Ranked the #1 Transfer Pricing Advisor globally by International Tax Review Deloitte Touche Tohmatsu Global Transfer Pricing Group 7尺 ANSFER PRICING ALERTD 30Apri2003 TP Alert 03-009 Germany Adopts Transfer Pricing Documentation Requirements and Penalties By: Heinz-Klaus Kroppen and Stephan Rasch, Dusseldorf After months of discussion, the German Parliament (Bundestag) and the Federal Council (Bundesrat) on 11 April finally approved the changes to the General Tax Code regarding transfer pricing documentation and penalties. Thus, German tax law now incorporates harsh transfer pricing documentation and penalty provisions. the nain features of the new transfer pricing law are summarized below Documentation Requirements The new documentation requirements are found in section 90, paragraph 3 of the General Tax Code, and include the following highlights Taxpayers must prepare documentation regarding the manner and content of their business relationships with related parties Documentation comprises all economic and legal information for the determination of an agreement that follows the arm's length principle and other terms of business agreed to with related parties Taxpayers must submit documents within 60 days after the tax authorities request. The submission period may be extended in exceptional cases; Any extraordinary transactions must be contemporaneously documented The tax authorities should request transfer pricing documentation only within the scope of a field audit; al Documentation requirements are applicable not only to transactions between parate legal entities, but also to the allocation of profits between head offices and permanent establishments The Federal Ministry of Finance will publish a decree-law(Rechtsverordnung) determine the manner, content and extent of required documentation It is important to distinguish between the documentation requirements set forth in section 90, paragraph 3 of the General Tax Code and the detailed description of documentation requirements that will be included in the pending decree-law. Section 90, paragraph 3, sentence 5 of the General Tax Code provides that the German Federal Ministry of Finance will issue this decree-law to ensure the consistent application of the General Tax Code provision a preliminary draft of the decree-law has already been discussed in the tax literature(see Kroppen/Rasch, Worldwide Tax Daily, 10 March 2003, WTD 46-6)
30 April 2003 TP Alert 03-009 Germany Adopts Transfer Pricing Documentation Requirements and Penalties By: Heinz-Klaus Kroppen and Stephan Rasch, Düsseldorf After months of discussion, the German Parliament (Bundestag) and the Federal Council (Bundesrat) on 11 April finally approved the changes to the General Tax Code regarding transfer pricing documentation and penalties. Thus, German tax law now incorporates harsh transfer pricing documentation and penalty provisions. The main features of the new transfer pricing law are summarized below. Documentation Requirements The new documentation requirements are found in section 90, paragraph 3 of the General Tax Code, and include the following highlights: • Taxpayers must prepare documentation regarding the manner and content of their business relationships with related parties; • Documentation comprises all economic and legal information for the determination of an agreement that follows the arm's length principle and other terms of business agreed to with related parties; • Taxpayers must submit documents within 60 days after the tax authorities’ request. The submission period may be extended in exceptional cases; • Any extraordinary transactions must be contemporaneously documented; • The tax authorities should request transfer pricing documentation only within the scope of a field audit; and • Documentation requirements are applicable not only to transactions between separate legal entities, but also to the allocation of profits between head offices and permanent establishments. The Federal Ministry of Finance will publish a decree-law (Rechtsverordnung) to determine the manner, content and extent of required documentation. It is important to distinguish between the documentation requirements set forth in section 90, paragraph 3 of the General Tax Code and the detailed description of documentation requirements that will be included in the pending decree-law. Section 90, paragraph 3, sentence 5 of the General Tax Code provides that the German Federal Ministry of Finance will issue this decree-law to ensure the consistent application of the General Tax Code provision. A preliminary draft of the decree-law has already been discussed in the tax literature (see Kroppen/Rasch, Worldwide Tax Daily, 10 March 2003, WTD 46-6)
Burden of proof Because the new tax law shifts the responsibility for determining and documenting the appropriateness of transfer prices to the taxpayer, it is up to the taxpayer to provide comparable data by using third-party data sources, such as databases. The underlying problem when seeking third-party comparable data is the limited availability of truly comparable data. A comparable uncontrolled price, for example requires a high degree of product and transactional comparability which in practice is almost nonexistent, even when internal third-party transactions are present. Other transactional methods also require a high level of comparability, including comparability of accounting practices, because accounting practices affect gross margins. However, the information required to make these accounting adjustments is almost never available. Thus, it is often difficult to apply a transactional method, and the cost to do so and to document the application is prohibitively high. Because of the difficulties inherent in applying transactional methods, the transactional net margin method (TNMM) is likely to be widely applied even though in the past the tax authorities have been reluctant to accept the use of this method Estimation of taxable income Failure to comply with the transfer pricing documentation requirements will expose taxpayers to severe consequences. If the taxpayer does not provide documentation, if the documentation submitted is insufficient or if the documentation for extraordinary transactions was not contemporaneously prepared, the tax authorities are entitled to assume that taxable income is higher than the income the taxpayer eported. One important"weapon"the tax authorities have in making an adjustment is that they can use the most disadvantageous point in the arm's length range of results when adjusting the taxpayer s income Penalties The law provides for the following penalties Minimum Range Maximum Documentation not E5,000 10% of the No absolute income adjustment maximum Submitted documentation does E 5,000 5 -10% of the No bsolute not comply with income adjustment maximum requirements Late submission of usable E 100 per day E 1 million documentation As noted d afte a 5-10% penalty would be applied to the income adjustment determined the tax authorities adjust taxable income. this could lead to significant penalties, particularly when the tax authorities put the taxpayer at the most disadvantageous point in the range. In practice, it has not been unusual for the German tax authorities to try to impose income adjustments that amount to several
Burden of proof Because the new tax law shifts the responsibility for determining and documenting the appropriateness of transfer prices to the taxpayer, it is up to the taxpayer to provide comparable data by using third-party data sources, such as databases. The underlying problem when seeking third-party comparable data is the limited availability of truly comparable data. A comparable uncontrolled price, for example, requires a high degree of product and transactional comparability, which in practice is almost nonexistent, even when internal third-party transactions are present. Other transactional methods also require a high level of comparability, including comparability of accounting practices, because accounting practices affect gross margins. However, the information required to make these accounting adjustments is almost never available. Thus, it is often difficult to apply a transactional method, and the cost to do so and to document the application is prohibitively high. Because of the difficulties inherent in applying transactional methods, the transactional net margin method (TNMM) is likely to be widely applied, even though in the past the tax authorities have been reluctant to accept the use of this method. Estimation of Taxable Income Failure to comply with the transfer pricing documentation requirements will expose taxpayers to severe consequences. If the taxpayer does not provide documentation, if the documentation submitted is insufficient, or if the documentation for extraordinary transactions was not contemporaneously prepared, the tax authorities are entitled to assume that taxable income is higher than the income the taxpayer reported. One important “weapon” the tax authorities have in making an adjustment is that they can use the most disadvantageous point in the arm’s length range of results when adjusting the taxpayer’s income. Penalties The law provides for the following penalties: Minimum Range Maximum Documentation not submitted € 5,000 5 – 10% of the income adjustment No absolute maximum Submitted documentation does not comply with requirements € 5,000 5 – 10% of the income adjustment No absolute maximum Late submission of usable documentation € 100 per day € 1 million As noted above, a 5-10% penalty would be applied to the income adjustment determined after the tax authorities adjust taxable income. This could lead to significant penalties, particularly when the tax authorities put the taxpayer at the most disadvantageous point in the range. In practice, it has not been unusual for the German tax authorities to try to impose income adjustments that amount to several million euro
The German tax authorities have chosen a phased approach for the introduction of penalties. Although documentation will be required for transactions entered into after 31 December 2002, the penalty provisions will not become effective until six months after the decree-law is introduced and not before 1 January 2004 outlook Although the German legislature has finally introduced mandatory transfer pricing documentation and penalty provisions in german tax law, the precise documentation requirements the taxpayer must fulfil will not be finalized until the decree-law is issued. While companies with current transactions in Germany know the importance of written intercompany agreements the new section 90 puts particular emphasis on documenting the legal circumstances. The latter should include appropriate intercompany agreements Taxpayers will be well advised to implement a proper documentation system including a storage process in the near future. from a practical point of view it is advisable not to postpone the documentation process because of the 60-day requirement for presenting documentation and the harsh penalties related to it. Taxpayers should also keep in mind that preparing documentation retroactively is even more burdensome and costly than preparing it contemporaneously For more information on this alert, please contact Heinz-Klaus Kroppen kroppen @deloitte. de Stephan Rasch rasch@deloitte. de or your local Deloitte Touche transfer pricing specialist c 2003 Deloitte Touche LLP. Deloitte Touche refers to deloitte Touche llp and related entities. Al rights reserved. For full legal disclaimer, click here
The German tax authorities have chosen a phased approach for the introduction of penalties. Although documentation will be required for transactions entered into after 31 December 2002, the penalty provisions will not become effective until six months after the decree-law is introduced, and not before 1 January 2004. Outlook Although the German legislature has finally introduced mandatory transfer pricing documentation and penalty provisions in German tax law, the precise documentation requirements the taxpayer must fulfil will not be finalized until the decree-law is issued. While companies with current transactions in Germany know the importance of written intercompany agreements, the new section 90 puts particular emphasis on documenting the legal circumstances. The latter should include appropriate intercompany agreements. Taxpayers will be well advised to implement a proper documentation system, including a storage process, in the near future. From a practical point of view, it is advisable not to postpone the documentation process because of the 60-day requirement for presenting documentation, and the harsh penalties related to it. Taxpayers should also keep in mind that preparing documentation retroactively is even more burdensome and costly than preparing it contemporaneously. click here. For more information on this alert, please contact Heinz-Klaus Kroppen hkroppen@deloitte.de Stephan Rasch srasch@deloitte.de or your local Deloitte & Touche transfer pricing specialist. © 2003 Deloitte & Touche LLP. Deloitte & Touche refers to Deloitte & Touche LLP and related entities. All rights reserved. For full legal disclaimer,
