《税法——转移定价》英文参考文献：02 Documentation_12 Federal Council to Decide on German Transfer Pricing Documentation Regulations

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 worldwide tax dail Federal council to Decide on german Transfer 级N8-0928或@8品2°9385g Pricing Documentation Regulations by Heinz-Klaus Kroppen and Stephan rasch fore. the future of the tax reform act and the transfer Heinz-Klaus Kroppen, LL.M. and Stephan pricing documentation rules remains unclear Rasch are with deloitte touche Nevertheless, the Federal Ministry of Finance Copyright o Deloitte & Touche, 2002 has prepared a first draft of the rechtsuerordnung (decree-law) regarding the manner, content, and doc umentation required under section 90, paragraph 3 The German Bundesrat (upper house of Parlia- of the General Tax Co ment, or Federal Council) will make a final decision on 14 March on whether to pass the tax reform bill Draft section 90, paragraph 3, sentence 5 of the which includes the transfer pricing documentatio General Tax Code reads as follows "To ensure a con sistent application of the law the Federal Ministry of regulations. The majority of the governing coalition Finance in accordance with the Federal Council will in the Bundestag (lower house of Parliament) ap- be authorized to determine the manner, content, ar proved the latest bill on 21 February 2 extent of the documentation in a decree-Lau emp? The conservative party, which holds a majority in sis added the Bundesrat, has indicated that they may reject the The decree-law therefore amends draft sections whole tax reform package, with the exception There- taxpayer documentation duties. However, draft sec- of pro- 90 and 162 of the General Tax Code which overn posed chang e co orporate tax system tions 90 and 162 only outline, in general terms, that a axpayer is required to prepare documentation for transfer pricing purposes. The Federal Ministry of Finance, under the proposed decree-law, is seeking to See Kroppen/Rasch, 11 Transfer 11 02; Kroppen/Rasch, Tax No See Kroppen/Rasch, Tax Notes Int'l, 18 Nov 2002, pp. 666 ff. 1035 f; Baumhoff, Internationales Steuerrecht 2003, pp. 1 ff. and Tax Notes Int', 10 Dec 2001, pp. 1111 ff for a discussion of For a first analysis see Kroppen/Rasch, 11 Transfer Pricing the reasons that caused the Federal Ministry of Finance to ena Report 885, 10 Feb. 2003; for an unofficial translation, see 11 statutory provisions regarding transfer pricing documentation Transfer Pricing Report 873, 19 Feb 2003 sues and penalties. Tax Analysts- Worldwide Tax Daily

Federal Council to Decide on German Transfer Pricing Documentation Regulations by Heinz-Klaus Kroppen and Stephan Rasch The German Bundesrat (upper house of Parlia￾ment, or Federal Council) will make a final decision on 14 March on whether to pass the tax reform bill, which includes the transfer pricing documentation regulations.1 The majority of the governing coalition in the Bundestag (lower house of Parliament) ap￾proved the latest bill on 21 February.2 The conservative party, which holds a majority in the Bundesrat, has indicated that they may reject the whole tax reform package, with the exception of pro￾posed changes to the corporate tax system. There￾fore, the future of the tax reform act and the transfer pricing documentation rules remains unclear. Nevertheless, the Federal Ministry of Finance has prepared a first draft of the Rechtsverordnung (decree-law) regarding the manner, content, and doc￾umentation required under section 90, paragraph 3 of the General Tax Code. Draft section 90, paragraph 3, sentence 5 of the General Tax Code reads as follows: “To ensure a con￾sistent application of the law the Federal Ministry of Finance in accordance with the Federal Council will be authorized to determine the manner, content, and extent of the documentation in a decree-law [empha￾sis added].” The decree-law therefore amends draft sections 90 and 162 of the General Tax Code, which govern taxpayer documentation duties.3 However, draft sec￾tions 90 and 162 only outline, in general terms, that a taxpayer is required to prepare documentation for transfer pricing purposes. The Federal Ministry of Finance, under the proposed decree-law, is seeking to Tax Analysts — Worldwide Tax Daily 1 Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 worldwide tax daily Heinz-Klaus Kroppen, LL.M. and Stephan Rasch are with Deloitte & Touche. Copyright © Deloitte & Touche, 2002 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 1 See Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003; Rasch/Roeder, 11 Transfer Pricing Report 731, 11 Dec. 2002; Kroppen/Rasch, Tax Notes Int’l, 18 Nov. 2002, pp. 666 ff.; Kroppen/Rasch, Internationale Wirtschaftsbriefe 13 Nov. 2002, pp. 1035 f.; Baumhoff, Internationales Steuerrecht 2003, pp. 1 ff. 2 For a first analysis see Kroppen/Rasch, 11 Transfer Pricing Report 885, 10 Feb. 2003; for an unofficial translation, see 11 Transfer Pricing Report 873, 19 Feb. 2003. 3 See Kroppen/Rasch, Tax Notes Int’l, 18 Nov. 2002, pp. 666 ff., and Tax Notes Int’l, 10 Dec. 2001, pp. 1111 ff for a discussion of the reasons that caused the Federal Ministry of Finance to enact statutory provisions regarding transfer pricing documentation is￾sues and penalties

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 clarify the documents that a taxpayer must prepare. length principle. To comply with the arm s-length The proposed decree-law also addresses timing, us- principle, the taxpayer must apply an appropriate bility, and storage requirements with which a tax- method to establish the transfer price must comply The taxpayer is therefore required to document, 或N8 Formal laws, including sections 90 and 162 of the before the transaction, how the conditions, including General Tax Code, are enacted by the bundestag, pricing, comply with the arms-length principle. The the usual legislative process, and, if necessary, by the taxpayer must consider, at the time the transaction Bundesrat takes place, any available information that the ta However, a decree-law is a specific source of law payer may obtain with a reasonable effort, including under the German legal system, and it may only be accessible data from transactions with third parties passed by the Federal Ministry of Finance. However, N22=× The draft decree-law stipulates that an internal under draft section 90 of the General Tax Code, the transfer pricing guideline, based on such consider- Bundesrat must also approve it before it becomes en- ations and the arms-length principle, is sufficient for acted.4 the cases covered by the guidelines The decree-law is one of the key components of the planned transfer pricing legislation because it Moreover, the taxpayer is required under section seeks to precisely define the taxpayers duties. 1 to gather additional information and data after the transaction has taken place. This enables the tax au The decree-law binds the tax authorities, the tax- thorities to ascertain whether a third party may have payer, and the courts. Therefore, it differs from tax made an adjustment because of changed facts and regulations that only bind the tax authorities This article analyzes the impact of the proposed Additionally, section 1 provides that the condi decree-law on transfer pricing documentation rules tions must be reviewed: if the taxpayer is making d the impact on German-based companies and losses from its total business relationships with re- subsidiaries, as well as permanent establishments of lated parties, or part of those relationships, which oreign-based multinational enterprises third parties would not have accepted on a continu ing basis; or if the parties subsequently agreed upon Outline of the decree-Law adjustments The draft decree-law includes 11 sections Section 2 provides that the documentation must Sections51 to 5 explain: that the taxpayer must de- be based on the terms and conditions of the actual 8939a品安 termine and document its transfer pricing under the arms-length test; the basic elements regarding man- transaction and must refer to the appropriateness of ner,content, and extent of the documentation; the tation duty depends on the facts and circumstances garding tax authorities' requests Section 6 details the documents that the taxpayer Under section 2. the documentation must detail must prepare Sections 7 to 11 cover: the appropriate the business relationships and economic facts. Re- companies; the manner of appropriate record- require data on the terms and conditions, including tion;and the application of the decree-law to allocat- that third parties in comparable transactions would ing head-office and Pe profits have agreed on or achieved. Application of the Arms-Length Principle, The taxpayer must document comparable data gregation, and Timing (prices, profit markups, gross margins, and net mar- mentation stating whether, and to what extent, the ties. To perform a plausibility check (hypothetical tionships with related parties, based on the arm's. ternal data, for example, forecasts and planning data. Third-party comparable data must be consid ered if it could be obtained with reasonable efforts Finally, the taxpayer must explain why the ap- plied transfer pricing method is appropriate. How dSee Rasch/Roeder, 11 Transfer Pricing Report 731, 12/11/02. ever, the taxpayer is not required to prepare docu- Unless otherwise noted, sections cited in the following refer mentation for more than one transfer pricing to the draft decree-law method Tax Analysts- Worldwide Tax Daily

clarify the documents that a taxpayer must prepare. The proposed decree-law also addresses timing, us￾ability, and storage requirements with which a tax￾payer must comply. Formal laws, including sections 90 and 162 of the General Tax Code, are enacted by the Bundestag, in the usual legislative process, and, if necessary, by the Bundesrat. However, a decree-law is a specific source of law under the German legal system, and it may only be passed by the Federal Ministry of Finance. However, under draft section 90 of the General Tax Code, the Bundesrat must also approve it before it becomes en￾acted.4 The decree-law is one of the key components of the planned transfer pricing legislation because it seeks to precisely define the taxpayer’s duties. The decree-law binds the tax authorities, the tax￾payer, and the courts. Therefore, it differs from tax regulations that only bind the tax authorities. This article analyzes the impact of the proposed decree-law on transfer pricing documentation rules and the impact on German-based companies and subsidiaries, as well as permanent establishments of foreign-based multinational enterprises. Outline of the Decree-Law The draft decree-law includes 11 sections. Sections5 1 to 5 explain: that the taxpayer must de￾termine and document its transfer pricing under the arm’s-length test; the basic elements regarding man￾ner, content, and extent of the documentation; the timing of the documentation; and the principles re￾garding tax authorities’ requests. Section 6 details the documents that the taxpayer must prepare. Sections 7 to 11 cover: the appropriate standard of documentation; exemptions for small companies; the manner of appropriate record￾keeping; the retention period for storing documenta￾tion; and the application of the decree-law to allocat￾ing head-office and PE profits. Application of the Arm’s-Length Principle, Aggregation, and Timing Under section 1, the taxpayer must prepare docu￾mentation stating whether, and to what extent, the taxpayer has generated income from business rela￾tionships with related parties, based on the arm’s￾length principle. To comply with the arm’s-length principle, the taxpayer must apply an appropriate method to establish the transfer price. The taxpayer is therefore required to document, before the transaction, how the conditions, including pricing, comply with the arm’s-length principle. The taxpayer must consider, at the time the transaction takes place, any available information that the tax￾payer may obtain with a reasonable effort, including accessible data from transactions with third parties. The draft decree-law stipulates that an internal transfer pricing guideline, based on such consider￾ations and the arm’s-length principle, is sufficient for the cases covered by the guidelines. Moreover, the taxpayer is required under section 1 to gather additional information and data after the transaction has taken place. This enables the tax au￾thorities to ascertain whether a third party may have made an adjustment because of changed facts and circumstances. Additionally, section 1 provides that the condi￾tions must be reviewed: if the taxpayer is making losses from its total business relationships with re￾lated parties, or part of those relationships, which third parties would not have accepted on a continu￾ing basis; or if the parties subsequently agreed upon adjustments. Section 2 provides that the documentation must be based on the terms and conditions of the actual transaction and must refer to the appropriateness of the related transfer price. The extent of the documen￾tation duty depends on the facts and circumstances of each case and the transfer pricing method used. Under section 2, the documentation must detail the business relationships and economic facts. Re￾cords detailing the appropriateness of transfer prices require data on the terms and conditions, including agreed prices, cost allocations, and profit margins that third parties in comparable transactions would have agreed on or achieved. The taxpayer must document comparable data (prices, profit markups, gross margins, and net mar￾gins) from transactions with or between third par￾ties. To perform a plausibility check (hypothetical arm’s-length test), the taxpayer must also record in￾ternal data, for example, forecasts and planning data. Third-party comparable data must be consid￾ered if it could be obtained with reasonable efforts. Finally, the taxpayer must explain why the ap￾plied transfer pricing method is appropriate. How￾ever, the taxpayer is not required to prepare docu￾mentation for more than one transfer pricing method. 2 Tax Analysts — Worldwide Tax Daily Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 4 See Rasch/Roeder, 11 Transfer Pricing Report 731, 12/11/02. 5 Unless otherwise noted, sections cited in the following refer to the draft decree-law

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 Generally, the taxpayer must keep records for a description of the taxpayers individual activi each transaction. Transactions that take place dur ties, for example, provision of services, manufac- ing a fiscal year may be gathered in groups of trans- turing, and distribution of assets actions if they: are of similar type and are processed N8 based on clear terms that have been agreed upon in a summary of contracts regarding business rela- advance; are linked to each other; or are partial tionships with related parties transactions within a total transaction. Further when examining the appropriateness of transactions information regarding the enterprises business that have been aggregated the examination must be strategies able to be done without having to separate each information regarding set-offs applied; and transaction Section 3 entitles the taxpayer to prepare doc a summary of the taxpayers transfer pricing N82928或 rulings and advance pricing agreements with uments either in writing or electronic form, and sec- tion 4 deals with contemporaneous documentation. foreign tax authorities, and competent authori- Draft section 90 paragraph 3 of the General Tax Code ty proceedings. currently states that contemporaneous documenta The taxpayer must also prepare documentation tion is only required for extraordinary transactions eg elationships with related p Documentation, under section 4, is prepared contem- ties. The taxpayers summary must address the kind poraneous if it is prepared in close timely connection and amount of transactions with individual related with the transaction. There is a presumption that parties, including procurement of goods, services, documentation has been prepared contemporane- lending activities, and assignment of intangible ously if it was prepared within six months after the property transaction was concluded The taxpayers functional and risk analysis must Section 4 defines"extraordinary transaction"as a address: the functions performed and risks ansaction that is not in the ordinary business and by the taxpayer and related parties, intangible as has a substantial impact on the amount of the tax- sets, contractual conditions, and market conditions payers income. Examples of extraordinary transac tions include: asset transfers in the context of re- The taxpayers transfer pricing analysis must clude structuring measures; substantial changes in functions performed by the taxpayer; business trans- Information about the transfer pricing method actions after a change in business strategy; and the its application, and the decisionmaking process conclusion or modification of significant long-term for determining a price or a cost allocation agreements When the cost plus method is applied, records Section 5 states that generally the documentation regarding the cost accounting are required. If a should only be demanded in the scope of a field audit. cost-sharing agreement is concluded, records as Section 5 is similar to draft section 90, paragraph 3, to the other participants, the cost allocation key, and the expected benefit from participating in sentence 6. of the general Tax Code. However. sec- the cost sharing are also tion 5 clarifies that the 60-day period for submitting the documents must be complied when the tax audit Reasons for the appropriateness of the price de- is postponed at the taxpayers request termination and the cost allocation based on the arms-length principle. Generally, a mere profit Mandatory Documentation comparison is insufficient to justify appropri Under section 6. the core of the draft decree-law ateness. If the taxpayer has used comparable prices and financial data from independent en- the taxpayer must prepare documentation regarding general information, percentage shareholdings, busi- terprises to determine transfer prices or a cost allocation, the prices and data, their compara ness operations, and organizational structure bility and any adjustments, will have to be pre including a description of the percentage shareholding between the taxpayer and related parties, with Records regarding adjustments at the taxpayer, particularly if these result fre m transie r pricing which the taxpayer maintains business rela adjustments or advance pricing agreements tionships within the meaning of section 1, para from a related party' s tax authorities graph 2 of the Foreign Tax Code Records regarding the reasons for losses and tional group structure, including modifications a description of the organizational and opera provisions for settling the loss situation, if the taxpayer accounts for a negative result on its tax Tax Analysts- Worldwide Tax Daily

Generally, the taxpayer must keep records for each transaction. Transactions that take place dur￾ing a fiscal year may be gathered in groups of trans￾actions if they: are of similar type and are processed based on clear terms that have been agreed upon in advance; are linked to each other; or are partial transactions within a total transaction. Further, when examining the appropriateness of transactions that have been aggregated, the examination must be able to be done without having to separate each transaction. Section 3 entitles the taxpayer to prepare doc￾uments either in writing or electronic form, and sec￾tion 4 deals with contemporaneous documentation. Draft section 90 paragraph 3 of the General Tax Code currently states that contemporaneous documenta￾tion is only required for extraordinary transactions. Documentation, under section 4, is prepared contem￾poraneous if it is prepared in close timely connection with the transaction. There is a presumption that documentation has been prepared contemporane￾ously if it was prepared within six months after the transaction was concluded. Section 4 defines “extraordinary transaction” as a transaction that is not in the ordinary business and has a substantial impact on the amount of the tax￾payer’s income. Examples of extraordinary transac￾tions include: asset transfers in the context of re￾structuring measures; substantial changes in functions performed by the taxpayer; business trans￾actions after a change in business strategy; and the conclusion or modification of significant long-term agreements. Section 5 states that generally the documentation should only be demanded in the scope of a field audit. Section 5 is similar to draft section 90, paragraph 3, sentence 6, of the General Tax Code. However, sec￾tion 5 clarifies that the 60-day period for submitting the documents must be complied when the tax audit is postponed at the taxpayer’s request. Mandatory Documentation Under section 6, the core of the draft decree-law, the taxpayer must prepare documentation regarding general information, percentage shareholdings, busi￾ness operations, and organizational structure, including: • a description of the percentage shareholdings between the taxpayer and related parties, with which the taxpayer maintains business rela￾tionships within the meaning of section 1, para￾graph 2 of the Foreign Tax Code; • a description of the organizational and opera￾tional group structure,including modifications; • a description of the taxpayer’s individual activi￾ties, for example, provision of services, manufac￾turing, and distribution of assets; • a summary of contracts regarding business rela￾tionships with related parties; • information regarding the enterprise’s business strategies; • information regarding set-offs applied; and • a summary of the taxpayer’s transfer pricing rulings and advance pricing agreements with foreign tax authorities, and competent authori￾ty proceedings. The taxpayer must also prepare documentation regarding business relationships with related par￾ties. The taxpayer’s summary must address the kind and amount of transactions with individual related parties, including procurement of goods, services, lending activities, and assignment of intangible property. The taxpayer’s functional and risk analysis must address: the functions performed and risks assumed by the taxpayer and related parties, intangible as￾sets, contractual conditions, and market conditions. The taxpayer’s transfer pricing analysis must include: • Information about the transfer pricing method, its application, and the decisionmaking process for determining a price or a cost allocation. When the cost plus method is applied, records regarding the cost accounting are required. If a cost-sharing agreement is concluded, records as to the other participants, the cost allocation key, and the expected benefit from participating in the cost sharing are also necessary. • Reasons for the appropriateness of the price de￾termination and the cost allocation based on the arm’s-length principle. Generally, a mere profit comparison is insufficient to justify appropri￾ateness. If the taxpayer has used comparable prices and financial data from independent en￾terprises to determine transfer prices or a cost allocation, the prices and data, their compara￾bility and any adjustments, will have to be pre￾sented. • Records regarding adjustments at the taxpayer, particularly if these result from transfer pricing adjustments or advance pricing agreements from a related party’s tax authorities. • Records regarding the reasons for losses and provisions for settling the loss situation, if the taxpayer accounts for a negative result on its tax Tax Analysts — Worldwide Tax Daily 3 Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 balance sheet for more than three successive fis- fied when determining transfer prices for transac- tions between the taxpayer and related parties. Al- Appropriate Standard of Documentation though the clarification is correct, it remains doubtful? whether the arms-length test may be en N8 Section 7 addresses the usability of records. The acted by changing the procedural law in the general decree-law requires that the records must permit a Tax Code. The arm's-length principle should be in competent third party to get an overview, within a corporated into the income tax law reasonable period of time, of the facts and circum- tances of the transactions between the taxpayer and Third-Party Comparable Data related parties, and whether the taxpayer acted in ndustry demanded that companies should only accordance with the arm,s-length principle be required to document their thinking at the time Records that do not fulfil that criterion are prices were set. This is now explicitly stated in sec N82928或 deemed to be unusable. which occurs when the re- tion 1 improper transfer pricing method, or the documenta- that the taxpayer should not be required to provide a comparable data from data banks and external con- Section 8 provides special rules for small enter sultants. 8 Taking into account the current wording of prises, which apply when: the sum of the arms section 1, industry was only partly successful on this Issue length prices for the supply of goods from related party transactions does not exceed 5 million euros; or Under section 2, the taxpayer must use when the sum of arms-length remuneration for the third-party data if the taxpayer is able to obtain the supply of services from related party transactions data by making reasonable efforts. It remains, how amounts does not exceed 500 000 euros. The docu- ever. unclear as to what constitutes reasonable ef- mentation duties set forth in draft section 90, para- forts. There is no clear guidance on what the tax au- graph 3 of the General Tax Code, and in the draft de- thorities will require in future tax audits cree-law, are deemed to be satisfied if the taxpayer provides information and submits documents upon The taxpayer must also collect information after the transaction has occurred. to enable the tax au- request of the tax authorities within the 60-day peri- thorities to check whether the situation has changed and an adjustment is required under the arms- Finally, sections 9 to 11 address recordkeeping, length test. This obligation is an unacceptable bur- the application of the provisions to profit allocation den for the taxpayer because the documentation duty between head offices and PEs, and when the de- goes beyond the considerations that caused the cree-law becomes effective transaction. It unclear when the obligation termi- Section 9 emphasizes that the documentation the traditional German view. which has conde must be stored as appropriate books or electronically. the U.S. commensurate-with-income standard ned Generally, the taxpayer must retain the records for 10 years. However, the retention period keeps run Although the decree-law does not explicitly re- ning so long as the records are important for taxation quire transfer pricing guidelines, such guidelines purposes for which the period of determination provide considerable benefits for documentation obli (festsetzungsfrist) is unexpired. The storage of doc- gations and will therefore be more common in the uments may also take place abroad future The decree-law requires that all comparable data Analysis used by the taxpayer must be documented, including Arms-Length Principle prices, markup, gross margins, net margins, and Similar to the latest version of draft section 90, German authorities will become more receptive to paragraph 3 of the General Tax Code, section 1 pro- profit-based methods than they have been in the vides that the arm s- length standard must be satis past. Such a step would be appropriate, taking into bThe 60-day period might be extended in exceptional cases, cf. an unofficial translation see 11 Transfer Pricing Report 873, 19 Feb. 2003; for an analysis see Kroppen/Rasch, 11 Transfer icing Report 885, 19 Feb 2003 Kroppen/Rasch, Tax Notes Int'l, 18 Nov 2002, pp 666 ff. Tax Analysts- Worldwide Tax Daily

balance sheet for more than three successive fis￾cal years. Appropriate Standard of Documentation Section 7 addresses the usability of records. The decree-law requires that the records must permit a competent third party to get an overview, within a reasonable period of time, of the facts and circum￾stances of the transactions between the taxpayer and related parties, and whether the taxpayer acted in accordance with the arm’s-length principle. Records that do not fulfil that criterion are deemed to be unusable, which occurs when the re￾cords are incomplete, the taxpayer uses an evidently improper transfer pricing method, or the documenta￾tion is contradictory. Section 8 provides special rules for small enter￾prises, which apply when: the sum of the arm’s￾length prices for the supply of goods from related party transactions does not exceed 5 million euros; or when the sum of arm’s-length remuneration for the supply of services from related party transactions amounts does not exceed 500,000 euros. The docu￾mentation duties set forth in draft section 90, para￾graph 3 of the General Tax Code, and in the draft de￾cree-law, are deemed to be satisfied if the taxpayer provides information and submits documents upon request of the tax authorities’ within the 60-day peri￾od.6 Finally, sections 9 to 11 address recordkeeping, the application of the provisions to profit allocation between head offices and PEs, and when the de￾cree-law becomes effective. Section 9 emphasizes that the documentation must be stored as appropriate books or electronically. Generally, the taxpayer must retain the records for 10 years. However, the retention period keeps run￾ning so long as the records are important for taxation purposes for which the period of determination (Festsetzungsfrist) is unexpired. The storage of doc￾uments may also take place abroad. Analysis Arm’s-Length Principle Similar to the latest version of draft section 90, paragraph 3 of the General Tax Code, section 1 pro￾vides that the arm’s-length standard must be satis￾fied when determining transfer prices for transac￾tions between the taxpayer and related parties. Al￾though the clarification is correct, it remains doubtful7 whether the arm’s-length test may be en￾acted by changing the procedural law in the General Tax Code. The arm’s-length principle should be in￾corporated into the income tax law. Third-Party Comparable Data Industry demanded that companies should only be required to document their thinking at the time prices were set. This is now explicitly stated in sec￾tion 1. However, the business community also argued that the taxpayer should not be required to provide comparable data from data banks and external con￾sultants.8 Taking into account the current wording of section 1, industry was only partly successful on this issue. Under section 2, the taxpayer must use third-party data if the taxpayer is able to obtain the data by making reasonable efforts. It remains, how￾ever, unclear as to what constitutes reasonable ef￾forts. There is no clear guidance on what the tax au￾thorities will require in future tax audits. The taxpayer must also collect information after the transaction has occurred, to enable the tax au￾thorities to check whether the situation has changed and an adjustment is required under the arm’s￾length test. This obligation is an unacceptable bur￾den for the taxpayer because the documentation duty goes beyond the considerations that caused the transaction. It unclear when the obligation termi￾nates. Also, the requirement seems to deviate from the traditional German view, which has condemned the U.S. commensurate-with-income standard. Although the decree-law does not explicitly re￾quire transfer pricing guidelines, such guidelines provide considerable benefits for documentation obli￾gations and will therefore be more common in the future. The decree-law requires that all comparable data used by the taxpayer must be documented, including prices, markup, gross margins, net margins, and profit splits. This could support the view that the German authorities will become more receptive to profit-based methods than they have been in the past. Such a step would be appropriate, taking into 4 Tax Analysts — Worldwide Tax Daily Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 6 The 60-day period might be extended in exceptional cases, cf. draft section 90, paragraph 3, sentence 9 General Tax Code. For an unofficial translation see 11 Transfer Pricing Report 873, 19 Feb. 2003; for an analysis see Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003. 7 Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003. 8 Kroppen/Rasch, Tax Notes Int’l, 18 Nov. 2002, pp. 666 ff

Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 account the importance of profit-based approaches in This shows that the tax authorities do not kne practice ow large MNEs work. It is impossible for MNEs to However, the decree-law states in section 6 that document every transaction. A reasonable documen ne taxpayer to doc- generally mere profit comparisons cannot justify the ument major transaction flows within the group 或N8 is again a sign that the german authorities are un Section 2 allows the aggregation of transactions willing to accept that, since 1995, when the oECd However, the Federal Ministry of Finance obviously principles were introduced, the world has changed does not want to acknowledge the use of a multi and often profit based approaches are the only ple-year analysis. Section 2 clearly states that the cost-effective means for a taxpayer to document transactions of a fiscal year may be aggregated under the conditions described above N82928或 Aggregation of Transactions Although the question of a multiple-year analysis The German tax administration has a clear pre should not be dealt with in the documentation regu erence for a transactional approach. Section 2.1.2. of lations, it is remarkable that the Federal Ministry of the Administrative Principles of 1983 already em Finance has limited the aggregation to transactions phasizes that the transfer price analysis should be within a fiscal year. This deviates from the multiple- based on every transaction. If one followed the word. year analysis, which, under certain conditions, is ing of the administrative principles, the administra supported by the oeCd, as well as by the u.stax tions preference would go much further than the administration. 10 OECD, which also allows companies to aggregate cer The multiple-year analysis is a tool for analyzing tain transactions(see paragraph 1. 42 of the OeCd the effects of business or product life cycles, currency 3 Guidelines) exchange risks, other business risk factors, or other influences that might affect the transfer prices It is fair to assume, however, that German princ- These influences might better be judged over a long aggregation is the only feasible approach to deter- period. If, for instance, a company incurs losses in the transactions are interrelated, multiple transac- a market slow down, and if the company derives ex- tions take place in a short period of time, or several traordinary profits in earlier or later years, the com transactions are part of a package deal pany's financials should be aggregated. 1 This is now acknowledged by The multiple-year analysis is sometimes rejected cree-law. However, the requirements set forth by tax auditors who argue that it violates a funda- mental precept of German tax law that requires tax the aggregated transactions must be based on terms to be based on the annual accounting period (Prinzip that have been agreed upon in advance. The taxpayer der Abschnittsbesteuerung). Therefore, in applying will have to submit these terms to the tax authori. the analysis, the taxpayer and the tax auditor have to ties.Thus, it appears that the taxpayer will need to make sure that the profit situation of other closed pe- riods does not lead to the conclusion that income is prepare written internal guidelines for aggregating too high or too low in the period under review. transactions, creating an additional administrative burden We believe, however, that the multiple-year anal te. It is frustrating that the tax authorities have dis- ysis should be seen as a tool to judge the transfer arded suggestions to introduce mi Inimum prices of the current year, for example, to judge amounts for transactions that need to be docu- start-up losses, a market penetration strategy, or the mented,which would have limited the administra- long-term influence of currency risks. Accordingly, it tive burden on taxpayers. To the contrary, the should not cause proble cree- law requires that, in principle, each transaction must be documented Administrative principles for the examination of income allo See paragraphs 1.49- 1.51 of the OECD guidelines; U.S the federal ministry of Finance dated 23 February 1983, BStBL. Treasury Reg. section 1.482-1())(2)(ii) Kroppen/Eigelshoven, Commentary on Transfer Pricing in Ger- tary on Transfer Pricing in Germany, in: Tax Treatme many, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002 Amsterdam, June 2002, chapter 8.2. ter 4.4 Tax Analysts- Worldwide Tax Daily

account the importance of profit-based approaches in practice. However, the decree-law states in section 6 that generally mere profit comparisons cannot justify the arm’s-length nature of transactions. This statement is again a sign that the German authorities are un￾willing to accept that, since 1995, when the OECD principles were introduced, the world has changed and often profit based approaches are the only cost-effective means for a taxpayer to document pricing. Aggregation of Transactions The German tax administration has a clear pref￾erence for a transactional approach. Section 2.1.2. of the Administrative Principles of 19839 already em￾phasizes that the transfer price analysis should be based on every transaction. If one followed the word￾ing of the administrative principles, the administra￾tion’s preference would go much further than the OECD, which also allows companies to aggregate cer￾tain transactions (see paragraph 1.42 of the OECD Guidelines). It is fair to assume, however, that German princi￾ples allow for aggregation, because in many cases, aggregation is the only feasible approach to deter￾mine the transfer price. This is especially true when the transactions are interrelated, multiple transac￾tions take place in a short period of time, or several transactions are part of a package deal. This is now acknowledged by the draft de￾cree-law. However, the requirements set forth in sec￾tion 2 seem stricter. It is specifically required that the aggregated transactions must be based on terms that have been agreed upon in advance. The taxpayer will have to submit these terms to the tax authori￾ties. Thus, it appears that the taxpayer will need to prepare written internal guidelines for aggregating transactions, creating an additional administrative burden. It is frustrating that the tax authorities have dis￾regarded suggestions to introduce minimum amounts for transactions that need to be docu￾mented, which would have limited the administra￾tive burden on taxpayers. To the contrary, the de￾cree-law requires that, in principle, each transaction must be documented. This shows that the tax authorities do not know how large MNEs work. It is impossible for MNEs to document every transaction. A reasonable documen￾tation law would only require the taxpayer to doc￾ument major transaction flows within the group. Section 2 allows the aggregation of transactions. However, the Federal Ministry of Finance obviously does not want to acknowledge the use of a multi￾ple-year analysis. Section 2 clearly states that the transactions of a fiscal year may be aggregated under the conditions described above. Although the question of a multiple-year analysis should not be dealt with in the documentation regu￾lations, it is remarkable that the Federal Ministry of Finance has limited the aggregation to transactions within a fiscal year. This deviates from the multiple￾year analysis, which, under certain conditions, is supported by the OECD, as well as by the U.S. tax administration.10 The multiple-year analysis is a tool for analyzing the effects of business or product life cycles, currency exchange risks, other business risk factors, or other influences that might affect the transfer prices. These influences might better be judged over a long period. If, for instance, a company incurs losses in one year because of certain risk factors or because of a market slow down, and if the company derives ex￾traordinary profits in earlier or later years, the com￾pany’s financials should be aggregated.11 The multiple-year analysis is sometimes rejected by tax auditors who argue that it violates a funda￾mental precept of German tax law that requires tax to be based on the annual accounting period (Prinzip der Abschnittsbesteuerung). Therefore, in applying the analysis, the taxpayer and the tax auditor have to make sure that the profit situation of other closed pe￾riods does not lead to the conclusion that income is too high or too low in the period under review. We believe, however, that the multiple-year anal￾ysis should be seen as a tool to judge the transfer prices of the current year, for example, to judge start-up losses, a market penetration strategy, or the long-term influence of currency risks. Accordingly, it should not cause problems. Tax Analysts — Worldwide Tax Daily 5 Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 9 Administrative principles for the examination of income allo￾cation in the case of internationally related enterprises, Decree of the Federal Ministry of Finance dated 23 February 1983, BStBl. I 1983, p. 218; for an English translation of the text see Kroppen/Eigelshoven, Commentary on Transfer Pricing in Ger￾many, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002, chapter 8.2. 10See paragraphs 1.49 - 1.51 of the OECD guidelines; U.S. Treasury Reg. section 1.482-1(f)(2)(iii). 11For a detailed analysis see Kroppen/Eigelshoven, Commen￾tary on Transfer Pricing in Germany, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002, chap￾ter 4.4

Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 Choice of Methods of assets and restructuring). However, the example of Section 2 affirms that the taxpayer is not obliged longterm contracts refers to continuous obligations to provide documentation for more than one transfer The decree-law is contradictory. Contemporane- the reasons for choosing the transfer pricing method. transactions. However, section 1 requires the taxpay- This clarification is clearly helpful and in line with er to document, before the transaction, its thinking note 1.69 of the OECD Transfer Pricing Guidelines regarding whether the conditions, including the pric However, section 7 of the decree-law points out ing, are in line with the arm's-length principle that documentation is unusable if the taxpayer uses Actually, th uld. based on the word an evidently improper transfer pricing method. Un- ing of section 1, prepare documentation before the fortunately, evidently improper transfer pricing transaction or at least document its thinking.The method"is not defined. The tax authorities therefore taxpayer should therefore prepare the documenta have the discretion to decide that a transfer pricing tion when the transaction takes place. This conflicts method is inappropriate with section 90, paragraph 3 of the General Tax Furthermore, it remains to be seen whether the Code, which takes precedence over the decree-law tax authorities will start asking why other methods According to the former law, there is no duty to pre- a cific method implicitly requires providing reasons for transactions refusing to apply other methods List of Mandatory Documentation Contemporaneous Documentation Section 4 provides further guidance regarding the mandatory documents would be short. They were di or The business community hoped that the list contemporaneous documentation requirement. The appointed. There are 13 mandatory document e dis- 3 revised draft section 90, paragraph 3 of the General Tax Code that has been approved by Parliament only Further the list of documents relating to general asks for contemporaneous documentation in case of information contains some mandatory elements that are questionable. It seems fair to ask for descriptions of the percentage shareholdings and the organiza Although section 90 of the General Tax Code fails tional and operational structure because the tax au to provide a definition of the term"extraordinary, " thorities need background information on the related extraordinary if it is not within the taxpayers ordi- party transactions section 4 states that a transaction is assumed to be 9a品93 nary business and has a substantial impact on the However, the required information should be lir taxpayers amount of income. Extraordinary transac- ited to transactions that the taxpayer is engaged in tions include: asset transfers in the context of re- There is no need to demand the total organizational tructuring measures; substantial ch anges in func. structure of a MNE. For inland transfer pricing pur tions performed; business transactions after a poses, the taxpayers related party transactions are change in the business strategy; and concluding or interest to the tax auditor. The wording of the de- modifying significant long-term agreements scription of the organization structure should be clar- It is unhelpful when a legislature tries to define ified. The same argument applies to the description of the taxpayers individual activities specific term by referring to its antonym- by ex- plaining“ extraordinary "using the term“ ordinary.” Section 6 also asks for information on the specific Moreover. it remains unclear when a transaction business strategies of the enterprise and set-offs ap- plied. Section 6, which defines the documentation has a substantial impact on the taxpayer's income. that the taxpayer must prepare, should only require Considering the above examples, extraordinary documents that are "necessary "Specific business transactions are probably a one-time event(transfer strategies are only relevant under specific circum- tances, that is, in exceptional cases From a system atic point of view, the section 6 list should not cover exceptional cases, only normal cases The industry and the advisers community sug- gested distinguishing between mandatory doc See Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb uments. the number of which should be limited to a 2003. minimum, and those documents that are"helpful"or "useful. This demand which would have been in line vides that: "For extraordinary business transactions the docu- with the OECD approach, was unsuccessful. The mentation has to be prepared contemporaneously. complete section 6 list includes only mandatory doc Tax Analysts- Worldwide Tax Daily

Choice of Methods Section 2 affirms that the taxpayer is not obliged to provide documentation for more than one transfer pricing method. The taxpayer has to only document the reasons for choosing the transfer pricing method. This clarification is clearly helpful and in line with note 1.69 of the OECD Transfer Pricing Guidelines. However, section 7 of the decree-law points out that documentation is unusable if the taxpayer uses an evidently improper transfer pricing method. Un￾fortunately, “evidently improper transfer pricing method” is not defined. The tax authorities therefore have the discretion to decide that a transfer pricing method is inappropriate. Furthermore, it remains to be seen whether the tax authorities will start asking why other methods have not been rejected. Providing reasons for one spe￾cific method implicitly requires providing reasons for refusing to apply other methods. Contemporaneous Documentation Section 4 provides further guidance regarding the contemporaneous documentation requirement. The revised draft section 90, paragraph 3 of the General Tax Code that has been approved by Parliament only asks for contemporaneous documentation in case of “extraordinary” transactions.12 Although section 90 of the General Tax Code fails to provide a definition of the term “extraordinary,”13 section 4 states that a transaction is assumed to be extraordinary if it is not within the taxpayer’s ordi￾nary business and has a substantial impact on the taxpayer’s amount of income. Extraordinary transac￾tions include: asset transfers in the context of re￾structuring measures; substantial changes in func￾tions performed; business transactions after a change in the business strategy; and concluding or modifying significant long-term agreements. It is unhelpful when a legislature tries to define a specific term by referring to its antonym — by ex￾plaining “extraordinary” using the term “ordinary.” Moreover, it remains unclear when a transaction has a substantial impact on the taxpayer’s income. Considering the above examples, extraordinary transactions are probably a one-time event (transfer of assets and restructuring). However, the example of long-term contracts refers to continuous obligations. The decree-law is contradictory. Contemporane￾ous documentation is only required for extraordinary transactions. However, section 1 requires the taxpay￾er to document, before the transaction, its thinking regarding whether the conditions, including the pric￾ing, are in line with the arm’s-length principle. Actually, the taxpayer should, based on the word￾ing of section 1, prepare documentation before the transaction or at least document its thinking. The taxpayer should therefore prepare the documenta￾tion when the transaction takes place. This conflicts with section 90, paragraph 3 of the General Tax Code, which takes precedence over the decree-law. According to the former law, there is no duty to pre￾pare contemporaneous documentation for ordinary transactions. List of Mandatory Documentation The business community hoped that the list of mandatory documents would be short. They were dis￾appointed. There are 13 mandatory documents. Further, the list of documents relating to general information contains some mandatory elements that are questionable. It seems fair to ask for descriptions of the percentage shareholdings and the organiza￾tional and operational structure because the tax au￾thorities need background information on the related party transactions. However, the required information should be lim￾ited to transactions that the taxpayer is engaged in. There is no need to demand the total organizational structure of a MNE. For inland transfer pricing pur￾poses, the taxpayer’s related party transactions are of interest to the tax auditor. The wording of the de￾scription of the organization structure should be clar￾ified. The same argument applies to the description of the taxpayer’s individual activities. Section 6 also asks for information on the specific business strategies of the enterprise and set-offs ap￾plied. Section 6, which defines the documentation that the taxpayer must prepare, should only require documents that are “necessary.” Specific business strategies are only relevant under specific circum￾stances, that is, in exceptional cases. From a system￾atic point of view, the section 6 list should not cover exceptional cases, only normal cases. The industry and the advisers community sug￾gested distinguishing between mandatory doc￾uments, the number of which should be limited to a minimum, and those documents that are “helpful” or “useful.” This demand, which would have been in line with the OECD approach, was unsuccessful. The complete section 6 list includes only mandatory doc- 6 Tax Analysts — Worldwide Tax Daily Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 12See Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003. 13Section 90, paragraph 3, of the General Tax Code only pro￾vides that: “For extraordinary business transactions the docu￾mentation has to be prepared contemporaneously

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 uments. If a mandatory document is not prepared that the three-year period now seems to be estab- when requested by the tax authorities, severe lished in binding law penalties will most likely become due Standard of Documentation The requirement to provide a summary of rulings and APAs from other tax authorities is clearly aimed Provisions in section 7, regarding "mostly incom 或N8 against the practice of unilateral APAs, which were plete"records, "evidently improper"transfer pricing rather common in the United States, Japan, and other countries. The german tax authorities always took the view that unilateral apas hurt the german ding the harsh penalties, the taxpayer fisc.The German tax authorities will therefore criti- needs further guidance regarding which records will cally review unilateral APAs, which will become un- be treated as incomplete. In our experience, tax au be reluctant to accept a documentation package as Section 6 also requires information regarding cost being "complete"if only minor elements are missing allocations and details regarding cost-sharing agree- Hence, taxpayers and auditors would be helped by ments, including list of participants, cost allocatio clarifying the Federal Ministry of Finances under and expected benefit. Section 5 of the Administrativ Principles on cost-sharing agreements sets forth an standing of incomplete"documentation extensive list of documentation that the taxpayer Exemption for Small Companies should prepare and file. The above elements are also The threshold of 5 million euros for the supply of included in the administrative principles goods and 500,000 euros for other transactions seem 389三 It is unclear whether the legislature wants to fair. It aims to reduce the administrative burden for overrule the current administrative principles. It is small companies. However, these taxpayers still therefore unclear whether the taxpayer only has to have compliance duties. When requested by the tax provide the cost-sharing details mentioned in the de- authorities, they must provide adequate oral infor- cree-law and does not have to comply with the admin- mation and documentation within the 60-day period istrative principles on cost-sharing agreements. This would certainly decrease the administrative burden Storage Process Unfortunately, the Federal Ministry of Finance Finally, the taxpayer is required to explain a loss did not take a more progressive approach regarding situation. It appears from the draft decree-law that the storage process. However, documentation may be companies making losses for more than three years stored abroad, which is helpful because often compa <rl be targeted by the tax authorities. This has been nies prepare and file documents centrally been supported by the german Federal Tax Court de- However, it would have been helpful if the de ons In199317and2001.18 cree-law would have pointed out that the documenta tion could be prepared in English. Although section Although the taxpayer is well advised to explain 87 of the General Tax Code provides that the official the reasons for losses or low profits, it is remarkable language is German, the Federal Ministry of Finance should consider allowing the taxpayer to prepare English documents. This would clearly decrease the taxpayers administrative burden. Additionally, suc ch an approach would be in line with note 5.5 of the Cf. see Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 OECD Guidelines Feb 2003; Rasch/Roeder, 11 Transfer Pricing Report 731, 11 Dec. oo 15Administrative principles on auditing cost-sharing arrar The storage process should be subject to the tax payers discretion. A taxpayer should be able"to store ments between internationally related enterprises, Decree of th relevant documents in the form of unprocessed origi- Federal Ministry of Finance, dated 30 December 1999, BStBL I nals or in a well-compiled book. "1s Tax Management Transfer Pricing 2000, Vol 9 No 14, pp. 914 ff. Kroppen/Eigelshoven, Commentary on Transfer Pricing Fina emarks Germany, in: Tax Treatment of Transfer Pricing, I loose-leaf, Amsterdam, June 2002, chapter 3.1.1.1 Under draft section 90, paragraph 3 of the Gener The Federal Tax Court stipulated that a distributor in a al Tax Code for normal transactions, taxpayers may start-up phase should not incur losses for more than three ye see Federal Tax Court dated 17 February 1993, BStBl II For distributors of well-established products, the tax court believes the loss period should be even shorter, see Federal Tax Court dated 17 October 2001, DB 2001, p 2474. For coverage, Kroppen/Rasch/Roeder, Tax Notes Int'l, 10 Dec. 2001, pp. 1111 ff. See note 5.5 of the oecd guidelines Tax Analysts- Worldwide Tax Daily

uments. If a mandatory document is not prepared when requested by the tax authorities, severe penalties14 will most likely become due. The requirement to provide a summary of rulings and APAs from other tax authorities is clearly aimed against the practice of unilateral APAs, which were rather common in the United States, Japan, and other countries. The German tax authorities always took the view that unilateral APAs hurt the German fisc. The German tax authorities will therefore criti￾cally review unilateral APAs, which will become un￾attractive to German companies. Section 6 also requires information regarding cost allocations and details regarding cost-sharing agree￾ments, including list of participants, cost allocation, and expected benefit. Section 5 of the Administrative Principles on cost-sharing agreements15 sets forth an extensive list of documentation that the taxpayer should prepare and file. The above elements are also included in the administrative principles. It is unclear whether the legislature wants to overrule the current administrative principles. It is therefore unclear whether the taxpayer only has to provide the cost-sharing details mentioned in the de￾cree-law and does not have to comply with the admin￾istrative principles on cost-sharing agreements. This would certainly decrease the administrative burden. Finally, the taxpayer is required to explain a loss situation. It appears from the draft decree-law that companies making losses for more than three years will be targeted by the tax authorities. This has been the practice in the past.16 Moreover, this practice has been supported by the German Federal Tax Court de￾cisions in 199317 and 2001.18 Although the taxpayer is well advised to explain the reasons for losses or low profits, it is remarkable that the three-year period now seems to be estab￾lished in binding law. Standard of Documentation Provisions in section 7, regarding “mostly incom￾plete” records, “evidently improper” transfer pricing methods, and documentation “contradictory in terms,” remain unclear. Regarding the harsh penalties, the taxpayer needs further guidance regarding which records will be treated as incomplete. In our experience, tax au￾thorities often have a very formalistic view and may be reluctant to accept a documentation package as being “complete” if only minor elements are missing. Hence, taxpayers and auditors would be helped by clarifying the Federal Ministry of Finance’s under￾standing of “incomplete” documentation. Exemption for Small Companies The threshold of 5 million euros for the supply of goods and 500,000 euros for other transactions seems fair. It aims to reduce the administrative burden for small companies. However, these taxpayers still have compliance duties. When requested by the tax authorities, they must provide adequate oral infor￾mation and documentation within the 60-day period. Storage Process Unfortunately, the Federal Ministry of Finance did not take a more progressive approach regarding the storage process. However, documentation may be stored abroad, which is helpful because often compa￾nies prepare and file documents centrally. However, it would have been helpful if the de￾cree-law would have pointed out that the documenta￾tion could be prepared in English. Although section 87 of the General Tax Code provides that the official language is German, the Federal Ministry of Finance should consider allowing the taxpayer to prepare English documents. This would clearly decrease the taxpayer’s administrative burden. Additionally, such an approach would be in line with note 5.5 of the OECD Guidelines. The storage process should be subject to the tax￾payer’s discretion. A taxpayer should be able “to store relevant documents in the form of unprocessed origi￾nals or in a well-compiled book.”19 Final Remarks Under draft section 90, paragraph 3 of the Gener￾al Tax Code for normal transactions, taxpayers may Tax Analysts — Worldwide Tax Daily 7 Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 14Cf. see Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003; Rasch/Roeder, 11 Transfer Pricing Report 731, 11 Dec. 2003. 15Administrative principles on auditing cost-sharing arrange￾ments between internationally related enterprises, Decree of the Federal Ministry of Finance, dated 30 December 1999, BStBl. I 1999, p. 1122; for an English translation of the provisions, see Tax Management Transfer Pricing 2000, Vol. 9 No. 14, pp. 914 ff. 16Kroppen/Eigelshoven, Commentary on Transfer Pricing in Germany, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002, chapter 3.1.1.1. 17The Federal Tax Court stipulated that a distributor in a start-up phase should not incur losses for more than three years, see Federal Tax Court dated 17 February 1993, BStBl. II 1993, p. 457. 18For distributors of well-established products, the tax court believes the loss period should be even shorter, see Federal Tax Court dated 17 October 2001, DB 2001, p. 2474. For coverage, see Kroppen/Rasch/Roeder, Tax Notes Int’l, 10 Dec. 2001, pp. 1111 ff. 19See note 5.5 of the OECD Guidelines

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 prepare transfer pricing documentation when re Regarding documenting loss situations, in many quested by the auditors cases taxpayers have to invest significant time to de liver good reasons for the losses and low profits. It is However, from a practical point of view, it is ad- often difficult to explain those reasons years later.A visable not to postpone preparing the documentation taxpayer should therefore consider the timely prepa because of the 60-day requirement to present the doc- ration of adequate reasoning, which should limit any mentation and the associated harsh penalties disputes in a potential tax audit. aN2928P98品2°93859g0 89989 Tax Analysts- Worldwide Tax Daily

prepare transfer pricing documentation when re￾quested by the auditors. However, from a practical point of view, it is ad￾visable not to postpone preparing the documentation because of the 60-day requirement to present the doc￾umentation and the associated harsh penalties. Regarding documenting loss situations, in many cases taxpayers have to invest significant time to de￾liver good reasons for the losses and low profits. It is often difficult to explain those reasons years later. A taxpayer should therefore consider the timely prepa￾ration of adequate reasoning, which should limit any disputes in a potential tax audit. ✦ 8 Tax Analysts — Worldwide Tax Daily Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content