opecia R e reports operational expenses between the companies involved by using the German Ministry of arms-length principle Contrary to the first draft, the Finance releases final final version not only defines the oncept of secondment, but also Regulations on Employee discusses cases in which mployee secondment should not Secondments be assumed. according to the new principles, an employee second ment exists if an employee reaches by Heinz-Klaus Kroppen, Stephan Rasch, and agreement with his current Achim roeder employer(the assigning company) to work for an affiliated company Dr. Heinz-Klaus Kroppen, LL.M, Dr. Rasch, and Dr. (the receiving company) for a Achim roeder. MA.. are with Deloitte limited period of time based on an usse Copyright o Deloitte Touche, 2002. All reserved employment contract between the receiving company and the mployer. Alternatively, an employee secondment is deemed exist if the receiving company acts as the employees economic and how costs should be allocated employer. ne German Federal Ministry between the assigning and of Finance recently released receiving companies. The analysis However, an employee second ment is not deemed to exist if an the final version of Principles for focuses primarily on changes that employee works for another enter. the audit of Income allocation arose after the first draft Between Internationally related prise to meet an obligation of the Companies in Cases of Employee assigning company to perform Secondments(Administrative I. The New Principles work services and his remunera- first draft of the regulations, which ie The principles first explain why the service or work. In that case Principles- Secondment). The is necessary to implement new had been distributed to various regulations on employee the transfer pricing issue is the business associations for comment, secondments Increasing globaliza- determination of an appropriate has been repeatedly analyzed in tion is seen as the most important tax literature. 1 The ministry, todays econ taking into consideration some of arm s-length principle is not those comments, has changed the relevant regarding the amount of final version. This article provides an employees wage because the Kroppen/Roeder, "Germany Tackles brief summary of the new relationship between an employer TMTP Vol 9(2000), No 14, p.434ff: ng," Secondments Issues and Transfer prie regulations and discusses the and an employee is, by its very underlying principles of employ Kroppen/Roeder, Internationale nature, at arms length. However, Wirtschaftsbriefe, Transfer Pricing News secondments(temporary tran the drafters' intent is to allocate No.20,p.979f Tax Notes International 4 February2002·511
The German Federal Ministry of Finance recently released the final version of “Principles for the Audit of Income Allocation Between Internationall has been repeatedly analyzed in tax literature.The ministry,taking into consideration some of those comments,has changed the final version.This a receiving companies. y Related Companies in Cases of Employee Secondments (Administrative Principles — Secondment).”The first draft of the regulations,which was distr rticle provides a brief summary of the new regulations and discusses the underlying principles of employee secondments (temporary transfers) and how costs should be allocated between the assigning and ibuted to various business associations for comment, The German Federal Ministry of Finance recently released the final version of “Principles for the Audit of Income Allocation Between Internationally Related Companies in Cases of Employee Secondments (Administrative Principles — Secondment).” The first draft of the regulations, which had been distributed to various business associations for comment, has been repeatedly analyzed in tax literature.1 The ministry, taking into consideration some of those comments, has changed the final version. This article provides a brief summary of the new regulations and discusses the underlying principles of employee secondments (temporary transfers) and how costs should be allocated between the assigning and receiving companies. The analysis focuses primarily on changes that arose after the first draft. I. The New Principles The principles first explain why it is necessary to implement new regulations on employee secondments. Increasing globalization is seen as the most important reason in today’s economy. The arm’s-length principle is not relevant regarding the amount of an employee’s wage because the relationship between an employer and an employee is, by its very nature, at arm’s length. However, the drafters’ intent is to allocate operational expenses between the companies involved by using the arm’s-length principle. Contrary to the first draft, the final version not only defines the concept of secondment, but also discusses cases in which an employee secondment should not be assumed. According to the new principles, an employee secondment exists if an employee reaches agreement with his current employer (the assigning company) to work for an affiliated company (the receiving company) for a limited period of time based on an employment contract between the receiving company and the employer. Alternatively, an employee secondment is deemed to exist if the receiving company acts as the employee’s economic employer. However, an employee secondment is not deemed to exist if an employee works for another enterprise to meet an obligation of the assigning company to perform work services and his remuneration is a component of the price for the service or work. In that case, the transfer pricing issue is the determination of an appropriate Tax Notes International 4 February 2002 • 511 German Ministry of Finance Releases Final Regulations on Employee Secondments by Heinz-Klaus Kroppen, Stephan Rasch, and Achim Roeder Dr. Heinz-Klaus Kroppen, LL.M., Dr. Stephan Rasch, and Dr. Achim Roeder, M.A., are with Deloitte & Touche Düsseldorf. Copyright © Deloitte & Touche, 2002. All rights reserved. 1 Kroppen/Roeder, “Germany Tackles Secondments Issues and Transfer Pricing,” TMTP Vol. 9 (2000), No. 14, p. 434 ff; Kroppen/Roeder, Internationale Wirtschaftsbriefe, Transfer Pricing News No. 20, p. 979 f. Special Reports
Special Reports arms-length remuneration, operational expenses related to the German assigning company to including a markup. It must also employee secondment are not take over a part of the operational be determined whether the admissible for tax purposes employee s activities result in the because expenses related to the creation of a permanent establish- employee assignment constitute According to section 3. 1.1 of the primary expenses of the commer- administrative principles, it is assumed as a rule that an For purposes of the administra- cial employer, based on the mployee works in the interest of tive principles, the term and for the account of the receiving “ employer” is related to its The administrative principles terprise. However, if the economic definition. Also, the term also state explicitly that a transfer employee receives remuneration is defined differently under of know-how, which might occur as exceeding wage levels in the Germany's income tax treaties a result of the employee's activities receiving companys country of wage tax law, civil law, or social behalf of the receiving company, residence, the assigning company security law. As a rule, under the and given his experience, need not might also be deemed to have an new principles, integration into the be remunerated additionally interest in the employee. The receiving company should be because a transfer of an intangible assigning company carries the assumed if the assignment exceeds is not deemed to occur. burden of proof regarding any three months 2 operational expenses it incurs, All direct and indirect expenses, even if the employee's remunera insofar as they affect the results of tion exceeds the wage level in the the receiving and/or assigning receiving company's country of enterprises, are to be allocated to the employee assignment, regard In case of a tax audit of a less of whether they are part of the The issue of domestic receiving company, the employees taxable wage. The secondment is tax auditors should take into account that a prudent and becoming more and diligent business manager would e the employee' s basic salary; more a discussion point e willing to accept only those current and nonrecurring in tax audits and the expenses he would have to bear if remuneration(such as sever- he engaged an employee from the ance pay and gratuities); trend can only get worse local labor market. The domestic receiving company must demon bonuses, vacation pay, and under the current administrative strate that any amount paid above normal wage levels is paid in its taxes assumed: principles own interest; if the company is not able to prove that, the foreign additions to pension accru assigning company would have to social security contributions in do so 6 the country of work and in the In contrast to the first draft the country of origin; final regulations stress that the foreign service allowances; comparable uncontrolled price method is to be used preferentially remuneration in kind and The evaluation criteria for for arms-length purposes. The first other incentives (including ncome allocation have not draft of the regulations distin company cars and stock changed significantly compared to those in the first draft. The new reimbursement of increase principles distinguish more maintenance costs and precisely whether the employee's increased taxes: activities are performed solely for the receiving company or whether ples Section 2 of the administrative princi- moving and travel allowances the assigning company might have (including expenses for a partial interest in the employee 3Section 2.3 of the administrative prin- relatives ): and work for the receiving company ciples expenses incurred for double This distinction might reduce the housekeeping, school, and possibility that tax authorities will cp section 4. 2 of the administrative prin- boarding school fees accept operational expe sEction 3.1 of the administrative prin those of a german assigning ciples. The administrative principle company. Otherwise, the new rules sEction 3.1.2 of the administrative emphasize that profit markups could provide an opportunity for a 512 4 February 2002 Tax Notes International
arm’s-length remuneration, including a markup. It must also be determined whether the employee’s activities result in the creation of a permanent establishment. For purposes of the administrative principles, the term “employer” is related to its economic definition. Also, the term is defined differently under Germany’s income tax treaties, wage tax law, civil law, or social security law. As a rule, under the new principles, integration into the receiving company should be assumed if the assignment exceeds three months.2 All direct and indirect expenses, insofar as they affect the results of the receiving and/or assigning enterprises, are to be allocated to the employee assignment, regardless of whether they are part of the employee’s taxable wage. The expenses include: • the employee’s basic salary; • current and nonrecurring remuneration (such as severance pay and gratuities); • bonuses, vacation pay, and Christmas bonuses; • taxes assumed; • additions to pension accruals; • social security contributions in the country of work and in the country of origin; • foreign service allowances; • remuneration in kind and other incentives (including company cars and stock options); • reimbursement of increased maintenance costs and increased taxes; • moving and travel allowances (including expenses for relatives); and • expenses incurred for double housekeeping, school, and boarding school fees. The administrative principles emphasize that profit markups on operational expenses related to the employee secondment are not admissible for tax purposes because expenses related to the employee assignment constitute primary expenses of the commercial employer, based on the principle of causation.3 The administrative principles also state explicitly that a transfer of know-how, which might occur as a result of the employee’s activities on behalf of the receiving company, and given his experience, need not be remunerated additionally4 because a transfer of an intangible is not deemed to occur. The evaluation criteria for income allocation have not changed significantly compared to those in the first draft. The new principles distinguish more precisely whether the employee’s activities are performed solely for the receiving company or whether the assigning company might have a partial interest in the employee’s work for the receiving company. This distinction might reduce the possibility that tax authorities will accept operational expenses as those of a German assigning company. Otherwise, the new rules could provide an opportunity for a German assigning company to take over a part of the operational expenses.5 According to section 3.1.1 of the administrative principles, it is assumed as a rule that an employee works in the interest of and for the account of the receiving enterprise. However, if the employee receives remuneration exceeding wage levels in the receiving company’s country of residence, the assigning company might also be deemed to have an interest in the employee. The assigning company carries the burden of proof regarding any operational expenses it incurs, even if the employee’s remuneration exceeds the wage level in the receiving company’s country of residence. In case of a tax audit of a domestic receiving company, the tax auditors should take into account that a prudent and diligent business manager would be willing to accept only those expenses he would have to bear if he engaged an employee from the local labor market. The domestic receiving company must demonstrate that any amount paid above normal wage levels is paid in its own interest; if the company is not able to prove that, the foreign assigning company would have to do so.6 In contrast to the first draft, the final regulations stress that the comparable uncontrolled price method is to be used preferentially for arm’s-length purposes. The first draft of the regulations distin- 512 • 4 February 2002 Tax Notes International Special Reports 2 Section 2 of the administrative principles. 3 Section 2.3 of the administrative principles. 4 Section 4.2 of the administrative principles. 5 Section 3.1 of the administrative principles. 6 Section 3.1.2 of the administrative principles. The issue of ‘secondment’ is becoming more and more a discussion point in tax audits, and the trend can only get worse under the current administrative principles
Reports guished between the internal ssignments have a typical standard. if a tax audit reveals external, and hypothetical arms duration of three to five years; that the secondment of numerous length test in its application to secondments. For the internal certain management positions mployees served the receiving as ell as the assigning company, an omparison, the regulations propose at the receiving enterprise are established uniform allocation analyzing the expenses incurred by permanently filled with employees of other companies standard can be applied to all the receiving company for compa- employee assignments in the rable employees. For the external framework of a classifying tax arms-length test, the regulations the receiving enterprise does treatment. Tax authorities in coor. propose analyzing the expenses not seriously attempt(for dination with the company, can independent companies would be instance, by placing employ base the tax assessment for the illing to bear under comparable ment advertisements)to fill period under review and the circumstances, in the same country positions with employees from subsequent period on that alloca as the receiving company. Finally, the local labor market. includ- tion standard, if the situation has the hypothetical arms-length rule ing employees it has trained not changed materially. determines whether a prudent and itself diligent business manager of an Finally, section 5 of the new independent company, under compa- principles refers to the documen nces would have tation requirements that must be fulfilled to provide evidence borne the expense for the second- ment in full, or whether he would regarding the total expenses have demanded a cost-sharing incurred and the interests that agreement with the seconding The hypothetical arms guide the allocation of the employees work, as well as the company length rule determines potential allocation of the total It must be emphasized that whether a prudent and expenses. Taxpayers must provide even when adequate employees diligent business evidence regarding those interests are not available in the local labor by means of, for example: market, the prudent and diligent manager of an an assignment contract; business manager would have independent company, assumed additional expenses only e an additional service contract if he could expect an appropriate under comparable a description of the receiving within a circumstances. would enterprise's business activity frame. The authors of the adminis- have borne the expense and its products and/or trative principles consider a three- for the secondment year period reasonable in full correspondence justifying the Section 3.4 deals with so-called pecial cases. One of the issue job descriptions for the discussed is the implementation of assigned employees a rotation system. A rotation system typically exists if precise proof of activity, such company has an underlying staff as reports or minutes that the employment and development In the case of workplaces assigned employee has oncept of group management, so permanently filled by the prepared for the assigning chat the receiving enterprise assigning enterprise under a cannot freely decide to fill vacant rotation system, it should be positions as needed, but must fill assumed that the assignment also. employment advertisements certain positions with employees of serves the interests of the examinations of comparative the assigning enterprise. Whether assigning enterprise and that the salaries in the local labor ch a rotation system exists latter therefore must bear any market. decided on review of the overall expenses exceeding those that facts and circumstances. Indicators would have been incurred for a of the existence of a rotation comparable local employee of the system include the following receiving enterprise. That rule might also apply in the case of assignments are always one- sided, rather than reciprocal "Section 3. 2 of the administrative pr among group companies(from The final regulations include a ciples the parent company to subordi- new paragraph regarding the Section 3.5 of the administrative prin- nate companies) application of a uniform allocation ciples Tax Notes International February2002·513
guished between the internal, external, and hypothetical arm’slength test in its application to secondments. For the internal comparison, the regulations propose analyzing the expenses incurred by the receiving company for comparable employees. For the external arm’s-length test, the regulations propose analyzing the expenses independent companies would be willing to bear under comparable circumstances, in the same country as the receiving company. Finally, the hypothetical arm’s-length rule determines whether a prudent and diligent business manager of an independent company, under comparable circumstances, would have borne the expense for the secondment in full, or whether he would have demanded a cost-sharing agreement with the seconding company. It must be emphasized that even when adequate employees are not available in the local labor market, the prudent and diligent business manager would have assumed additional expenses only if he could expect an appropriate benefit within a reasonable time frame. The authors of the administrative principles consider a threeyear period reasonable.7 Section 3.4 deals with so-called special cases. One of the issues discussed is the implementation of a rotation system. A rotation system typically exists if a company has an underlying staff employment and development concept of group management, so that the receiving enterprise cannot freely decide to fill vacant positions as needed, but must fill certain positions with employees of the assigning enterprise. Whether such a rotation system exists is decided on review of the overall facts and circumstances. Indicators of the existence of a rotation system include the following: • assignments are always onesided, rather than reciprocal among group companies (from the parent company to subordinate companies); • assignments have a typical duration of three to five years; • certain management positions at the receiving enterprise are permanently filled with employees of other companies; and • the receiving enterprise does not seriously attempt (for instance, by placing employment advertisements) to fill positions with employees from the local labor market, including employees it has trained itself. In the case of workplaces permanently filled by the assigning enterprise under a rotation system, it should be assumed that the assignment also serves the interests of the assigning enterprise and that the latter therefore must bear any expenses exceeding those that would have been incurred for a comparable local employee of the receiving enterprise. That rule might also apply in the case of expert secondments. The final regulations include a new paragraph8 regarding the application of a uniform allocation standard. If a tax audit reveals that the secondment of numerous employees served the receiving as well as the assigning company, an established uniform allocation standard can be applied to all employee assignments in the framework of a classifying tax treatment. Tax authorities, in coordination with the company, can base the tax assessment for the period under review and the subsequent period on that allocation standard, if the situation has not changed materially. Finally, section 5 of the new principles refers to the documentation requirements that must be fulfilled to provide evidence regarding the total expenses incurred and the interests that guide the allocation of the employee’s work, as well as the potential allocation of the total expenses. Taxpayers must provide evidence regarding those interests by means of, for example: • an assignment contract; • an additional service contract; • a description of the receiving enterprise’s business activity and its products and/or services; • correspondence justifying the assignment; • job descriptions for the assigned employees; • precise proof of activity, such as reports or minutes that the assigned employee has prepared for the assigning company; • employment advertisements; • examinations of comparative salaries in the local labor market; Tax Notes International 4 February 2002 • 513 Special Reports 7 Section 3.2 of the administrative principles. 8 Section 3.5 of the administrative principles. The hypothetical arm’slength rule determines whether a prudent and diligent business manager of an independent company, under comparable circumstances, would have borne the expense for the secondment in full
Special Reports profit expectations of the neur who economically pays for the not economically responsible for receiving enterprise dependent work carried out for the employee,s remuneration for the employee, s employment him, regardless of whether he pays the work performed if the wage is contracts with the assigning the remuneration to the employee only part of a service remunera- and receiving enterprises himself or if another enterprise tion The use of the economic term poses as a substitute. The regional"employer"is appropriate because evidence regarding wage ex- tax office in Nuremberg has agreed it corresponds to the valuation in penses before assignment with that judicial position and article 15 of the oeCd model tions of the assigned employee; under the management of the tho allows the exemption in the scop reaty. The principle that the right a benefit test regarding wage of article 15 if the employee owe o taxation lies with the country expenses and profit contribu- his service. if he becomes acti whose tax substance is reduced by considering the operating exper time sheets for type and extent employer, if he is accountable, and relating to the employee an if the wage is not part of the price operating expenditure must be for a delivery or plant output. 3 Unlike the approach to the term The economic cost is borne by a functional employee organi- employer"used in the civil law the enterprise that pays the wage zation chart and can thus claim the operating expenditure deduction. As a result, IL. Analysis the state where that enterprise is The following is an analysis of located has the right to tax those the modifications introduced in the wages, in counterpoint to the new administrative principles, provision of operating expenditure compared with the draft version deductions dated September 2000.9 It is a welcome change Unlike the original draft, the final version lacks the statement A. Definitions(Section 2) that secondment is now that personnel secondments will It is a welcome change that not only defined e treated as the provision of a defined positively, but is also set off positively, but is also set service. That is a logical conclusion secondment is now not only because there can hardly be a against an exchange of services on off against an exchange service provision by the assigning the basis of a service agreement of services on the basis enterprise if the receiving enter- The administrative principles use of a service agreement prise becomes the economic the economic interpretation of the mployer. Whether a service is term"employer, rather than provided by the assigning enter adopting the definition provided in prise is to be examined when the the wage tax law, and thus corre- spond to the Federal Tax Court's legal practice and tax authorities current interpretation. Under wage tax law, the definition of the term“ employer” can be indirectly derived from the terms"employee and the wage tax law, the question Kroppen/Roeder, supra note 1 at 435 ,see For an analysis of this first version within the scope of section 1 of the as to who pays the employee's IoLohnsteuerdurchfuhrungsverordnung regulation regarding payroll tax remuneration is now the focus of as of 10 Dec 1989. the term employer is then defined attention l For the term"employee" in a civil law s that person with whom a Therefore, the negative demar- Gesetzbuch(Munchen: Beck Verlag 2001), certain individual has an employee cation of an employee secondment inleitung zu section 611 note 6: Schmidt- and the chosen definition contrib- (Munchen: Beck verlag 2001)section 3 A Federal tax Court decision ute to a clarification of the tax law ote 4 dated 21 August 1985 ruled in a Because there is no"employee 1-Ref. No. I R 63/80. Federal Tax case involving Germany's income secondment but rather the Bulletin 1986 Il, p 4, 5 tax treaty with Spain that the provision of a service, taxation by wording of article 15, paragraph the state where the service has al Tax Office Nuremberg reg. lit. b DTt("if remuneration is paid been rendered is not appropriate, p.39 of12sept.1989,p.1301-357,DStR1990 by one employer or for 5 of the basis of article 15 employer) points to the use of the OECD model treaty, in that the en- Unternehmensbesteuerung (Munchen term"employer"as that entrepre- terprise in the receiving country is Beck ve 999),p.1036f 4 February 2002 Tax Notes International
• profit expectations of the receiving enterprise; • the employee’s employment contracts with the assigning and receiving enterprises; • evidence regarding wage expenses before assignment; • a benefit test regarding wage expenses and profit contributions of the assigned employee; • time sheets for type and extent of the work; • travel expense accounts; and • a functional employee organization chart. II. Analysis The following is an analysis of the modifications introduced in the new administrative principles, compared with the draft version dated September 2000.9 A. Definitions (Section 2) It is a welcome change that secondment is now not only defined positively, but is also set off against an exchange of services on the basis of a service agreement. The administrative principles use the economic interpretation of the term “employer,” rather than adopting the definition provided in the wage tax law, and thus correspond to the Federal Tax Court’s legal practice and tax authorities’ current interpretation. Under wage tax law, the definition of the term “employer” can be indirectly derived from the terms “employee” and “employment status (service)” within the scope of section 1 of the regulation regarding payroll tax;10 the term employer is then defined as that person with whom a certain individual has an employee relationship.11 A Federal Tax Court decision dated 21 August 198512 ruled in a case involving Germany’s income tax treaty with Spain that the wording of article 15, paragraph 2, lit. b DTT (“if remuneration is paid by one employer or for one employer”) points to the use of the term “employer” as that entrepreneur who economically pays for the dependent work carried out for him, regardless of whether he pays the remuneration to the employee himself or if another enterprise poses as a substitute. The regional tax office in Nuremberg has agreed with that judicial position and allows the exemption in the scope of article 15 if the employee owes his service, if he becomes active under the management of the employer, if he is accountable, and if the wage is not part of the price for a delivery or plant output.13 Unlike the approach to the term “employer” used in the civil law and the wage tax law, the question as to who pays the employee’s remuneration is now the focus of attention. Therefore, the negative demarcation of an employee secondment and the chosen definition contribute to a clarification of the tax law. Because there is no “employee secondment,” but rather, the provision of a service, taxation by the state where the service has been rendered is not appropriate, on the basis of article 15 of the OECD model treaty, in that the enterprise in the receiving country is not economically responsible for the employee’s remuneration for the work performed if the wage is only part of a service remuneration. The use of the economic term “employer” is appropriate because it corresponds to the valuation in article 15 of the OECD model treaty. The principle that the right to taxation lies with the country whose tax substance is reduced by considering the operating expense relating to the employee an operating expenditure must be observed.14 The economic cost is borne by the enterprise that pays the wages and can thus claim the operating expenditure deduction. As a result, the state where that enterprise is located has the right to tax those wages, in counterpoint to the provision of operating expenditure deductions. Unlike the original draft, the final version lacks the statement that personnel secondments will be treated as the provision of a service. That is a logical conclusion because there can hardly be a service provision by the assigning enterprise if the receiving enterprise becomes the economic employer. Whether a service is provided by the assigning enterprise is to be examined when the 514 • 4 February 2002 Tax Notes International Special Reports 9 For an analysis of this first version, see Kroppen/Roeder, supra note 1 at 435. 10Lohnsteuerdurchführungsverordnung as of 10 Dec. 1989. 11For the term “employee” in a civil law sense, see Palandt-Putzo, Bürgerliches Gesetzbuch (München: Beck Verlag 2001), Einleitung zu section 611 note 6; SchmidtDrenseck, Einkommensteuergesetz (München: Beck Verlag 2001) section 38 note 4. 12Ref. No.: I R 63/80, Federal Tax Bulletin 1986 II, p. 4, 5. 13Regional Tax Office Nuremberg reg. of 12 Sept. 1989, p. 1301-357, DStR 1990, p. 39. 14See Jacobs, Internationale Unternehmensbesteuerung (München: Beck Verlag 1999), p. 1036 f. It is a welcome change that secondment is now not only defined positively, but is also set off against an exchange of services on the basis of a service agreement
Report receiving enterprise is not the service-that there is an actual part of the employees remunera employer. and economic connection to the tion (for instance when the It is obvious that all the rose. is decisive for the employee accepts special functions criticism directed at the first draft deduction of operational expenses. by order of the local assigning of the principles regarding the If the taxpayers operational origin subsidiary). It is then the correct can be clearly stated, the question result that the assigning foreign tion for the transfer of know-how regarding the amount of the opera- headquarters company accept part has been taken into account.15 An tional expenses is no longer of of the expenses of an employ assigned employees special interest. Thus the administrativ ho has been received by a local tion for know-how is then justified need not be functiona pense %yy knowledge does not necessarily principles go astray when they subsidiary. In the case of the local ad to a remunerative transfer of question the amount of receiving subsidiary, that means expenses for an employee; on th that possibly only part of the only if, for instance, samples, plans, or drafts are transferred. The appropriate If the local headquarters necessary remuneration resulting Regarding the evaluation of the company is the assigning company, from that transfer, however, is not cause of the assignment costs, the it should carry the burden of proof ted with the aployee s and documentation for the opera assignment. In fact, it would have tional origin of expenses that hay been paid regardless of the second been incurred locally. Otherwise ment. The drafters of the adminis- the local receiving subsidiary must trative principles have settled for rove that increased labor costs exactly that differentiation. (additional expenditures)for the received employee(for example B. Evaluation of Operational because he has special professional Interests The external arm’s skills) are actually in the interest The preliminary draft took length deal probably of the receiving subsidiary. operational origin as its starting will fail because of a There is an inconsistency in point for the apportionment of lack of comparable that argument, especially in the wage expenditures between the legal consequences, if appropriate assigning and the e receIve g enter- assignment situations proof cannot be furnished. If the orise. The operational origin, espe- among independent assigning local(German) company cially the question whether the receiving enterprise would accept third parties cannot prove the operational origin, the costs must be borne in a higher total equipment of an full by the receiving(foreign) assigned employee, should be subsidiary, even if they exceed the judged according to the arms- local wage level. Conversely, the length ole. The final draft no assigning (foreign)parent is longer emphasizes that approach. obligated to carry the additional In fact. the allocation of Income res now directly refers to the arm s length principle. The question of how the relationship between the inducement principle and the administrative principles only arms-length principle is to be differentiate between the case of a German company assigning an evaluated in a legal and system- employees and the opposite case atic way is certain ly not decisive for practical purposes. However when a german company receives See Kroppen/Roeder, supra note 1 at 435. the new administrative principles loyee are not as clear on that point as SEction 3 of the administra one wou The principles state appropri- tely that an assigned employee Still worth criticizing is the usually becomes active in the point that the arms-length interest of the receiving enterprise Schmidt-Heinicke principle is blurred with the That is postulated only for Einkommensteuergesetz(Munchen: Beck correct understanding of the term German assigning enterprises; Verlag 2001). section 4 note 480 “ operational expenses” for evalu- however, the assigning company Section 3.1.1 of the administrative ating the expenditures connected can also have an interest in the with the personnel secondment assignment of the employee and 20Section 3.1.2 of the administrative The operational cause of the will thus take on responsibility for Tax Notes International 4 February2002·515
receiving enterprise is not the employer. It is obvious that all the criticism directed at the first draft of the principles regarding the question of additional remuneration for the transfer of know-how has been taken into account.15 An assigned employee’s special knowledge does not necessarily lead to a remunerative transfer of know-how. A separate remuneration for know-how is then justified only if, for instance, samples, plans, or drafts are transferred. The necessary remuneration resulting from that transfer, however, is not associated with the employee’s assignment. In fact, it would have been paid regardless of the secondment. The drafters of the administrative principles have settled for exactly that differentiation. B. Evaluation of Operational Interests16 The preliminary draft took operational origin as its starting point for the apportionment of wage expenditures between the assigning and the receiving enterprise. The operational origin, especially the question whether the receiving enterprise would accept a higher total equipment of an assigned employee, should be judged according to the arm’slength principle. The final draft no longer emphasizes that approach. In fact, the allocation of income now directly refers to the arm’slength principle. The question of how the relationship between the inducement principle and the arm’s-length principle is to be evaluated in a legal and systematic way is certainly not decisive for practical purposes. However, the new administrative principles are not as clear on that point as one would wish. Still worth criticizing is the point17 that the arm’s-length principle is blurred with the correct understanding of the term “operational expenses” for evaluating the expenditures connected with the personnel secondment. The operational cause of the service — that there is an actual and economic connection to the enterprise18 — is decisive for the deduction of operational expenses. If the taxpayer’s operational origin can be clearly stated, the question regarding the amount of the operational expenses is no longer of interest. Thus, the administrative principles go astray when they question the amount of operational expenses for an employee; on the contrary, operational expenses need not be functional, common, or appropriate. Regarding the evaluation of the cause of the assignment costs, the administrative principles only differentiate between the case of a German company assigning an employee19 and the opposite case when a German company receives an employee.20 The principles state appropriately that an assigned employee usually becomes active in the interest of the receiving enterprise. That is postulated only for German assigning enterprises; however, the assigning company can also have an interest in the assignment of the employee and will thus take on responsibility for part of the employee’s remuneration (for instance when the employee accepts special functions by order of the local assigning subsidiary). It is then the correct result that the assigning foreign headquarters company accept part of the expenses of an employee who has been received by a local subsidiary. In the case of the local receiving subsidiary, that means that possibly only part of the operational expenses will be up for negotiation. If the local headquarters company is the assigning company, it should carry the burden of proof and documentation for the operational origin of expenses that have been incurred locally. Otherwise, the local receiving subsidiary must prove that increased labor costs (additional expenditures) for the received employee (for example, because he has special professional skills) are actually in the interest of the receiving subsidiary. There is an inconsistency in that argument, especially in the legal consequences, if appropriate proof cannot be furnished. If the assigning local (German) company cannot prove the operational origin, the costs must be borne in full by the receiving (foreign) subsidiary, even if they exceed the local wage level. Conversely, the assigning (foreign) parent is obligated to carry the additional expenditures if the local receiving Tax Notes International 4 February 2002 • 515 Special Reports 15See Kroppen/Roeder, supra note 1 at 435. 16Section 3 of the administrative principles. 17See Kroppen/Roeder, supra note 1 at 436. 18Schmidt-Heinicke, Einkommensteuergesetz (München: Beck Verlag 2001), section 4 note 480. 19Section 3.1.1 of the administrative principles. 20Section 3.1.2 of the administrative principles. The external arm’slength deal probably will fail because of a lack of comparable assignment situations among independent third parties
Special Reports company cannot demonstrate and length deal wont be practicable taxpayer once again is confronted and that tax authorities therefore with increased documentation There is no obvious reason for will return to the diffuse criteria of requirements. Moreover, it remains that unequal treatment. It is the hypothetical arms-length deal. ambiguous why a three-year unacceptable that in one case the An internal arms-length deal often period seems appropriate receiving company must bear th will not be applicable to the Finally, the principles are additional expenses, and in the secondment of experts because of completely vague as to how an must bear those expenses. It is ?2 other case, the assigning compa the lack of comparable local personnel. The external arms increase in profits should b length deal probably will fail comprehended. Imagine the problematic that the administra- because of a lack of comparable ssignment of a Czech expert to a criteria for evaluation and instead assignment situations among inde- in that company is so far removed aim at the interests of the assigning company on the one of the hypothetical arms-length hand and at the local wage level of deal, the criticism made so far sti sale of the products that one can hardly establish a connection. In the receiving company on the other holds strong-that is, that the hand. Those two tests. however hypothetical arms-length deal as result in skepticism on the side of are not congruent. Even if the tax authorities when an employee wages are above the local level is assigned to a local company in that does not automatically Germany. If the company suffers indicate an interest of the losses, tax authorities will most assigning company. The assigning likely question the deductibility of company can also have an interest wage costs. In addition, tax author- if the wages are similar to the local ities will face the question of wage level whether the same criteria are In our opinion, the conflict can valid for a local assignment to a only be resolved by consistent It is questionable foreign company suffering losses burden of proof regulations whether the rules of the D. Rotation Procedure Whether the German enterprise is the assigning party(doubtful with rotation procedure are at Expert Secondment quite a few deductions abroad )or all applicable in the case secondments. several cases can be the receiving one(participation by of expert secondment the parent is doubtful when there distinguished. If an expert cannot are additional expenses)is be recruited from the local labor certainly not a valid criterion. market, the receiving company must bear all expenditures. 27 If an C. The Arms-Length pert with comparable abilities Principle The preliminary draft did not settle on a specific transfer pricing method the administrative principles, by contrast, commit 2 Section 3.1.2, 2nd para. of the admin. comparable uncontrolled price a themselves predominantly to the described in section 3.2.3 istrative principles. resembles in its result the use of German administrative principles method.That is quite remarkable profit methods that, up to now, related companies. For an English transla German administrative Germany, in Tax Treatment of Transfer Principles 22 states that there is no Pricing(Amsterdam 1987), ch 8.2 ranking of standard methods in It is also remarkable. in the Ref No. IR 103/00. Der Betrieb 2001 the examination of transfer prices 2474,2477 a position the Federal Tax Court cope of the hypothetical arms- has explicitly emphasized in its length test, that a prudent and release dated 13 July 1995, printed in decision dated 17 October 2001.23 diligent business manager will ear the additional expenses for an kroppen /igelshoven The administrative principles assigned employee in comparison 25Section 3.2.3 of the strative differentiate among the internal with an available employee on the principles the external, and the hypothetical local labor market only ifhe"can ection 3.4 of the administrative prin- arms-length principle. In our xpect an economically noticeable ciples opinion, there is some danger that profit over a manageable period of 2/Section 3.4.1 of the administrative he internal or external arms time. 25 One should note that the 516 4 February 2002 Tax Notes International
company cannot demonstrate and prove the operational interests.21 There is no obvious reason for that unequal treatment. It is unacceptable that in one case the receiving company must bear the additional expenses, and in the other case, the assigning company must bear those expenses. It is problematic that the administrative principles lack consistent criteria for evaluation and instead aim at the interests of the assigning company on the one hand and at the local wage level of the receiving company on the other hand. Those two tests, however, are not congruent. Even if the wages are above the local level, that does not automatically indicate an interest of the assigning company. The assigning company can also have an interest if the wages are similar to the local wage level. In our opinion, the conflict can only be resolved by consistent burden of proof regulations. Whether the German enterprise is the assigning party (doubtful with quite a few deductions abroad) or the receiving one (participation by the parent is doubtful when there are additional expenses) is certainly not a valid criterion. C. The Arm’s-Length Principle The preliminary draft did not settle on a specific transfer pricing method; the administrative principles, by contrast, commit themselves predominantly to the comparable uncontrolled price method. That is quite remarkable because section 2.4.1 of the 1983 German Administrative Principles22 states that there is no ranking of standard methods in the examination of transfer prices, a position the Federal Tax Court has explicitly emphasized in its decision dated 17 October 2001.23 The administrative principles differentiate among the internal, the external, and the hypothetical arm’s-length principle. In our opinion, there is some danger that the internal or external arm’slength deal won’t be practicable and that tax authorities therefore will return to the diffuse criteria of the hypothetical arm’s-length deal. An internal arm’s-length deal often will not be applicable to the secondment of experts because of the lack of comparable local personnel. The external arm’slength deal probably will fail because of a lack of comparable assignment situations among independent third parties. In the case of the hypothetical arm’s-length deal, the criticism made so far still holds strong — that is, that the hypothetical arm’s-length deal as described in section 3.2.3 resembles in its result the use of profit methods that, up to now, have been covered by the German tax authority.24 It is also remarkable, in the scope of the hypothetical arm’slength test, that a prudent and diligent business manager will bear the additional expenses for an assigned employee in comparison with an available employee on the local labor market only if he “can expect an economically noticeable profit” over a manageable period of time.25 One should note that the taxpayer once again is confronted with increased documentation requirements. Moreover, it remains ambiguous why a three-year period seems appropriate. Finally, the principles are completely vague as to how an increase in profits should be comprehended. Imagine the assignment of a Czech expert to a production company. His activity in that company is so far removed from the actual profits from the sale of the products that one can hardly establish a connection. In practice, we fear, the test may result in skepticism on the side of tax authorities when an employee is assigned to a local company in Germany. If the company suffers losses, tax authorities will most likely question the deductibility of wage costs. In addition, tax authorities will face the question of whether the same criteria are valid for a local assignment to a foreign company suffering losses. D. Rotation Procedure — Expert Secondment26 On the issue of expert secondments, several cases can be distinguished. If an expert cannot be recruited from the local labor market, the receiving company must bear all expenditures.27 If an expert with comparable abilities 516 • 4 February 2002 Tax Notes International Special Reports 21Section 3.1.2, 2nd para. of the administrative principles. 22German administrative principles on the allocation of income of international related companies. For an English translation, see Kroppen/Eigelshoven, Chapter on Germany, in Tax Treatment of Transfer Pricing (Amsterdam 1987), ch. 8.2. 23Ref. No.: I R 103/00, Der Betrieb 2001, p. 2474, 2477. 24See Federal Ministry of Finance press release dated 13 July 1995, printed in DStR 1995, p. 1500, and Kroppen/Eigelshoven, supra note 22. 25Section 3.2.3 of the administrative principles. 26Section 3.4 of the administrative principles. 27Section 3.4.1 of the administrative principles. It is questionable whether the rules of the rotation procedure are at all applicable in the case of expert secondment
Report can be recruited on the local It should first of all be consid administrative principles here market, the general rules should red that an assigned employee view a period of three to five years apply(that is, a division of expen- who is part of a rotation system in which a substitution takes place ditures should be made between might become an expert. It is today as common. 28 It must be carefully the assigning and the receiving quite common that employees are investigated whether the general companies, in accordance with assigned so that the receiving labor turnover in the receiving sections 3.1.1 and 3.1.2). The third company can have access to the company and the particular case refers to the secondment of technical and product know-how of industry, respectively, deviates experts in a rotation procedure from the period mentioned in the Here. the rules of section 3.4.1 should also apply: The receiving Furthermore, it remains unclear administrative principles. In that ompany must bear all expenses if why the taxpayer should not be respect, one should also consider he employee,s operational area. it cannot find a compari expenses related to the assign Employees nowadays probably will employee on the labor market. ment. It is thus worth analyzing one emt Thus, it remains unclear how the the definition. According to the their entire working life. Thus, it is difference between a "mere expert administrative principles, a not feasible to reject a potential secondment,' and secondment under rotation may be defined rotation system is deemed to exist deduction if the taxpayer considers the reality of today s business life exactly. In both cases, the receiving where rotation takes place on an company bears the costs. ongoing basis. The rule that, according to E. Documentation section 3.4.2, applies in a rotation Section 5 deals with the procedure - that the assigning documentation requirements the company also has an operational German tax authorities taxpayer must fulfil regarding interest in the expert secondment cross-border employee nd thus should bear a part of the are at the cutting edge secondments. Taking into account costs-cannot be applied. If a when it comes to putting he decision of the german federal suitable comparable employee the allocation of costs Tax Court dated 17 October 2001.29 cannot be found on the labor however, it is questionable market. the interest of the between related whether the taxpayer is required receiving company may doubt companies on a basis to provide specific documentation essly be assumed A rotation for secondments. The following system for the position filled by that is at least binding documents might serve as that expert certainly won't change on the tax authorities anything in that regard. The precise proof of activity, such assumption rule included in as reports or minutes the section 3.4.2 thus cannot assigned employee has understood in its current form prepared for the assigning company One should also note that the company will face substantial examinations of comparative difficulties in finding an employee if the company performs central salaries in the local labor on the market who is comparable marke defined as someone who has indi- substitution of employees on a particular field. It is thus most continuous basis. However that likely that an enormous effort understanding is not reflected in section 3.4.2 of the administrative would be made to search for an Cf. Kuckhoff/Schreiber adequate expert, an expenditure principles. That criterion is he taxpayer would have to pay considered only a starting point for Betriebspruifung, (Beck Munchen 1997) Once again, it is the taxpayer who must be assumed The use of the must bear the costs for the 2For a detailed analysis, see documentation requirements and phrase"rotation system"is in fact Kroppen/Rasch/Roeder, Tax Notes Int'l, 10 the burden of proof. Thus, it ite confusing Doc 2001-30307(8 original pages); questionable whether the rules of the rotation procedure are at all whether a continuous substitution Wirtschaftsbriefe Fach 3 Deutschland, Gr applicable in the case of expert of employees might discriminate 2465.; Baumhoff, In secondment against the receiving company. The recht 2001, p.751 Tax Notes International 4 February2002·517
can be recruited on the local market, the general rules should apply (that is, a division of expenditures should be made between the assigning and the receiving companies, in accordance with sections 3.1.1 and 3.1.2). The third case refers to the secondment of experts in a rotation procedure. Here, the rules of section 3.4.1 should also apply: The receiving company must bear all expenses if it cannot find a comparable employee on the labor market. Thus, it remains unclear how the difference between a “mere expert secondment” and secondment under rotation may be defined exactly. In both cases, the receiving company bears the costs. The rule that, according to section 3.4.2, applies in a rotation procedure — that the assigning company also has an operational interest in the expert secondment and thus should bear a part of the costs — cannot be applied. If a suitable comparable employee cannot be found on the labor market, the interest of the receiving company may doubtlessly be assumed. A rotation system for the position filled by that expert certainly won’t change anything in that regard. The assumption rule included in section 3.4.2 thus cannot be understood in its current form. One should also note that the company will face substantial difficulties in finding an employee on the market who is comparable to the expert. An expert is usually defined as someone who has individual and specific abilities in a particular field. It is thus most likely that an enormous effort would be made to search for an adequate expert, an expenditure the taxpayer would have to pay. Once again, it is the taxpayer who must bear the costs for the documentation requirements and the burden of proof. Thus, it is questionable whether the rules of the rotation procedure are at all applicable in the case of expert secondment. It should first of all be considered that an assigned employee who is part of a rotation system might become an expert. It is today quite common that employees are assigned so that the receiving company can have access to the technical and product know-how of the assigning company. Furthermore, it remains unclear why the taxpayer should not be allowed to deduct the operational expenses related to the assignment. It is thus worth analyzing the definition. According to the administrative principles, a rotation system is deemed to exist if the company performs centralized human resource planning. The word “rotation” indicates a substitution of employees on a continuous basis. However, that understanding is not reflected in section 3.4.2 of the administrative principles. That criterion is considered only a starting point for determining whether a rotation must be assumed. The use of the phrase “rotation system” is in fact quite confusing. It is moreover questionable whether a continuous substitution of employees might discriminate against the receiving company. The administrative principles here view a period of three to five years in which a substitution takes place as common.28 It must be carefully investigated whether the general labor turnover in the receiving company and the particular industry, respectively, deviates from the period mentioned in the administrative principles. In that respect, one should also consider the employee’s operational area. Employees nowadays probably will not stay with one employer for their entire working life. Thus, it is not feasible to reject a potential deduction if the taxpayer considers the reality of today’s business life, where rotation takes place on an ongoing basis. E. Documentation Section 5 deals with the documentation requirements the taxpayer must fulfil regarding cross-border employee secondments. Taking into account the decision of the German Federal Tax Court dated 17 October 2001,29 however, it is questionable whether the taxpayer is required to provide specific documentation for secondments. The following documents might serve as examples: • precise proof of activity, such as reports or minutes the assigned employee has prepared for the assigning company; • examinations of comparative salaries in the local labor market; Tax Notes International 4 February 2002 • 517 Special Reports 28Cf. Kuckhoff/Schreiber, Verrechnungspreise in der Betriebsprüfung, (Beck München 1997), note 229. 29For a detailed analysis, see Kroppen/Rasch/Roeder, Tax Notes Int’l, 10 Dec. 2001, p. 1111, 2001 WTD 237-11, or Doc 2001-30307 (8 original pages); Kroppen/Rasch/Roeder, Internationale Wirtschaftsbriefe Fach 3 Deutschland, Gr. 1 p. 1787.; Wassermeyer, Der Betrieb 2001, p. 2465.; Baumhoff, Internationales Steuerrecht 2001, p. 751. German tax authorities are at the cutting edge when it comes to putting the allocation of costs between related companies on a basis that is at least binding on the tax authorities
Special Reports evidence regarding the amount II Final remarks and It seems extremely strange to of wage expenses before Conclusions for practice us that the so-called safe harb At first sight. it seems advanta- rule included in the original draft benefit tests regarding wag geous that German tax authorities version has not been included in expenses and profit contribu- re at the cutting edge when it the final version, A substantial tions of the assigned employ comes to putting the allocation of number of enterprises are expected costs between related companies to make use of that regulation. The new regulation presupposes that There are two main problems on a basis that is at least binding in the scope of a standardized with those documents. First the n the tax authorities. however Federal Tax Court has clearly after a closer look, the final result approach, the cost between the tated that german tax law does is far from perfect. Also, it remains assigning and the receiving enter- unclear how other countries will prise would have been appropriate not require taxpayers to submit specific transfer pricing documen- react to the regulation of alloca- if the assigning enterprise had tation. Thus, taxpayers-in spite tions. German tax authorities also borne 20 percent of the total costs of the rule of evidence as must answer why they didn't first That rule had been particularly principles-are not obligated to OECD level. Surely it is permitted tives beca by business representa- mentioned in the administrative try to find a consensus at the ontroversial audit issue would prepare any additional transfer pricing documents. It should be have been scotched immediately. Moreover that standardization stressed once again that the would surely have been compatible taxpayer is only required to submit with the principle of taxation after books. records, and business efficiency. Such a regulation papers, and to answer questions. 0 certainly would have made things easier, given that a presentation of The Federal ministry of he operational interests would Finance, once again, has failed to It is encouraging that have entailed considerable effort consider that domestic subsidiaries there now exists the are usually unable to obtain It remains to be seen how tax information from foreign relate possibility to negotiate a authorities will use the new parties. The Federal Tax Court uniform allocation administrative principles. In light held, in a decision dated 10 May standard with tax of experiences from past audits, 2001,31 that an obligation of the taxpayers should be armed against taxpayer would only be acceptable authorities substantial conflicts with tax au if a third party would have thorities. Thus, taxpayers are wel requested the right to demand dvised to document secondment documents from the other party to issues in as much detail as possible, the transaction. Therefore it is and to show up operational likely that the taxpayer will not be interests, even if the legal basis of able to provide any information the documentation list is more than about the amount of wage questionable. But it expenses before the assignment that there now exists the possibility o negotiate a uniform allocation Moreover it should be stressed to make the point that such an standard with tax authorities. That that tax authorities ask for the important trading nation as will certainly help mitigate impossible. The taxpayer will Germany cannot allow itself to be arguments in audits probably face difficulties in underrepresented on the advisory performing a so-called benefit test. board of the OECD First of all, the taxpayer will not be The problem of secondments able to obtain the necessary data has really come to the fore in the Cf. Becker, in Becker/Kroppen(Edit) related to the particular employee national area of secondment of Handbuch internationale if the taxpayer does not prepare spreise(Koln: Dr pecific documentation in that employees of Japanese parents to Schmidt verlag, 1999/2001),U number German subsidiaries. However, the 5.1.1. note 3 with further references, and respect. Also, the assigned problem doesn't end there; in fact, Wassermeyer, in Flick/Wassermey employee often will perform just the opposite is true. The issue B: pensteuerrecht( Koln services that might not be reflected of"secondment" is becoming more Dr. Otto Schmidt Verlag 1997/2001) by any allocation keys That and more a discussion point in tax section 1 AStG note 821 applies in particular to adminis- audits, and the trend can only get trative services and to highl worse under the current admini for an in-depth analysis, see Krop Eigelshoven, International Transfer aggregated operational areas trative principles Pricing Journal 2001, p. 226 4 February 2002 Tax Notes International
• evidence regarding the amount of wage expenses before assignment; and • benefit tests regarding wage expenses and profit contributions of the assigned employee. There are two main problems with those documents. First, the Federal Tax Court has clearly stated that German tax law does not require taxpayers to submit specific transfer pricing documentation. Thus, taxpayers — in spite of the rule of evidence as mentioned in the administrative principles — are not obligated to prepare any additional transfer pricing documents. It should be stressed once again that the taxpayer is only required to submit books, records, and business papers, and to answer questions.30 The Federal Ministry of Finance, once again, has failed to consider that domestic subsidiaries are usually unable to obtain information from foreign related parties. The Federal Tax Court held, in a decision dated 10 May 2001,31 that an obligation of the taxpayer would only be acceptable if a third party would have requested the right to demand documents from the other party to the transaction. Therefore, it is likely that the taxpayer will not be able to provide any information about the amount of wage expenses before the assignment. Moreover, it should be stressed that tax authorities ask for the impossible. The taxpayer will probably face difficulties in performing a so-called benefit test. First of all, the taxpayer will not be able to obtain the necessary data related to the particular employee if the taxpayer does not prepare specific documentation in that respect. Also, the assigned employee often will perform services that might not be reflected by any allocation keys. That applies in particular to administrative services and to highly aggregated operational areas. III. Final Remarks and Conclusions for Practice At first sight, it seems advantageous that German tax authorities are at the cutting edge when it comes to putting the allocation of costs between related companies on a basis that is at least binding on the tax authorities. However, after a closer look, the final result is far from perfect. Also, it remains unclear how other countries will react to the regulation of allocations. German tax authorities also must answer why they didn’t first try to find a consensus at the OECD level. Surely it is permitted to make the point that such an important trading nation as Germany cannot allow itself to be underrepresented on the advisory board of the OECD. The problem of secondments has really come to the fore in the national area of secondment of employees of Japanese parents to German subsidiaries. However, the problem doesn’t end there; in fact, just the opposite is true. The issue of “secondment” is becoming more and more a discussion point in tax audits, and the trend can only get worse under the current administrative principles. It seems extremely strange to us that the so-called safe harbor rule included in the original draft version has not been included in the final version. A substantial number of enterprises are expected to make use of that regulation. The new regulation presupposes that in the scope of a standardized approach, the cost between the assigning and the receiving enterprise would have been appropriate if the assigning enterprise had borne 20 percent of the total costs. That rule had been particularly welcome by business representatives because an especially controversial audit issue would have been scotched immediately. Moreover, that standardization would surely have been compatible with the principle of taxation after efficiency. Such a regulation certainly would have made things easier, given that a presentation of the operational interests would have entailed considerable effort. It remains to be seen how tax authorities will use the new administrative principles. In light of experiences from past audits, taxpayers should be armed against substantial conflicts with tax authorities. Thus, taxpayers are well advised to document secondment issues in as much detail as possible, and to show up operational interests, even if the legal basis of the documentation list is more than questionable. But it is encouraging that there now exists the possibility to negotiate a uniform allocation standard with tax authorities. That will certainly help mitigate arguments in audits. ✦ 518 • 4 February 2002 Tax Notes International Special Reports It is encouraging that there now exists the possibility to negotiate a uniform allocation standard with tax authorities. 30Cf. Becker, in Becker/Kroppen (Edit.), Handbuch Internationale Verrechnungspreise (Köln: Dr. Otto Schmidt Verlag, 1999/2001), U number 5.1.1, note 3 with further references, and Wassermeyer, in Flick/Wassermeyer/ Baumhoff (edit.), Außensteuerrecht (Köln Dr. Otto Schmidt Verlag 1997/2001), section 1 AStG note 821. 31Ref. No: I S3/01, DB 2001, p. 1180; for an in-depth analysis, see Kroppen/ Eigelshoven, International Transfer Pricing Journal 2001, p. 226