possible to overcome the difficulties associated with identifying identical transactions, but it in turn relies on comparability studies whose inherent limitations are sometimes insufficiently taken into account and are always overshadowed by the apparent precision of the results obtained. The criteria used to select comparable enterprises, the quality of available data, and the adjustments required necessarily involve an element of judgment.
These analyses are indispensable tools for assessing whether a transaction is conducted at arm’s length. They shed light on an economic situation, but they never dispense with a thorough analysis of the context in which the transaction was carried out, and they cannot lead to the identification of a single, incontestable price.
It is precisely this margin of uncertainty that often explains the disagreements between companies and the tax authorities. In many cases, the disagreement does not stem from any intention to circumvent the rules, but from the inherent limitations of the tools used and the difficulty of fully grasping the complexity of economic situations.
Ultimately, it should be recalled that the arm’s length principle does not consist in seeking an ideal theoretical price, but in assessing whether an independent enterprise, placed in comparable conditions, could have made the same economic decision.
This approach does not, therefore, weaken the application of the arm’s length principle. On the contrary, it allows it to be applied with greater rigour and humility, favouring an analysis grounded in the facts and in a thorough understanding of economic realities. It is also the condition for a more constructive dialogue between companies and the tax authorities.
