Transfer Pricing Germany
Transfer Pricing Germany

Overview over German Transfer Pricing Regulations

German transfer pricing law is spread throughout a few Paragraphs in different Codes. The most important ones are outlined below. It has to be noted that most of the relevant sections contain clauses according to which a detailed law ("Ordinance") can be issued in a simplified procedure. Most of the relevant law is contained in these parts. Moreover, tax administration issues its interpretation of law and Ordinances in the form of "Administration Principles". These contain guidance but are not binding for the taxpayer.

 

Arm's length principle

Paragraph 1 Section 1 of the Foreign Tax Act stipulates that related persons should deal at arm's length. For this purpose, all relevant information is assumed to be known and the behaviour of a prudent business manager should be applied. According to Section 2, it can be assumed that parties are related if one disposes over control over 25% or more of the shares of another person or factually controls the other person. Section 3 discusses the hierachy of methods (preference for standard methods) and contains detailed and specific rules on base shifting similar to Chapter IX of the OECD Guidelines. This part is complemented by an Ordnance that also has the level of law. Section 4 discusses what qualifies as business relationship falling under the law.

 

Authorized OECD Approach (AOA)

Paragraph 1 Section 5 of the Foreign Tax Act (enacted 2013) contains regulations regarding the attribution of profits to permanent establishments that are reflecting the Authorized OECD Approach. This part is complemented by an Ordnance that also has the level of law and was enacted effective as of 2015.

 

Documentation

Paragraph 90 Section 3 of the General Tax Code contains regulations regarding the obligation to prepare transfer pricing documentation. Basically, documentation has to be prepared and presented within 60 days upon request. In the case of extraordinary transactions, documentation has to be prepared timely and presented within 30 days upon request. This part is complemented by an Ordnance that also has the level of law. This Ordinance provides detailed requirements regarding the content of documentation.

 

"Where circumstances relate to transactions having a bearing on another country, the taxpayer shall keep records on the nature and content of his business relations with associated persons within the meaning of section 1(2) of the Foreign Tax Act. The obligation to keep records shall also extend to the economic and legal basis of any agreement on prices and other terms of business complying with the arm’s-length principle with associated persons. In the case of exceptional business transactions, records shall be prepared without delay. The obligation to keep records shall apply accordingly to taxpayers who, for the purposes of domestic taxation, are obliged to allocate profits between their domestic enterprise and its foreign permanent establishment or to determine the profit of the domestic permanent establishment of their foreign enterprise. In order to ensure the uniform application of the law, the Federal Ministry of Finance shall be empowered with the consent of the Bundesrat by way of ordinance to determine the nature, content and extent of the records to be kept. The revenue authority should require the submission of records only for the purposes of conducting an external audit. Such submission shall be governed by section 97 with the proviso that subsection (2) of this provision shall not apply. It shall be done on request within a period of 60 days. Where records of exceptional business transactions are to be submitted, the period shall be 30 days. The period for submission may be extended in substantiated individual cases."

 

Penalties

Paragraph 162 Section 3 of the General Tax Code stipulates that, if documentation is not provided, the tax base can be estimated to the burden of the taxpayer. Section 4 defines the penalties to be applied in the event that documentation is not provided or provided too late.

 

"(3) Where a taxpayer contravenes his obligation to cooperate under section 90(3) by not submitting the records or where records submitted are essentially of no use or where it is determined that the taxpayer has not drawn up records within the meaning of section 90(3), third sentence, in a timely manner, it shall be refutably assumed that his income which is subject to tax in Germany and whose determination the records within the meaning of section 90(3) serve is higher than the income he declared. Where in such cases the revenue authority must conduct an estimate and where this income can only be determined within a certain scale, especially only on the basis of price ranges, this scale may be fully exhausted to the detriment of the taxpayer. Where despite the submission of usable records by the taxpayer there are indications that his income would, taking into account the arm’s length approach, be higher than the income declared on the basis of the records, and where corresponding doubts cannot be clarified on account of this because a foreign associated person does not fulfil his obligation to cooperate pursuant to section 90(2) or his obligation to provide information pursuant to section 93(1), the second sentence above shall be applied accordingly.

(4) Where a taxpayer does not submit records within the meaning of section 90(3), or where submitted records are essentially of no use, a surcharge of 5,000 euros shall be set. The surcharge shall be at least 5 per cent and at most 10 per cent of the additional income that arises from the correction after applying subsection (3) above where this leads to a surcharge of more than 5,000 euros. Where there is a delay in submitting usable records, the surcharge may total up to 1,000,000 euros, and shall be at least 100 euros for each full day beyond the date of the deadline. Where the revenue authorities are allowed discretion with respect to the extent of the surcharge, in addition to its purpose of obliging the taxpayer to draw up and submit in a timely manner the records within the meaning of section 90(3), the benefit gained by the taxpayer and, in the case of delayed submission, the length of time by which the deadline has been exceeded shall be taken into account. No surcharge shall be set where non-fulfilment of the obligations under section 90(3) appears excusable or where default is only minor. Default by a legal representative or aide shall be deemed equal to personal default. The surcharge shall be set as a matter of routine once the external audit has been completed."

 

 

Ordinance on Documentation Requirements

As discussed above, the law enacting documentation requirements is complemented by an Ordinance on documentation requirements. This Ordinance qualifies as law. In Paragraph 4, this Ordinance defines the required content of documentation notes as follows.

"The taxpayer pursuant to Paragraphs 1 through 3 above is obliged to compile the following documentation notes to the extent that they are relevant for the review of related party transactions within the meaning of Paragraph 90 Section 3 of the General Tax Act:

 

1. General Information in relation to Shareholder Relations, Business Operations and the Organizational Structure:

 

a) Illustration of the shareholder relations between the taxpayer and the related entities within the meaning of Paragraph 1 Section 2 No. 1 and 2 of the Foreign Tax Act with whom the taxpayer is engaged in business transactions either directly or indirectly through intermediaries, both at the beginning of the fiscal years under review and changes in these shareholder relations throughout the review period;
b) Illustration of other circumstances that would give rise to the assumption that entities are related entities within the meaning of Paragraph 1 Section 2 No. 3 of the Foreign Tax Act;
c) Illustration of the organizational and operational structure of the group as well as changes thereof, including permanent establishments and partnerships;
d) Description of the activities of the taxpayer, e.g. services, production or distribution of goods, research and development;

 

2. Business Transactions with Related Entities:

 

a) Illustration of the business transactions with related entities, overview of type and extent of these business transactions (e.g. purchasing of goods, services, loan agreements and other provision of use, cost allocations) and overview over the underlying agreements and their changes;
b) Compilation (list) of all significant intangible that the taxpayer owns and uses or makes available in the context of transactions with related entities;

 

3. Functional Analysis:

 

a) Information over the functions performedand risks borne and any changes thereto, over significant assets employed, over the conditions of the underlying agreements, over the business strategies chosen and the important conditions relating to the relevant markets and competitors;
b) Description of the value chain and illustration of the taxpayer's contribution to the value chain compared to related entities with whom business relationships exist;

 

4. Economic Analysis:

 

a) Illustration of the selected transfer pricing method;
b) Reasoning regarding the appropriateness of the selected method;
c) Records regarding calculations performed in applying the selected transfer pricing method;
d) Preparation of prices used for comparison or financial data of independent enterprises as well as information on adjustment calculations."

 

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