《税法——转移定价》英文参考文献：02 Documentation_03 New German Draft Ordinance on Transfer Pricing Documentation

taranalysts tax notes Respectfully disagreeable since 197 international -0N2002-82月85g女 New german Draft Ordinance on Transfer Pricing Documentation a399于a品3 by Heinz-Klaus Kroppen and stephan Rasch Reprinted from Tax Notes Int, January 10, 2005, P. 197

(C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. New German Draft Ordinance on Transfer Pricing Documentation by Heinz
Klaus Kroppen and Stephan Rasch Reprinted from Tax Notes Int’l, January 10, 2005, p. 197

India: Nishith M. Desai, Nishith Desai Associates, Mumbai: Sanjay Sanghvi, RSM Co, Mumbai TAX NOTES INTERNATIONAL Indonesia: Freddy Karyadi, Karyadi Co Law and Tax Office, Jakarta Copyright 2005, Tax Analysts Ireland: Kevin Mcloughlin, Emst Young. dublin IsSN1048-3306 chand Vanderplank, Cains Advocates& Notaries, Douglas naceutical Industries Ltd. Petach Tikva Doron Herman. s. Friedman Editor: Cathy Phillips Co. Advocates Italy: Alessandro Adelchi Rossi and Luigi Penin. George R. Co, P C. New York: N Special Reports Editor: Alice Keane Putman Japan: Gary Thomas, White Case, Tokyo. Shimon Takagi, White Case, Tokyo Managing Editor: Maryam Enayat Jersey: J. Paul Frith, Emst Young. St. Helier Deputy Editor: Doug Smith Kenya: Glenday Graham, Ministry of Finance and Planning, Nairobi Korea: Chang Hee Lee, Seoul National Univ. College of Law. Seoul, Korea Production: Paul Doster Kuwait: Abdullah Kh. Al-Ayoub, Kuwait Latin America: Emst Young LLP. miami Chief of Correspondents: Cordia Scott(scott tax. org) Latvia: Andrejs Birums, Tax Policy Department, Ministry of Finance, Riga Executive Director and Publisher: Chris bergi Libya: Ibrahim Baruni. Ibrahim Baruni Co, Tripoli lithuania: Nora Vitkuniene, Intemational Tax Division. Ministry of Finance, vilnius N8=2-928或 Senior Executive Editor: Robert Manning Malawi: Clement L Mononga Assistant Commisioner of Tax, Blantyre Editor-in-Chief, International: Robert Goulder Malaysia: Jeyapalan Kasipillai, University Utara. Sintok Founder: Thomas F Field Malta: Dr. Antoine Fiott Zammit Tabona Bonello Co, and Lecturer in Taxation, Faculty of Law uascCoopers, Port Louis Kenzie, Juarez, Tijuana, Monterey, and Correspondents Aziz Nishtar. Nishtar Zafar Karachi. Pakista Africa: Zein Kebonang. University of Botswana. Gaborone Monaco: Eamon McGregor, Moores Rowland Coporate Services, Monte Carlo hania: Adriana Civici, Ministry of Finance, Tirana Mongolia: Baldangiin Ganhuleg, General Department of National Taxation, Ulaanbaatar Anguilla: Alex Richardson, Anguilla Offshore Finance Centre, Ang Myanmar: Timothy J. Holzer, Baker McKenzie, Singapore ntigua: Donald B. Ward, Pricewaterhouse Coopers Center, St. Joh ia: Graeme S. Cooper, University of Sydney. Sydney: Richard Krever, Deakin Freshfields, Amsterdam: Michaela Vrouwenvelder Solvay NV. Amsterdam: Jan Ter Wisch. Allen niversity, Melbourne. Austria: Markus Stefaner, Vienna University of Economics and Business Administration, Antilles: Dennis Cijntje, KPMG Meijburg Co. Curacao Koen Lozie Deurle New Zealand: Adrian Sawyer, University of Canterbury, Christchurch Bahamas: Hywel Jones, Canadian Imperial Bank of Commerce Trust Company(Bahamas)Ltd, Nigeria: Elias Aderemi Sulu, Lagos Northern Mariana Islands: John A Manglona, Saipan Bangladesh: M. taque Ahmed, Emst Young, Dhaka Barbados: Patrick B. Toppin, Pannell Kerr Forster, Christ Church Norway: Frederik Zimmer, Department of Public and International Law, University of Oslo, Osk Oman: FudI R Talyarkhan, Emst Young, Muscat elgium: Werner Heyvaert Nauta Dutilh, Brussels, Marc Quaghebeur. Vandendijk Partners, Panama: Leroy Watson. Arias, Fabrega Fabrega, Panama City uda: Wendell Hollis, Ernst Young Bermuda Papua New Guinea: Lutz K. Heim, Emst Young Port Moresby swana: LO. Sennanyana, Deputy Director, Tax Policy, Ministry of Finance Development Peru: Italo Fernandez origgi, Yon Law Firm, Lima razil: David Roberto R. Soares da silva. Farroco Lobo Advogados, Sao Paulo Poland: Dr Janusz Fiszer, Warsaw University/hite Case, Warsaw ritish Virgin Islands: william L. Blum, Solomon Pearl Blum Heymann Stich LLP, St. Portugal: Francisc rais Leitao J Galvdo Teles, Lisbon Manuel Bulgaria: Todor Tabakov, Interlex. Sofia Sexton, Emst Young Doha Romania: Sonin Adrian Anghel Senior Finance Officer& vice President. The Chase Manhattan Canada: Brian J. Arnold Goodmans, Toronto, Ontano Jack Bemstein. Aird Berlis. Toronto, ussia: Scott C. Antel, Emst Young, Moscow, Joel McDonald, Salans, London dy, Toronto(Markham) Ontario M. Novello, Nevis Services Limited, Red Bank Caribbean: Bruce Zagaris, Berliner, Corcoran, and Rowe. Washington, D.C. Saudi Arabia: Fauzi Awad, Saba Abulkhair Co.. Dammam Cayman Islands: Timothy Ridley, Maples Calder Asia, Hong Kong Sierra Leone: Shakib N K Basma and Berthan Macaulay, Basma& Macaulay, Freetown Chile: Alex Fischer. Carey y Cia Ltda. Santiago: Macarena Navarrete, Ernst Young. Santiago ngapore: Linda Ng. White Case, Tokyo, Japan hina(P.RC): Jinyan Li, York University, Toronto: Lawrence Sussman, O'Melveny Myers South Africa: Peter Surtees, Deneys Reitz, Cape Town Cook Islands: David R. McNair, Southpac Trust Limited, Rarotonga Spain: Jose M. Calderon, University of La Coruna, La Coruna Croatia: Hrvoje Zgombic, Zgombic Partners. Zagreb Sri Lanka: DD_M. Waidvasekera Mt lavinia Cyprus: Theodoros Philippou, Pricewaterhouse Coopers, Nicosia Sweden: Leif Muten, Professor Emeritus. Stockholm School of Economics Taiwan: Keye S. Wu, Baker McKenzie, Taipei, Yu Ming-i, Ministry of Finance, Taipei enmark: Nikolaj Bjornholm, Bech-Bruun Dragsted Law Firm, Copenhagen Eastern Europe: lurie Lungu, Graham Levintsa, Chisinau Turkey: Mustafa Camlica, Emst Young, Istanbul Egypt: Farouk Metwally, Ernst Young, Cairo Turks Caicos Islands. British West Indies: Anel Misick. Misick and Stanbrook Grand Turk Estonia: Helen Pahapill, Ministry of Finance, Tallinn European Union: Joann M. Weiner, Facultes Universitaires Saint-Louis, Brussels nited Arab Emirates: Nicholas J. Love, Emst Young Fiji: Bruce Sutton, KPMG Peat Marwick, Suva United Kingdom: Trevor Johnson, Trevor Johnson Associates, Wimal: Eileen O Grady, nland: Marjaana Helminen. University of Helsinki in the Faculty of Law, Helsinki United States: Richard Doemberg. Emory Univ. School of Law, Atlanta GA. James Fuller, Gambia: Samba Ebrima Saye, Income Tax Division. Banj Ministry of Finance, Berlin/Bonn: Rosemarie Portner, Meilicke U.S. Virgin Islands: Marjorie Rawls Roberts, Attomey at Law. St. Thomas, USVI er. Bonn: Klaus Sicker. Flick Gocke Schaumburg, Frankfurt Uruguay: Dr James A. Whitelaw. Whitelaw Attorneys, Uruguay Ghana: Seth Terkper, Chartered Accountant/Tax Expert, Accra Gibraltar: Charles D. Serruya. Baker Tilly. Gibraltar Vanuatu: Bill L. Hawkes, KPMG. Port Vila Venezuela: Ronald Evans Baker McKenzie Caracas Guam: Stephen A Cohen, Carlsmith Ball LLP, Hagatna Vietnam: Frederick Burke. Baker McKenzie Ho chi N Atherly, Georgetown European Consulting Group. ong Kong: Colin Farrell, Pricewaterhouse Coopers, Hong Kong Zambia: W Z Mwanza KPMG Peat Marwick Lusaka Hungary: Daniel Deak, Budapest University of Economics, Budapest Zimbabwe: Prof. Ben Hlatshwayo, University of Zimbabwe, Harare Iceland: Indridi H. Thorlaksson, Reykjavik

Correspondents Africa: Zein Kebonang, University of Botswana, Gaborone Albania: Adriana Civici, Ministry of Finance, Tirana Angola: Trevor Wood, Ernst & Young, Lisbon Anguilla: Alex Richardson, Anguilla Offshore Finance Centre, Anguilla Antigua: Donald B. Ward, PricewaterhouseCoopers Center, St. John’s Argentina: Cristian E. Rosso Alba, Rosso Alba, Francia & Asociados, Buenos Aires Armenia: Suren Adamyan, Association of Accountants and Auditors of Armenia, Yerevan Australia: Graeme S. Cooper, University of Sydney, Sydney; Richard Krever, Deakin University, Melbourne. Austria: Markus Stefaner, Vienna University of Economics and Business Administration, Vienna Bahamas: Hywel Jones, Canadian Imperial Bank of Commerce Trust Company (Bahamas) Ltd., Nassau Bangladesh: M. Mushtaque Ahmed, Ernst & Young, Dhaka Barbados: Patrick B. Toppin, Pannell Kerr Forster, Christ Church Belgium: Werner Heyvaert, Nauta Dutilh, Brussels;Marc Quaghebeur, Vandendijk & Partners, Brussels Bermuda: Wendell Hollis, Ernst & Young, Bermuda Botswana: I.O. Sennanyana, Deputy Director, Tax Policy, Ministry of Finance & Development Planning, Gaborone Brazil: David Roberto R. Soares da Silva, Farroco & Lobo Advogados, São Paulo British Virgin Islands: William L. Blum, Solomon Pearl Blum Heymann & Stich LLP, St. Thomas, USVI and New York Bulgaria: Todor Tabakov, Interlex, Sofia Cameroon: Edwin N. Forlemu, International Tax Program, Harvard University, Cambridge Canada: Brian J. Arnold, Goodmans, Toronto, Ontario; Jack Bernstein, Aird & Berlis, Toronto, Ontario; Martin Przysuski, Srini Lalapet, and Hendrik Swaneveld, Transfer Pricing and Competent Authority Services, BDO Dunwoody, Toronto (Markham) Ontario Caribbean: Bruce Zagaris, Berliner, Corcoran, and Rowe, Washington, D.C. Cayman Islands: Timothy Ridley, Maples & Calder Asia, Hong Kong Chile: Alex Fischer, Carey y Cia Ltda., Santiago; Macarena Navarrete, Ernst & Young, Santiago China (P.R.C.): Jinyan Li, York University, Toronto; Lawrence Sussman, O’Melveny & Myers LLP, Beijing Cook Islands: David R. McNair, Southpac Trust Limited, Rarotonga Croatia: Hrvoje Zgombic, Zgombic & Partners, Zagreb Cyprus: Theodoros Philippou, PricewaterhouseCoopers, Nicosia Czech Republic: Michal Dlouhy, White & Case, Prague Denmark: Nikolaj Bjørnholm, Bech-Bruun Dragsted Law Firm, Copenhagen Dominican Republic: Dr. Fernándo Ravelo Alvarez, Santo Domingo Eastern Europe: Iurie Lungu, Graham & Levintsa, Chisinau Egypt: Farrouk Metwally, Ernst & Young, Cairo Estonia: Helen Pahapill, Ministry of Finance, Tallinn European Union: Joann M. Weiner, Facultés Universitaires Saint-Louis, Brussels Fiji: Bruce Sutton, KPMG Peat Marwick, Suva Finland: Marjaana Helminen, University of Helsinki in the Faculty of Law, Helsinki France: Olivier Delattre, Latham & Watkins, Paris Gambia: Samba Ebrima Saye, Income Tax Division, Banjul Germany: Jörg-Dietrich Kramer, Ministry of Finance, Berlin/Bonn; Rosemarie Portner, Meilicke Hoffmann & Partner, Bonn; Klaus Sieker, Flick Gocke Schaumburg, Frankfurt Ghana: Seth Terkper, Chartered Accountant/Tax Expert, Accra Gibraltar: Charles D. Serruya, Baker Tilly, Gibraltar Greece: Alexandra Gavrielides, Athens Guam: Stephen A. Cohen, Carlsmith Ball LLP, Hagatna Guernsey: Neil Crocker, PricewaterhouseCoopers, St. Peter Port Guyana: Lancelot A. Atherly, Georgetown Hong Kong: Colin Farrell, PricewaterhouseCoopers, Hong Kong Hungary: Daniel Deak, Budapest University of Economics, Budapest Iceland: Indridi H. Thorlaksson, Reykjavik India: Nishith M. Desai, Nishith Desai Associates, Mumbai; Sanjay Sanghvi, RSM & Co., Mumbai Indonesia: Freddy Karyadi, Karyadi & Co Law and Tax Office, Jakarta Iran: Mohammad Tavakkol, Maliyat Journal, College of Economic Affairs, Tehran Ireland: Kevin McLoughlin, Ernst & Young, Dublin Isle of Man: Richard Vanderplank, Cains Advocates & Notaries, Douglas Israel: Joel Lubell, Teva Pharmaceutical Industries, Ltd., Petach Tikva; Doron Herman, S. Friedman & Co. Advocates & Notaries, Tel-Aviv Italy: Alessandro Adelchi Rossi and Luigi Perin, George R. Funaro & Co., P.C., New York; Gianluca Queiroli, Cambridge, Massachusetts Japan: Gary Thomas, White & Case, Tokyo; Shimon Takagi, White & Case, Tokyo Jersey: J. Paul Frith, Ernst & Young, St. Helier Kenya: Glenday Graham, Ministry of Finance and Planning, Nairobi Korea: Chang Hee Lee, Seoul National Univ. College of Law, Seoul, Korea Kuwait: Abdullah Kh. Al-Ayoub, Kuwait Latin America: Ernst & Young LLP, Miami Latvia: Andrejs Birums, Tax Policy Department, Ministry of Finance, Riga Lebanon: Fuad S. Kawar, Beirut Libya: Ibrahim Baruni, Ibrahim Baruni & Co., Tripoli Lithuania: Nora Vitkuniene, International Tax Division, Ministry of Finance, Vilnius Luxembourg: Jean-Baptiste Brekelmans, Loyens & Loeff, Luxembourg Malawi: Clement L. Mononga, Assistant Commisioner of Tax, Blantyre Malaysia: Jeyapalan Kasipillai, University Utara, Sintok Malta: Dr. Antoine Fiott, Zammit Tabona Bonello & Co., and Lecturer in Taxation, Faculty of Law, University of Malta, Valletta Mauritius: Ram L. Roy, PricewaterhouseCoopers, Port Louis Mexico: Jaime Gonzalez-Bendiksen, Baker & McKenzie, Juarez, Tijuana, Monterrey, and Guadalajara; Ricardo Leon-Santacruz, Sanchez-DeVanny Eseverri, Monterrey Middle East: Aziz Nishtar, Nishtar & Zafar, Karachi, Pakistan Monaco: Eamon McGregor, Moores Rowland Corporate Services, Monte Carlo Mongolia: Baldangiin Ganhuleg, General Department of National Taxation, Ulaanbaatar Morocco: Mohamed Marzak, Agadir Myanmar: Timothy J. Holzer, Baker & McKenzie, Singapore Nauru: Peter H. MacSporran, Melbourne Nepal: Prem Karki, Regional Director, Regional Treasury Directoriate, Kathmandu Netherlands: Eric van der Stoel, Otterspeer, Haasnoot & Partners, Rotterdam; Dick Hofland, Freshfields, Amsterdam; Michaela Vrouwenvelder, Solvay NV, Amsterdam; Jan Ter Wisch, Allen & Overy, Amsterdam Netherlands Antilles: Dennis Cijntje, KPMG Meijburg & Co., Curaçao; Koen Lozie, Deurle New Zealand: Adrian Sawyer, University of Canterbury, Christchurch Nigeria: Elias Aderemi Sulu, Lagos Northern Mariana Islands: John A. Manglona, Saipan Norway: Frederik Zimmer, Department of Public and International Law, University of Oslo, Oslo Oman: Fudli R. Talyarkhan, Ernst & Young, Muscat Panama: Leroy Watson, Arias, Fabrega & Fabrega, Panama City Papua New Guinea: Lutz K. Heim, Ernst & Young, Port Moresby Peru: Italo Fernández Origgi, Yori Law Firm, Lima Philippines: Benedicta Du Baladad, Bureau of Internal Revenue, Manila Poland: Dr. Janusz Fiszer, Warsaw University/White & Case, Warsaw Portugal: Francisco de Sousa da Câmara, Morais Leitao & J. Galvão Teles, Lisbon; Manuel Anselmo Torres, Galhardo Vilão, Torres, Lisbon Qatar: Finbarr Sexton, Ernst & Young, Doha Romania: Sorin Adrian Anghel, Senior Finance Officer & Vice President, The Chase Manhattan Bank, Bucharest Russia: Scott C. Antel, Ernst & Young, Moscow; Joel McDonald, Salans, London Saint Kitts–Nevis: Mario M. Novello, Nevis Services Limited, Red Bank Saudi Arabia: Fauzi Awad, Saba, Abulkhair & Co., Dammam Sierra Leone: Shakib N.K. Basma and Berthan Macaulay, Basma & Macaulay, Freetown Singapore: Linda Ng, White & Case, Tokyo, Japan Slovakia: Alzbeta Harvey, Principal, KPMG New York South Africa: Peter Surtees, Deneys Reitz, Cape Town Spain: José M. Calderón, University of La Coruña, La Coruña Sri Lanka: D.D.M. Waidyasekera, Mt. Lavinia Sweden: Leif Mutén, Professor Emeritus, Stockholm School of Economics Taiwan: Keye S. Wu, Baker & McKenzie, Taipei; Yu Ming-i, Ministry of Finance, Taipei Trinidad & Tobago: Rolston Nelson, Port of Spain Tunisia: Lassaad M. Bediri, Hamza, Bediri & Co., Legal and Tax Consultants, Tunis Turkey: Mustafa Çamlica, Ernst & Young, Istanbul Turks & Caicos Islands, British West Indies: Ariel Misick, Misick and Stanbrook, Grand Turk Uganda: Frederick Ssekandi, Kampala United Arab Emirates: Nicholas J. Love, Ernst & Young, Abu Dhabi United Kingdom: Trevor Johnson, Trevor Johnson Associates, Wirral; Eileen O’Grady, barrister, London; Jefferson P. VanderWolk, Baker & McKenzie, London United States: Richard Doernberg, Emory Univ. School of Law, Atlanta GA.; James Fuller, Fenwick & West, Palo Alto U.S. Virgin Islands: Marjorie Rawls Roberts, Attorney at Law, St. Thomas, USVI Uruguay: Dr. James A. Whitelaw, Whitelaw Attorneys, Uruguay Uzbekistan: Ian P. Slater, Arthur Andersen, Almaty Vanuatu: Bill L. Hawkes, KPMG, Port Vila Venezuela: Ronald Evans, Baker & McKenzie, Caracas Vietnam: Frederick Burke, Baker & McKenzie, Ho Chi Minh City Western Samoa: Maiava V.R. Peteru, Kamu & Peteru, Apia Yugoslavia: Danijel Pantic, European Consulting Group, Belgrade Zambia: W Z Mwanza, KPMG Peat Marwick, Lusaka Zimbabwe: Prof. Ben Hlatshwayo, University of Zimbabwe, Harare TAX NOTES INTERNATIONAL Copyright 2005, Tax Analysts ISSN 1048-3306 Editor: Cathy Phillips Special Reports Editor: Alice Keane Putman Managing Editor: Maryam Enayat Deputy Editor: Doug Smith Production: Paul M. Doster Chief of Correspondents: Cordia Scott (cscott@tax.org) Executive Director and Publisher: Chris Bergin Senior Executive Editor: Robert Manning Editor-in-Chief, International: Robert Goulder Founder: Thomas F. Field (C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Report New German Draft Ordinance on Transfer Pricing Documentation by Heinz-Klaus Kroppen and Stephan Rasch -N six-page document that-based on new sections 90 an Heinz-Klaus Kroppen is an international tax 162, Code of Procedures specifies documentation partner and head of Deloitte s European Transfer requirements for the taxpayer. 6 Whereas the Documen- Pricing Group. Stephan Rasch is a senior manager tation Law and the Decree Law (hereinafter jointly with the European Transfer Pricing Group referred to as the "Documentation Law)are binding on Copyright o 2004 Deloitte Touche Tohmatsu. the tax authorities and the taxpayer the draft All rights reserved ordinance is only the tax authorities interpretation of the new legal requirements and is only binding on the tax authorities. We analyze some of the provisions in The german Ministry of Finance published a draft the draft ordinance below taking into account that it is ordinance on" the audit of the income allocation impossible to cover the 88 pages in detailin this article. between internationally related companies and related persons with cross-border transactions on . Overview income adjustments as well as investigation and coop- The draft ordinance is divided into seven chapters eration obligations and competent authority and arbi- (1)introduction; (2)obligation of the tax authorities; (3) tration procedures"on October 18, 2004. This 83-page cooperation duties of the taxpayer and others; (4)con- document is the last of a series of changes in the sequences of noncompliance; (5)performance of adjust German transfer pricing environment ments;(6)competent authority and arbitration 是 Tax Court decided on October 17, procedures; and(7)the replacement of 2001, that under German law there were no documen- The tax authorities have taken quite some time to tation requirements for the taxpayer and that the produce the draft ordinance under the lead of the 8 burden of proof was on the tax authorities. Then the Federal Ministry of Finance with the involvement of German legislature introduced documentation requirements into the Code of Procedures (Abgabenordnung), including penalties for noncompli- Nov. 12, 2003: Heinz-Klaus Kroppen and Stephan Rasch, 11 ance(section 90 and 162, Code of Procedures). The Transfer Pricing Report 885, Feb. 19, 2003; Heinz-Klaus Krorso documentation requirements were later regulated in and Stephan Rasch, Tax Notes Intl, Nov. 18, 2002, p. 66 more detail through the documentation Decree Law,. 731, December 1, 2002; see also 11 Transfer Pricing Report 1080 April 16, 2003. For further coverage with numerous reference see: Rasch, in: Becker/Kroppen(eds )Handbuch internationale JA first overview is provided by Heinz-Klaus Kroppen and number 5.2 note 4 Terrechnungspreise(Koln: Dr. Otto Schmidt Verlag, 1999), O ordinanceisavailableat:http://www.bundesfinanzministerium Verordnung zu Art, Inhalt und Umfang von Aufzeichnungen dAnlage27113/Entwurf_ x. pdf U. im Sinne des 8 90 Abs. 3 der Abgabenordnung-Gewinnabgren- 2German Federal tax Court decision. dated October 17.2001 zungsverordnung, "dated Oct. 17, 2003, Federal Council BR Drs I R 103/00, Der Betrieb 2001, p 2474 583/03 For coverage see inter alia: Heinz-Klaus Kroppen, Stephan Rasch, and Achim Roeder, Tax Notes Int'l, Dec. 10, 2001, p 1111 Stephan Rasch, 12 Transfer Pricing Report 642, Nov. 12, 2003 Heinz-Klaus Kroppen, Stephan Rasch, and Achi Internationale Wirtschaftsbriefe, Fach 3 Deutschland, Gruppe 1 Kuckhof, and Rolf schreiber internationale wirtschaisbreafe Rasch, Tax Notes Int'l, Nov. 18, 2002, p 666; Stephan Rasch and Achim Roeder, 11 Transfer Pricing Report 731, Dec. 1, 2002; Fach 3 Deutschland, Gruppe 1, p. 1863; Hubertus Baumhoff, also 11 Transfer Pricing R Internationales Steuerrecht 2001, P. 745: Wolf-Dieter Hoffmann Eigelshoven and Roman Dawid, Tax Notes Int'l, Jan. 12, 2004, p gmbh Rundschau 2001. 1163: Dietmar Gosch. Die Steuerlich 185; Franz Wassermeyer, Der Betrieb, 2003, p. 1535: Rolf Betriebspruifung 2001, p 360. Schreiber, Steuerberatung 2003, P. 474. Hahn/Suhrbier-Hahn Internationales Steuerrecht, 2003, p 84; Stephan Schnorberger English translation, see 11 Transfer Pricing Report Der Betrieb, 2003, p. 1241 1085, April 16, 2003; for an analysis, see, e.g., HeinzKlar ppen and Stephan Rasch, 12 Transfer Pricing Report 642, Heinz-Klaus Kroppen and Axel Eigelshoven in IBFD, Ta (Footnote continued in next column. pricing, Chapter 1, loose-leaf, Amsterdam as of June 2002 Tax Notes International January10,2005·197

New German Draft Ordinance on Transfer Pricing Documentation by Heinz-Klaus Kroppen and Stephan Rasch The German Ministry of Finance published a draft ordinance on “the audit of the income allocation between internationally related companies and related persons with cross-border transactions on income adjustments as well as investigation and coop￾eration obligations and competent authority and arbi￾tration procedures” on October 18, 2004.1 This 83-page document is the last of a series of changes in the German transfer pricing environment. The Supreme Tax Court decided on October 17, 2001,2 that under German law there were no documen￾tation requirements for the taxpayer and that the burden of proof was on the tax authorities.3 Then the German legislature introduced documentation requirements into the Code of Procedures (Abgabenordnung), including penalties for noncompli￾ance (section 90 and 162, Code of Procedures).4 Those documentation requirements were later regulated in more detail through the Documentation Decree Law,5 a six-page document that — based on new sections 90 and 162, Code of Procedures — specifies documentation requirements for the taxpayer.6 Whereas the Documen￾tation Law and the Decree Law (hereinafter jointly referred to as the “Documentation Law”) are binding on the tax authorities and the taxpayer, the draft ordinance is only the tax authorities’ interpretation of the new legal requirements and is only binding on the tax authorities.7 We analyze some of the provisions in the draft ordinance below, taking into account that it is impossible to cover the 83 pages in detail in this article. I. Overview The draft ordinance is divided into seven chapters: (1) introduction;(2) obligation of the tax authorities;(3) cooperation duties of the taxpayer and others; (4) con￾sequences of noncompliance;(5) performance of adjust￾ments; (6) competent authority and arbitration procedures; and (7) the replacement of existing rules. The tax authorities have taken quite some time to produce the draft ordinance under the lead of the Federal Ministry of Finance with the involvement of Tax Notes International January 10, 2005 • 197 Special Reports Heinz-Klaus Kroppen is an international tax partner and head of Deloitte’s European Transfer Pricing Group. Stephan Rasch is a senior manager with the European Transfer Pricing Group. Copyright © 2004 Deloitte Touche Tohmatsu. All rights reserved. 1A first overview is provided by Heinz-Klaus Kroppen and Stephan Rasch, Tax Notes Int’l, Nov. 15, 2004, p. 591. The draft ordinance is available at: http://www.bundesfinanzministerium. de/Anlage27113/Entwurf__x.pdf U. 2German Federal Tax Court decision, dated October 17, 2001 — I R 103/00, Der Betrieb 2001, p. 2474. 3For coverage see inter alia: Heinz-Klaus Kroppen, Stephan Rasch, and Achim Roeder, Tax Notes Int’l, Dec. 10, 2001, p. 1111; Heinz-Klaus Kroppen, Stephan Rasch, and Achim Roeder, Internationale Wirtschaftsbriefe, Fach 3 Deutschland, Gruppe 1, p. 1787; Franz Wassermeyer, Der Betrieb 2001, p. 2465, Harald Kuckhoff, and Rolf Schreiber, Internationale Wirtschaftsbriefe, Fach 3 Deutschland, Gruppe 1, p. 1863; Hubertus Baumhoff, Internationales Steuerrecht 2001, p. 745; Wolf-Dieter Hoffmann, GmbH Rundschau 2001, 1163; Dietmar Gosch, Die Steuerliche Betriebsprüfung 2001, p. 360. 4For an English translation, see 11 Transfer Pricing Report 1085, April 16, 2003; for an analysis, see, e.g., Heinz-Klaus Kroppen and Stephan Rasch, 12 Transfer Pricing Report 642, (Footnote continued in next column.) Nov. 12, 2003; Heinz-Klaus Kroppen and Stephan Rasch, 11 Transfer Pricing Report 885, Feb. 19, 2003; Heinz-Klaus Kroppen and Stephan Rasch, Tax Notes Int’l, Nov. 18, 2002, p. 666; Stephan Rasch and Achim Roeder, 11 Transfer Pricing Report 731, December 1, 2002; see also 11 Transfer Pricing Report 1080, April 16, 2003. For further coverage with numerous references, see: Rasch, in: Becker/Kroppen (eds.) Handbuch Internationale Verrechnungspreise (Köln: Dr. Otto Schmidt Verlag, 1999), O number 5.2, note 4. 5“Verordnung zu Art, Inhalt und Umfang von Aufzeichnungen im Sinne des § 90 Abs. 3 der Abgabenordnung-Gewinnabgren￾zungsverordnung,” dated Oct. 17, 2003, Federal Council BR Drs. 583/03. 6For a detailed discussion, see cf. Heinz-Klaus Kroppen and Stephan Rasch, 12 Transfer Pricing Report 642, Nov. 12, 2003; Heinz-Klaus Kroppen and Stephan Rasch, 11 Transfer Pricing Report 885, Feb. 19, 2003; Heinz-Klaus Kroppen and Stephan Rasch, Tax Notes Int’l, Nov. 18, 2002, p. 666; Stephan Rasch and Achim Roeder, 11 Transfer Pricing Report 731, Dec. 1, 2002; see also 11 Transfer Pricing Report 1080, Apr. 16, 2003; Axel Eigelshoven and Roman Dawid, Tax Notes Int’l, Jan. 12, 2004, p. 185; Franz Wassermeyer, Der Betrieb, 2003, p. 1535; Rolf Schreiber, Steuerberatung 2003, p. 474.; Hahn/Suhrbier-Hahn, Internationales Steuerrecht, 2003, p. 84; Stephan Schnorberger, Der Betrieb, 2003, p. 1241. 7Heinz-Klaus Kroppen and Axel Eigelshoven in IBFD, Tax Treatment of Transfer Pricing, Commentary on German transfer pricing, Chapter 1, loose-leaf, Amsterdam as of June 2002. (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Special Reports representatives of the German states'tax authorities. possibility also existed prior to the draft ordinance the The document was prepared by a working group, explicit statement in the draft ordinance certainly will which met regularly in Berlin and received input from lead to an increased demand from tax auditors for representatives of German industry. The tax authori- those documents. Therefore, taxpayers are well ties requested comments on the document within four advised when formulating those minutes to take into weeks from the publishing date. It can be expected that account that their content might be reviewed by the after reviewing those comments the final document tax auditor will be published at the beginning of 2005 B. Use of Secret Comparables Il Obligations of the Tax Authorities The draft ordinance allows tax auditors to use secret comparables, which can be found in the tax files of the Unlike other announcements of the tax authorities, authorities for other taxpayers. 12 This is in line with the draft ordinance emphasizes that tax authorities have the jurisdiction of the Supreme Tax Court of October an obligation to investigate and try to discover facts that 17, 2001, in which the court also permitted the use of are beneficial for the taxpayer: The draft ordinance also those secret comparables. However, the draft orrectly states that a correct transfer price usually does ordinance emphasizes that these data cannot be not exist and that the taxpayer has no obligation under disclosed to the taxpayer, the tax court, and the other German law to prove the correctness of the chosen price. tax authority in a competent authority or arbitration This last clarification is particularly important because it procedure. In spite of those disclosure restrictions, the had been asserted in German tax literature that the draft ordinance then requires that the taxpayer be Documentation Law, under which the taxpayer is given the opportunity to comment on the comparable required to prepare documentation on the appropriate data and the comparability of that data. This is, of ness of the transfer price, would lead to a change of the course, almost impossible for the taxpayer if the burden of proof. This is technically not correct, although necessary information is not disclosed to him a832938 the taxpayer should prepare documentation about the Therefore, the evidence value of secret comparables is appropriateness of the chosen price. That documenta- largely decreased. This is acknowledged in the draft tion, however, will usually lead to the identification of a ordinance. Therefore, it can be expected that the range of prices or results that could be arms length Of relevance of secret comparables will be minimal in ourse, then the tax authorities can establish a different practice. range, and, in case of doubt, the taxpayer does not have to prove the correctness of the chosen price setting. Instead, C Criminal Proceedings the tax authorities have the burden of proof that the One rather disturbing aspect of the new draft osen price is not at arms length. ordinance is that the tax authorities mention several A Preparation of an Audit evasion in connection with the determination and The new draft ordinance encourages the tax author- documentation of transfer prices. It can only be hoped ities to organize and plan the tax audit before the start that in practice the tax auditors will apply those provi- of the investigation on the premises of the taxpayer. 10 sions very carefully. As already stated by the OeCD, To achieve this, the draft ordinance suggests that setting transfer prices is not an exact science 16 and certain documents and papers be obtained prior to the requires considerable judgment. Therefore, criminal start of the audit. among other documents, the draft proceedings for setting transfer prices should be ordinance also states that the auditor might request limited to very extreme cases minutes from supervisory board meetings, board meetings, and shareholder meetings. 1 Although this Wassermeyer/Baumhoff, AuBensteuerrecht, section 1 AStG, note 823.1 See in particular, Heinz-Klaus Kroppen and Stephan Ras BFD, International Transfer Pricing Journal, 2004, P. 222 Heinz-Klaus Kroppen and Stephan Rasch, Internationa 12Note 2.6 of the draft ordinance haftsbriefe, Fach 3 Deutschland, Gruppe 1, p. 2057; Axel Eigelshoven and Stephan Rasch, 13 Transfer Pricing Report 114 June9,2004. 10Note 2.2 of the draft ordinance Heinz. 11See, e.g., decision of the tax court of Munster, dated Aug 22, Internat. 000, 6K 2712/00, Entscheidungen der Finanzgerichte 20 pp. 1787, 1789, and note 3.30 of the OECD Guidelines ff. ; see also Rasch, in Becker/Kroppen (eds ) Ho Internationale verrechnungspreise(Koln: Dr. Otto Verlag. 1999),0 number 5.2, note 4. CNote 1.46 of the OECD guidelines

representatives of the German states’ tax authorities. The document was prepared by a working group, which met regularly in Berlin and received input from representatives of German industry. The tax authori￾ties requested comments on the document within four weeks from the publishing date. It can be expected that after reviewing those comments the final document will be published at the beginning of 2005. II. Obligations of the Tax Authorities Unlike other announcements of the tax authorities, the draft ordinance emphasizes that tax authorities have an obligation to investigate and try to discover facts that are beneficial for the taxpayer. The draft ordinance also correctly states that a correct transfer price usually does not exist and that the taxpayer has no obligation under German law to prove the correctness of the chosen price. This last clarification is particularly important because it had been asserted in German tax literature8 that the Documentation Law, under which the taxpayer is required to prepare documentation on the appropriate￾ness of the transfer price, would lead to a change of the burden of proof. This is technically not correct, although the taxpayer should prepare documentation about the appropriateness of the chosen price. That documenta￾tion, however, will usually lead to the identification of a range of prices or results that could be arm’s length. Of course, then the tax authorities can establish a different range,and,in case of doubt,the taxpayer does not have to prove the correctness of the chosen price setting.Instead, the tax authorities have the burden of proof that the chosen price is not at arm’s length.9 A. Preparation of an Audit The new draft ordinance encourages the tax author￾ities to organize and plan the tax audit before the start of the investigation on the premises of the taxpayer.10 To achieve this, the draft ordinance suggests that certain documents and papers be obtained prior to the start of the audit. Among other documents, the draft ordinance also states that the auditor might request minutes from supervisory board meetings, board meetings, and shareholder meetings.11 Although this possibility also existed prior to the draft ordinance, the explicit statement in the draft ordinance certainly will lead to an increased demand from tax auditors for those documents. Therefore, taxpayers are well advised when formulating those minutes to take into account that their content might be reviewed by the tax auditor. B. Use of Secret Comparables The draft ordinance allows tax auditors to use secret comparables, which can be found in the tax files of the authorities for other taxpayers.12 This is in line with the jurisdiction of the Supreme Tax Court of October 17, 2001,13 in which the court also permitted the use of those secret comparables. However, the draft ordinance emphasizes that these data cannot be disclosed to the taxpayer, the tax court, and the other tax authority in a competent authority or arbitration procedure. In spite of those disclosure restrictions, the draft ordinance then requires that the taxpayer be given the opportunity to comment on the comparable data and the comparability of that data. This is, of course, almost impossible for the taxpayer if the necessary information is not disclosed to him. Therefore, the evidence value of secret comparables is largely decreased.14 This is acknowledged in the draft ordinance. Therefore, it can be expected that the relevance of secret comparables will be minimal in practice. C. Criminal Proceedings One rather disturbing aspect of the new draft ordinance is that the tax authorities mention several times15 the possibility of criminal proceedings for tax evasion in connection with the determination and documentation of transfer prices. It can only be hoped that in practice the tax auditors will apply those provi￾sions very carefully. As already stated by the OECD, setting transfer prices is not an exact science16 and requires considerable judgment. Therefore, criminal proceedings for setting transfer prices should be limited to very extreme cases. 198 • January 10, 2005 Tax Notes International Special Reports 8For a discussion, cf. Franz Wassermeyer, in Flick/ Wassermeyer/Baumhoff, Außensteuerrecht, section 1 AStG, note 823.17. 9See in particular, Heinz-Klaus Kroppen and Stephan Rasch, IBFD, International Transfer Pricing Journal, 2004, p. 222; Heinz-Klaus Kroppen and Stephan Rasch, Internationale Wirtschaftsbriefe, Fach 3 Deutschland, Gruppe 1, p. 2057; Axel Eigelshoven and Stephan Rasch, 13 Transfer Pricing Report 114, June 9, 2004. 10Note 2.2 of the draft ordinance. 11See, e.g., decision of the tax court of Münster, dated Aug. 22, 2000, 6 K 2712/00, Entscheidungen der Finanzgerichte 2001, pp. 4 ff.; see also Rasch, in Becker/Kroppen (eds.) Handbuch Internationale Verrechnungspreise (Köln: Dr. Otto Schmidt Verlag, 1999), O number 5.2, note 4. 12Note 2.6 of the draft ordinance. 13See footnote 2. 14See Heinz-Klaus Kroppen, Stephan Rasch, and Achim Roeder, Tax Notes Int’l, Dec. 10, 2001, p. 1111, at 1112; Heinz-Klaus Kroppen, Stephan Rasch, and Achim Roeder, Internationale Wirtschaftsbriefe, Fach 3 Deutschland, Gruppe 1, pp. 1787, 1789, and note 3.30 of the OECD Guidelines. 15Note 2.7. and 3.2.6 of the draft ordinance. 16Note 1.46 of the OECD guidelines. (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Report III Cooperation Duties of Taxpayers and later have a substantial practical impact on prior And others tax years A Preservation of documents C Documents Prepared by Related Parties In this section, the tax authorities cover the general The draft ordinance put extensive obligations on the operation duties of the taxpayer. The tax authorities taxpayer to obtain documents and information from formulate rather extensive cooperation and document related parties. 19 However, those obligations are preservation duties for taxpayers. It is, for example limited by the legal or factual ability to obtain the required that the taxpayer, within his or her legal and documents or information from those parties. This is factual ability, assures that documents and data kept particularly relevant for a German subsidiary of a by a foreign related party and relevant to german foreign parent, because it might be legally and taxation will not be destroyed before the german time factually very difficult to obtain information from the limit for the preservation of files has elapsed. 1? This is a parent company or another related party. In that case, rather critical point, because the German time period it cannot be held against a German taxpayer if the for the preservation of documents is generally 10 years, taxpayer can show through pertinent correspondence which is often longer than the time periods in other that a foreign related party does not cooperat countries and can be extended for an audit it therefore can be a substantial burden for an international group The draft ordinance emphasizes that to ensure that the german preservation periods are tax authorities have a duty to observed by related parties in other countries. investigate and try to discover facts that B. Amendments of prior Tax Returns are beneficial for the taxpayer. A very important aspect of the new draft ordinance the stipulated requirement to amend previously ag品38 filed tax returns. That will have a substantial impact in For a German parent company, the draft ordinance practice. According to section 153 of the Code of assumes generally that the ability to obtain documents and information from foreign related parties exists Procedures, the taxpayer is required to amend prior because the German parent company can influence the decision process in the foreign subsidiaries. The draft in the German Code of Procedures for a long time, its ordinance also states that in the relationship between practical importance was rather limited. However a German subsidiary and its foreign parent, it will be with the explicit reference in the new draft ordinance presumed that a possibility to obtain information exists if the same person is a managing director of the In relatio on to the documentation and cooperation obli- gations, it can be expected that the importance of this German subsidiary and the parent company. 1 It therefore should be carefully considered for the future provision will largely increase in tax audits. It can whether foreign officers of the group become officers of easily be foreseen that a taxpayer who tries to fulfil the new documentation obligations for the year 2003 and following years may learn that for prior years that In addition, the draft ordinance stipulates cases in either a particular transaction was not charged at which independent third parties would have contrac- (for instance, headquarter services from a German tually agreed on the provision of information and parent company to its foreign subsidiary)or the prices documents, namely that were charged were clearly not at arm s length. In for the participation in a cost-sharing pool for that case, the draft ordinance requires that the tax the allocable cost and the allocation key; returns be amended for all open years. Failure to amend prior years' tax returns could lead to criminal for the charging of services on the cost basis proceedings. Taxpayers are therefore well advised to analyze what impact their documentation package, which they must prepare for the years 2003 and later, may have on their tax returns for prior years and take steps to prevent harsh consequences. Therefore, based 19Note 3.3.2 of the draft ordinance on section 153 of the Code of Procedures and the expla Roman Seer, Finanzrundschau 2002, pp 380, 281: Wolfgang nation in the tax authorities ordinance. the new docu Ritter, Finanzrundschau 1985, pp 34, 35; Michael Kemperman Finanzrundschau 1990, pp. 437, 438: Franz Wasse mentation requirements effective for the years 2003 note 822; for an analysis of notes 5.10 and 5.11 of the OECD guidelines, cf. Rasch, in Becker/Kroppen (eds ) Handbuch Internationale Verrechnungspreise(Koln: Dr. Otto Schmidt Verlag, 1999), O number 5.10 and 5.11 1 Note 3.4.1 of the draft ordinance INote 3.3.2 lit. b) draft ordinance 18Note 3.2.5 of the draft ordinance 22Note 3.3.2 lit. b) draft ordinance Tax Notes International January10,2005·199

III. Cooperation Duties of Taxpayers And Others A. Preservation of Documents In this section, the tax authorities cover the general cooperation duties of the taxpayer. The tax authorities formulate rather extensive cooperation and document preservation duties for taxpayers. It is, for example, required that the taxpayer, within his or her legal and factual ability, assures that documents and data kept by a foreign related party and relevant to German taxation will not be destroyed before the German time limit for the preservation of files has elapsed.17This is a rather critical point, because the German time period for the preservation of documents is generally 10 years, which is often longer than the time periods in other countries and can be extended for an audit.It therefore can be a substantial burden for an international group to ensure that the German preservation periods are observed by related parties in other countries. B. Amendments of Prior Tax Returns A very important aspect of the new draft ordinance is the stipulated requirement to amend previously filed tax returns.That will have a substantial impact in practice.18 According to section 153 of the Code of Procedures, the taxpayer is required to amend prior year tax returns if the taxpayer learns that the tax return was incorrect. Although this provision has been in the German Code of Procedures for a long time, its practical importance was rather limited. However, with the explicit reference in the new draft ordinance in relation to the documentation and cooperation obli￾gations, it can be expected that the importance of this provision will largely increase in tax audits. It can easily be foreseen that a taxpayer who tries to fulfill the new documentation obligations for the year 2003 and following years may learn that for prior years that either a particular transaction was not charged at all (for instance, headquarter services from a German parent company to its foreign subsidiary) or the prices that were charged were clearly not at arm’s length. In that case, the draft ordinance requires that the tax returns be amended for all open years. Failure to amend prior years’ tax returns could lead to criminal proceedings. Taxpayers are therefore well advised to analyze what impact their documentation package, which they must prepare for the years 2003 and later, may have on their tax returns for prior years and take steps to prevent harsh consequences. Therefore, based on section 153 of the Code of Procedures and the expla￾nation in the tax authorities’ ordinance, the new docu￾mentation requirements effective for the years 2003 and later have a substantial practical impact on prior tax years. C. Documents Prepared by Related Parties The draft ordinance put extensive obligations on the taxpayer to obtain documents and information from related parties.19 However, those obligations are limited by the legal or factual ability to obtain the documents or information from those parties.20 This is particularly relevant for a German subsidiary of a foreign parent, because it might be legally and factually very difficult to obtain information from the parent company or another related party. In that case, it cannot be held against a German taxpayer if the taxpayer can show through pertinent correspondence that a foreign related party does not cooperate. The draft ordinance emphasizes that tax authorities have a duty to investigate and try to discover facts that are beneficial for the taxpayer. For a German parent company, the draft ordinance assumes generally that the ability to obtain documents and information from foreign related parties exists because the German parent company can influence the decision process in the foreign subsidiaries. The draft ordinance also states that in the relationship between a German subsidiary and its foreign parent, it will be presumed that a possibility to obtain information exists if the same person is a managing director of the German subsidiary and the parent company.21 It therefore should be carefully considered for the future whether foreign officers of the group become officers of the German subsidiary. In addition, the draft ordinance stipulates cases in which independent third parties would have contrac￾tually agreed on the provision of information and documents,22 namely: for the participation in a cost-sharing pool for the allocable cost and the allocation key; for the charging of services on the cost basis; Tax Notes International January 10, 2005 • 199 Special Reports 17Note 3.4.1 of the draft ordinance. 18Note 3.2.5 of the draft ordinance. 19Note 3.3.2 of the draft ordinance. 20Roman Seer, Finanzrundschau 2002, pp. 380, 281; Wolfgang Ritter, Finanzrundschau 1985, pp. 34, 35; Michael Kempermann, Finanzrundschau 1990, pp. 437, 438; Franz Wassermeyer, in Flick/Wassermeyer/Baumhoff, Außensteuerrecht, section 1 AStG, note 822; for an analysis of notes 5.10 and 5.11 of the OECD guidelines, cf. Rasch, in Becker/Kroppen (eds.) Handbuch Internationale Verrechnungspreise (Köln: Dr. Otto Schmidt Verlag, 1999), O number 5.10 and 5.11. 21Note 3.3.2 lit. b) draft ordinance. 22Note 3.3.2 lit. b) draft ordinance. (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Special Reports for a license agreement for the sales as a basis request the documentation even for tax audits covering for the royalty; and years long before the effective date of the documentation for prices based on the resale price method for obligations, because that documentation could be of the prices charged to customers relevance even for those prior years. The draft ordinance contains an example in which the german For those mentioned cases, the draft ordinance is distribution subsidiary of an international group is probably in line with the pertinent jurisdiction of the audited in July 2004 for the years 1996 to 2000.The Supreme Tax Court. Also, the court has acknowledged distribution contract was concluded in 1994 and still that in some cases a foreign related party has to exists without any major amendments. The draft provide the basis for the determination of the prices to ordinance states that the auditor is entitled to request ts German affiliate because independent parties the documentation that should have been prepared would provide that information. until the end of 2003 for auditing the prior years 1996 to2000. Taxpayers are well advised to analyze That provision of the draft ordinance, in our view, what impact their documentation contradicts the pertinent sections of the law and package for 2003 and later may have on therefore is not valid. Section 90, paragraph 3 sentence 6 of the Code of Procedures provides that the their tax returns for prior years tax authorities shall, in principle, only request the submission of documentation for a tax audit section A The most important area of discussion in the future 22 of the introductory law in the Code of Procedures will probably be the rules of the draft ordinance on the provides that documentation obligations are only obligation of the taxpayer to take contractual precau effective for business years that start after December tions for obtaining information. 23 The draft ordinance 31, 2002. 27 ag品38 requires the taxpayer, if possible and reasonable, upon Those two provisions cannot be interpreted sepa the conclusion of a contract with arelated party, to take rately, but rather must be read together. It cannot be precautions in the contract that the related party will concluded that the obligation of the tax authorities to provide all necessary information to the German in principle, only request the documentation for an affiliate.24 It can be foreseen that the question of that audit refers to any audit, but is, of course, aimed at an provision in a contract being possible or reasonable will audit for those years for which the documentation obli lead to extensive discussions with german auditors gation was effective. It therefore must be concluded Auditors will principally take the position that the that the tax authorities can only request the documen- German taxpayer could have extensively provided for tation according to section 90, paragraph 3, sentence 6 all kinds of information in the contractual relation- for audits of those years for which, according to section ships with foreign affiliates. It is, therefore going to be 2, the obligation to document was in force. Those are interesting to see whether that position is sustainable, audits for the year 2003 and years following. However, particularly in cases other than the ones explicitly the draft ordinance clearly shows the strong tendency described in the draft ordinance and mentioned above. of the tax authorities to expand the documentation D. Extraordinary Long-Term Contracts obligation to prior open years, even though there is no The documentation law. and the documentatio legal basis for that extension Decree Law26 contain special provisions for extraordi- nary long-term intercompany relationships. If those I. Documentation of Compliance extraordinary long-term intercompany relationships With the arms-Length Principle were concluded prior to the effective date of the law A cornerstone of the documentation law and the (generally, January 1, 2003), they must be documented draft ordinance is the documentation on compliance until December 31, 2003. Therefore, principally for with the arms-length principle. Section 90, paragraph those relationships, the pertinent documentation would have to exist today. For that documentation, the 3, sentence 2 of the Code of Procedures requires the taxpayer to document that the arms-length principle draft ordinance now provides that the auditor can was observed when concluding contracts with related parties. There is a lot of controversy about that require 3Note 3.3.3 draft ordinance rt. 22, section 97 of the introductory act to the Code of Pro- Internationale Verrechnungspreise(Koln: Dr. Otto Schmidt Verlag, 1999),0 number 5.26 note 2 ff. cedures reads as follows: "Section 90, paragraph 3, and sectio 162, paragraph 4 of the general tax code in the version of article 9 25Sec 90 and 162 Code of procedures, see footnote 4 of the law dated 16 May 2003(BGBL I p 660) has to be applied for he first time to any fiscal years beginning after December 31 See footnotes 5 and 6 2002 January 10, 2005 Tax Notes International

for a license agreement for the sales as a basis for the royalty; and for prices based on the resale price method for the prices charged to customers. For those mentioned cases, the draft ordinance is probably in line with the pertinent jurisdiction of the Supreme Tax Court. Also, the court has acknowledged that in some cases a foreign related party has to provide the basis for the determination of the prices to its German affiliate because independent parties would provide that information. Taxpayers are well advised to analyze what impact their documentation package for 2003 and later may have on their tax returns for prior years. The most important area of discussion in the future will probably be the rules of the draft ordinance on the obligation of the taxpayer to take contractual precau￾tions for obtaining information.23 The draft ordinance requires the taxpayer, if possible and reasonable, upon the conclusion of a contract with a related party,to take precautions in the contract that the related party will provide all necessary information to the German affiliate.24 It can be foreseen that the question of that provision in a contract being possible or reasonable will lead to extensive discussions with German auditors. Auditors will principally take the position that the German taxpayer could have extensively provided for all kinds of information in the contractual relation￾ships with foreign affiliates. It is, therefore, going to be interesting to see whether that position is sustainable, particularly in cases other than the ones explicitly described in the draft ordinance and mentioned above. D. Extraordinary Long-Term Contracts The Documentation Law25 and the Documentation Decree Law26 contain special provisions for extraordi￾nary long-term intercompany relationships. If those extraordinary long-term intercompany relationships were concluded prior to the effective date of the law (generally, January 1, 2003), they must be documented until December 31, 2003. Therefore, principally for those relationships, the pertinent documentation would have to exist today. For that documentation, the draft ordinance now provides that the auditor can request the documentation even for tax audits covering years long before the effective date of the documentation obligations, because that documentation could be of relevance even for those prior years. The draft ordinance contains an example in which the German distribution subsidiary of an international group is audited in July 2004 for the years 1996 to 2000. The distribution contract was concluded in 1994 and still exists without any major amendments. The draft ordinance states that the auditor is entitled to request the documentation that should have been prepared until the end of 2003 for auditing the prior years 1996 to 2000. That provision of the draft ordinance, in our view, contradicts the pertinent sections of the law and therefore is not valid. Section 90, paragraph 3, sentence 6 of the Code of Procedures provides that the tax authorities shall, in principle, only request the submission of documentation for a tax audit. Section 22 of the introductory law in the Code of Procedures provides that documentation obligations are only effective for business years that start after December 31, 2002.27 Those two provisions cannot be interpreted sepa￾rately, but rather must be read together. It cannot be concluded that the obligation of the tax authorities to, in principle, only request the documentation for an audit refers to any audit, but is, of course, aimed at an audit for those years for which the documentation obli￾gation was effective. It therefore must be concluded that the tax authorities can only request the documen￾tation according to section 90, paragraph 3, sentence 6 for audits of those years for which, according to section 22, the obligation to document was in force. Those are audits for the year 2003 and years following. However, the draft ordinance clearly shows the strong tendency of the tax authorities to expand the documentation obligation to prior open years, even though there is no legal basis for that extension. IV. Documentation of Compliance With the Arm’s-Length Principle A cornerstone of the Documentation Law and the draft ordinance is the documentation on compliance with the arm’s-length principle. Section 90, paragraph 3, sentence 2 of the Code of Procedures requires the taxpayer to document that the arm’s-length principle was observed when concluding contracts with related parties.There is a lot of controversy about that require- 200 • January 10, 2005 Tax Notes International Special Reports 23Note 3.3.3 draft ordinance. 24For a discussion of the arm’s-length character of those pre￾cautions, see Rasch, in Becker/Kroppen (eds.) Handbuch Internationale Verrechnungspreise (Köln: Dr. Otto Schmidt Verlag, 1999), O number 5.26 note 2 ff. 25Sec. 90 and 162 Code of Procedures, see footnote 4. 26See footnotes 5 and 6. 27Art. 22, section 97 of the introductory act to the Code of Pro￾cedures reads as follows: “Section 90, paragraph 3, and section 162, paragraph 4 of the general tax code in the version of article 9 of the law dated 16 May 2003 (BGBl. I p. 660) has to be applied for the first time to any fiscal years beginning after December 31, 2002.” (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Report ment in the literatures and whether it actually leads The draft ordinance does not explain what is meant to a shift of the burden of proof from the tax authorities by distribution companies with limited functions and to the taxpayer. In the draft ordinance the tax authori risks In many transfer pricing methods for interna- ties now have clarified their view on how the law must tional groups, the distribution companies of those be interpreted. According to the draft ordinance, the groups are viewed as having only limited functions and documentation of the taxpayer must show a serious risks compared to the owners of intangible and manu- effort to observe the arms-length principle in transac- facturing comp If for those distribution tions with related parties. In this respect, documenta- companies a net margin approach could be used, the tion shall reflect the considerations made by the new German draft ordinance would be a major step taxpayer of why, from his or her perspective, the forward, in practice. However, if the wording in the agreed prices are at arms length. The taxpayer shall draft ordinance is meant to draw a distinction between if this is possible and reasonable-use external and a normal distribution company and a distribution internal comparables as well as internal budget data. company that compared therewith has even more Although that documentation requirement can be limited functions and risks, the application of a net rather burdensome for the taxpayer, it can hardly be margin approach would be too restricted. In particular, said that it technically leads to a shift of the burden of because in many other developed countries the use of proof. In case of doubt, the taxpayer does not have to the TNMM approach is widely accepted and practiced prove that the price was correct, but rather the tax au- for normal distribution companies, a too-narrow inter- thorities have to prove that the price was incorrect pretation in the german draft ordinance would cause However, the requirement to obtain and use unjustified additional efforts for German documenta any para bles will likely result in substantial external tion. In that case, the existing documentation in other and internal costs, because that comparable data is countries(that is, in the United States or the United normally not readily available Kingdom), which might have been based on a TNMM application for a"normal distribution company in V. Use of Transactional Net Margin Germany, would not satisfy German documentation Method requirements and would cause the company additional cost for preparing German-specific documentation One of the major new developments in the new draft based on a different approach. This would certainly be ordinance is the acceptance of the transactional net contradictory to various international efforts and the margin method (TNMM) in specific circumstances. In spirit of the EU Joint Transfer Pricing Forum to reduce the past, the tax authorities publicly had a very documentation costs for international companies. 2 negative attitude about any kind of profit-oriented transfer pricing approach and often denied the use of VI. Use of Databanks the trmm The new draft ordinances is evidence of a The draft ordinance contains detailed provisions on developments in many other countries and a reflection the use of databanks. This is, in the international that, in many cases, third-party data is only available context, aratherpositive development, because the use for net margins. Unfortunately, the new draft of database comparable searches is fairly common in ordinance still takes a too-limited approach to the use other countries. For the first time, the German tax au- of net margin methods when it requires that the appli- thorities recognize that in many cases the use of cation of those methods is restricted to toll manufac- publicly available databanks is the only means of turers, simple service companies, and distribution obtaining any kind of comparable data. This new companies with very limited functions and risks. 1 to consequence of the new German legal requirement that the taxpayer should support the arms-length nature of its pricing. This requirement would, from the outset, be completely unrealistic if the tax author ties did not also allow the use of databanks in some cases. because other data is often not available On the 8See inter alia: Heinz-Klaus Kroppen and Stephan Rasch, 12 other hand, the draft ordinance makes it very clear Transfer Pricing Report 642, Nov. 12, 2003; Franz Wassermeye p 474. Schnorberger, Der Betrieb, 2003, p 1241.g Heinz-Klaus Kroppen and Axel Eigelshoven in IBFD, Tax Treat. sion at the eu joint tra ng Forum ment of Transfer Pricing, Commentary on German transfer pric- cf.http∥e eu. int/comm/taxation c ing, Chapter 2.3, loose-leaf, Amsterdam as of June 2002 pany_tar NOte 3.4.9.3 ff. of the draft ordinance +. 33Notes 3.4.9.3 lit. b),3.4.9.4, and 3.4.9.5 of the draft ord 3INote 3.4.9.3 lit. a)of the draft ordinance. 34See above under section 4 Tax Notes International January10,2005·201

ment in the literature28 and whether it actually leads to a shift of the burden of proof from the tax authorities to the taxpayer. In the draft ordinance, the tax authori￾ties now have clarified their view on how the law must be interpreted. According to the draft ordinance, the documentation of the taxpayer must show a serious effort to observe the arm’s-length principle in transac￾tions with related parties. In this respect, documenta￾tion shall reflect the considerations made by the taxpayer of why, from his or her perspective, the agreed prices are at arm’s length. The taxpayer shall — if this is possible and reasonable — use external and internal comparables as well as internal budget data. Although that documentation requirement can be rather burdensome for the taxpayer, it can hardly be said that it technically leads to a shift of the burden of proof. In case of doubt, the taxpayer does not have to prove that the price was correct, but rather the tax au￾thorities have to prove that the price was incorrect. However, the requirement to obtain and use comparables will likely result in substantial external and internal costs, because that comparable data is normally not readily available. V. Use of Transactional Net Margin Method One of the major new developments in the new draft ordinance is the acceptance of the transactional net margin method (TNMM) in specific circumstances. In the past, the tax authorities publicly29 had a very negative attitude about any kind of profit-oriented transfer pricing approach and often denied the use of the TNMM. The new draft ordinance30 is evidence of a more open mind for the use of that method, in line with developments in many other countries and a reflection that, in many cases, third-party data is only available for net margins. Unfortunately, the new draft ordinance still takes a too-limited approach to the use of net margin methods when it requires that the appli￾cation of those methods is restricted to toll manufac￾turers, simple service companies, and distribution companies with very limited functions and risks.31 The draft ordinance does not explain what is meant by distribution companies with limited functions and risks. In many transfer pricing methods for interna￾tional groups, the distribution companies of those groups are viewed as having only limited functions and risks compared to the owners of intangible and manu￾facturing companies. If for those distribution companies a net margin approach could be used, the new German draft ordinance would be a major step forward, in practice. However, if the wording in the draft ordinance is meant to draw a distinction between a normal distribution company and a distribution company that compared therewith has even more limited functions and risks, the application of a net margin approach would be too restricted. In particular, because in many other developed countries the use of the TNMM approach is widely accepted and practiced for normal distribution companies, a too-narrow inter￾pretation in the German draft ordinance would cause unjustified additional efforts for German documenta￾tion. In that case, the existing documentation in other countries (that is, in the United States or the United Kingdom), which might have been based on a TNMM application for a “normal” distribution company in Germany, would not satisfy German documentation requirements and would cause the company additional cost for preparing German-specific documentation based on a different approach. This would certainly be contradictory to various international efforts and the spirit of the EU Joint Transfer Pricing Forum to reduce documentation costs for international companies.32 VI. Use of Databanks The draft ordinance contains detailed provisions on the use of databanks.33 This is, in the international context,a rather positive development,because the use of database comparable searches is fairly common in other countries. For the first time, the German tax au￾thorities recognize that in many cases the use of publicly available databanks is the only means of obtaining any kind of comparable data. This new openness to databank searches can also be seen as a consequence of the new German legal requirement that the taxpayer should support the arm’s-length nature of its pricing.34 This requirement would, from the outset, be completely unrealistic if the tax authori￾ties did not also allow the use of databanks in some cases, because other data is often not available. On the other hand, the draft ordinance makes it very clear Tax Notes International January 10, 2005 • 201 Special Reports 28See inter alia: Heinz-Klaus Kroppen and Stephan Rasch, 12 Transfer Pricing Report 642, Nov. 12, 2003; Franz Wassermeyer, Der Betrieb, 2003, p. 1535; Rolf Schreiber, Steuerberatung 2003, p. 474.; Schnorberger, Der Betrieb, 2003, p. 1241. 29See press release of the Federal Ministry of Finance, dated July 13, 1995, Deutsches Steuerrecht 1995, p. 1500. See also Heinz-Klaus Kroppen and Axel Eigelshoven in IBFD, Tax Treat￾ment of Transfer Pricing, Commentary on German transfer pric￾ing, Chapter 2.3, loose-leaf, Amsterdam as of June 2002. 30Note 3.4.9.3 ff. of the draft ordinance. 31Note 3.4.9.3 lit. a) of the draft ordinance. 32For the discussion at the EU Joint Transfer Pricing Forum, cf. http://europa.eu.int/comm/taxation_customs/taxation/com￾pany_tax/transfer_pricing/forum/index_en.htm. 33Notes 3.4.9.3 lit. b), 3.4.9.4, and 3.4.9.5 of the draft ordi￾nance. 34See above under section 4. (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Special Reports that under no circumstances is it mandatory for the The tax authorities also state that data obtained taxpayer to prepare a net margin analysis using from databanks very often will only have limited databanks. Therefore, the approach of the tax authori- comparability because of a lack in the reliability of the ties is balanced and provides the taxpayer with the data. In this case, the german tax authorities require necessary flexibility for its documentation. that the range of data obtained from the databank Taxpayers who for good reasons believe that a research be reduced using statistical methods. The databank net margin analysis is not appropriate in new draft ordinance explicitly mentions the their case have the ability to prepare the documenta- interquartile range as the means to reduce the range tion using other resources. Those taxpayers that of results. Again, the tax authorities follow an interna already prepared databank net margin analysis or tional trend, because the use of interquartile ranges is believe they are an effective and cost-efficient means of a widely accepted approach in many countries. 36 complying with the German documentation require- Taxpayers should welcome that development because ments also have the ability to do so. This rather large it again allows them in many cases to use approaches flexibility for taxpayers is particularly welcome, that they have already applied in preparin heir because the attitude towards profit- or net foreign documentation. This should help the taxpayers margin-based analyses might be rather different limit time and expense for preparing German tween German-based multinational groups and documentation foreign-based multinational groups. In particular, the latter often have vast experience using that kind of VI. Transfer Pricing Adjustments analysis in their home jurisdiction and the eretore wt be confronted with unnecessary additional documen- In the past, it was very common in German transfer tation burdens if they could not use large parts of the transfer pricing audit adjustment solely on the fact documentation they have prepared in their home that the taxpayer had used a method under which country year-end price adjustments were made if the result of for example, a german distribution company fell The most important area of discussion outside the interquartile range of acceptable results will probably be the obligation of the There were even cases when tax auditors stated that taxpayer to take contractual they acknowledged that those adjustments led to precautions for obtaining information arms-length result, but they still made an audit adjustment because they believed that under the German rules those year-end adjustments were not 8 If the taxpayer prepares documentation on the basis permissible. Here, the new German draft ordinance of databank data, the new draft ordinance requires includes some positive developments. The draft that the taxpayer makes those data available to the tax ordinance states that price adjustments made after the authorities in In electro nic form and that the medium transaction has been completed will only be acceptable (disk, diskettes, and so on) includes all relevant dat if they are made according to an agreement concluded available at the point in time of the search. 35 It is not beforehand. This agreement must be clear and clear what exactly the tax authorities require from the unequivocal and must include all factors that are taxpayer. If the request has to be understood in a way necessary to determine the final price so that the later that the taxpayer has to store all data that adjustment can be made solely through a calculation available at the time of the search in, for example, the without the discretion of the parties to the transaction. Amadeus Databank, the tax authorities need to recon- In addition, the draft ordinance provides that if a sider this requirement. At the moment, it is impossible taxpayer concludes a transaction based on a price that for legal reasons that the taxpayer copy all available is not at arm's length during the business year, but data from the Amadeus Databank on a disc and adjusts that non-arm's-length price for tax purposes in provide this disc to the tax authorities. That action the tax return, documentation needs to be prepared for would, in many cases, violate the usage agreements the price that was used for tax purposes. again, this that taxpayers or tax consultants have with providers statement of the draft ordinance can only refer to a of publicly available databases, such as Bureau Van situation in which the taxpayer has used a price in the Dijk providing the Amadeus Databank. The tax au- price setting during the year, but has adjusted that thorities should reconcile their request for the most price for tax purposes to comply with the arm's-length comprehensive data documentation with the legal principle bility of the taxpayer to provide data Note 3.4.9.3 lit. b of the draft ordinance 36Cf. U.S. Treas reg. 1.482-1(eX2 iii)(C) 202 January 10, 2005 Tax Notes International

that under no circumstances is it mandatory for the taxpayer to prepare a net margin analysis using databanks. Therefore, the approach of the tax authori￾ties is balanced and provides the taxpayer with the necessary flexibility for its documentation. Taxpayers who for good reasons believe that a databank net margin analysis is not appropriate in their case have the ability to prepare the documenta￾tion using other resources. Those taxpayers that already prepared databank net margin analysis or believe they are an effective and cost-efficient means of complying with the German documentation require￾ments also have the ability to do so. This rather large flexibility for taxpayers is particularly welcome, because the attitude towards profit- or net margin-based analyses might be rather different between German-based multinational groups and foreign-based multinational groups. In particular, the latter often have vast experience using that kind of analysis in their home jurisdiction and therefore would be confronted with unnecessary additional documen￾tation burdens if they could not use large parts of the documentation they have prepared in their home country. The most important area of discussion will probably be the obligation of the taxpayer to take contractual precautions for obtaining information. If the taxpayer prepares documentation on the basis of databank data, the new draft ordinance requires that the taxpayer makes those data available to the tax authorities in electronic form and that the medium (disk, diskettes, and so on) includes all relevant data available at the point in time of the search.35 It is not clear what exactly the tax authorities require from the taxpayer. If the request has to be understood in a way that the taxpayer has to store all data that was available at the time of the search in, for example, the Amadeus Databank, the tax authorities need to recon￾sider this requirement. At the moment, it is impossible for legal reasons that the taxpayer copy all available data from the Amadeus Databank on a disc and provide this disc to the tax authorities. That action would, in many cases, violate the usage agreements that taxpayers or tax consultants have with providers of publicly available databases, such as Bureau Van Dijk providing the Amadeus Databank. The tax au￾thorities should reconcile their request for the most comprehensive data documentation with the legal ability of the taxpayer to provide data. The tax authorities also state that data obtained from databanks very often will only have limited comparability because of a lack in the reliability of the data. In this case, the German tax authorities require that the range of data obtained from the databank research be reduced using statistical methods. The new draft ordinance explicitly mentions the “interquartile range” as the means to reduce the range of results. Again, the tax authorities follow an interna￾tional trend, because the use of interquartile ranges is a widely accepted approach in many countries.36 Taxpayers should welcome that development because it again allows them in many cases to use approaches that they have already applied in preparing their foreign documentation.This should help the taxpayers limit time and expense for preparing German documentation. VII. Transfer Pricing Adjustments In the past, it was very common in German transfer pricing audits for the German auditor to base a transfer pricing audit adjustment solely on the fact that the taxpayer had used a method under which year-end price adjustments were made if the result of, for example, a German distribution company fell outside the interquartile range of acceptable results. There were even cases when tax auditors stated that they acknowledged that those adjustments led to an arm’s-length result, but they still made an audit adjustment because they believed that under the German rules those year-end adjustments were not permissible. Here, the new German draft ordinance includes some positive developments. The draft ordinance states that price adjustments made after the transaction has been completed will only be acceptable if they are made according to an agreement concluded beforehand. This agreement must be clear and unequivocal and must include all factors that are necessary to determine the final price so that the later adjustment can be made solely through a calculation without the discretion of the parties to the transaction. In addition, the draft ordinance provides that if a taxpayer concludes a transaction based on a price that is not at arm’s length during the business year, but adjusts that non-arm’s-length price for tax purposes in the tax return, documentation needs to be prepared for the price that was used for tax purposes. Again, this statement of the draft ordinance can only refer to a situation in which the taxpayer has used a price in the price setting during the year, but has adjusted that price for tax purposes to comply with the arm’s-length principle. 202 • January 10, 2005 Tax Notes International Special Reports 35Note 3.4.9.3 lit. b of the draft ordinance. 36Cf. U.S. Treas. reg. 1.482-1(e)(2)(iii)(C). (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Report Both statements of the draft ordinance help German tax authorities for transfer pr taxpayers overcome a problem that often exists in transfer pricing methods, this statement in the draft practice when implementing a transfer pricing system. ordinance is also a positive development In many cases, the tax department of a multinational group must struggle with the operational department IX. Transfer Pricing Guidelines in the various business units, because the business peoples' approach to the setting of prices often deviates The Documentation Law gives an important role to from what is required for tax purposes. In that case, it transfer pricing guidelines, because if those guidelines is frequently necessary to allow the operational are implemented within an international group and are departments to set their prices during the year in based on the arms-length principle, the law allows not way that satisfies their operational needs, but, at the documenting the business on a transactional basis. 8 same time, allow a price adjustment at the end of the For that transfer pricing guideline, the draft year based on arms-length criteria for taxes. It seems ordinance now clarifies that, even though those guide- that the new draft ordinance will allow that approach lines might exist, the other information that is if it is properly documented and the adjustment is required in sections 4 and 5 of the Documentation according to a clear agreement that describes all Decree Law must be prepared(that is, general infor djustment factors beforehand. This should lead to a mation, information on kind and size of business rela substantial simplification of transfer pricing discus- tionships with related parties). The draft ordinance sions within international groups also emphasizes that if the taxpayer deviates from its guideline in a particular case, special documentation VI. Aggregation must be prepared because the transfer pricing guideline is not applicable <A very important aspect for the preparation of nsfer pricing documentation is the aggregation of The draft ordinance requires the auditor to check, a832938 every transaction with a related party, but has to pricing guideline has actually been applied. If several the sale of a product or products to various distribution found without special documentation for those cases companies in different jurisdictions. The new German there is a large risk that the tax authorities will view the entire documentation as unusable with the conse- 是 draft ordinance generally allows an aggregation if quence(among others)of a shift of the burden of proof that aggregation of transactions is common and the possibility of transfer pricing penalties. between third parties (for example, the sale of a printer and its service and maintenance); X Documentation for Special Cases the aggregation is made according to reason able and understandable rules that have been The Transfer Pricing Law and Decree Law contain agreed on prior to the transactions; and specific requirements for documentation if a transac- tion was concluded under particular circumstances the transactions are economically comparable that is, the taxpayer changed business strategy or for the functions performed, the assets used claims that a result of a transaction should be set off and the risks assumed with the results of another transaction 39 The most Also, for aggregation, the german tax authorities have taken a reasonable approach, in particular, when allowing the aggregation of transactions that are not Cf sec. 2 paragraph 5 of the Decree Law(see footnote 5). It similar but are sold together in the market by third has already been stipul that the inclusion of transfer pricing parties. A separation of those transactions would be guidelines as a means of documenting a multinational's transfer overly burdensome and it would be very difficult to find pricing system has to be seen as a major step forward and as uitable comparables. In particular, when mentation with reasonable efforts. See heinz. Klaus kr databanks, it is hardly possible to separate the trans- Stephan Rasch, 12 Transfer Pricing Report 642, Nov 12, 2003 actions in the available information when, for example 39Cf. section 5 of the decree law(see footnote 5):"To the exten the product and the service of the product are sold that certain circumstances of the kind named in Sentence 2 are of ether if he relies -in respect of business conditions agreed by hin. o relevance for the agreed business relati In addition, the draft ordinance emphasizes that the for the establishment of an arm' s-length principle on certain axpayer has the ability to ask the tax authorities for a cumstances. then documentation about these circumstances ad ording to Sections 1 to 3 must be prepared. Depending on the in the pastit was rather difficult to get rulings froml individual circumstances, the following documentation might be binding ruling on the aggregation method. 37 Becaus necessary:..3. Information on transfer pricing consent or a taxpayer agreements with foreign tax autho with the taxpayer respectively and arbitration or 37Note 3.4.10 of the draft ordinance tries that relate to business transactions of the taxpayer oun ment proceedings applied for or already finished Tax Notes International January10,2005·203

Both statements of the draft ordinance help taxpayers overcome a problem that often exists in practice when implementing a transfer pricing system. In many cases, the tax department of a multinational group must struggle with the operational departments in the various business units, because the business peoples’ approach to the setting of prices often deviates from what is required for tax purposes. In that case, it is frequently necessary to allow the operational departments to set their prices during the year in a way that satisfies their operational needs, but, at the same time, allow a price adjustment at the end of the year based on arm’s-length criteria for taxes. It seems that the new draft ordinance will allow that approach if it is properly documented and the adjustment is according to a clear agreement that describes all adjustment factors beforehand. This should lead to a substantial simplification of transfer pricing discus￾sions within international groups. VIII. Aggregation A very important aspect for the preparation of transfer pricing documentation is the aggregation of transactions.No taxpayer is able to document each and every transaction with a related party, but has to document similar transactions together, for example, the sale of a product or products to various distribution companies in different jurisdictions. The new German draft ordinance generally allows an aggregation if: that aggregation of transactions is common between third parties (for example, the sale of a printer and its service and maintenance); the aggregation is made according to reason￾able and understandable rules that have been agreed on prior to the transactions; and the transactions are economically comparable for the functions performed, the assets used, and the risks assumed. Also, for aggregation, the German tax authorities have taken a reasonable approach, in particular, when allowing the aggregation of transactions that are not similar but are sold together in the market by third parties. A separation of those transactions would be overly burdensome and it would be very difficult to find suitable comparables. In particular, when using databanks, it is hardly possible to separate the trans￾actions in the available information when,for example, the product and the service of the product are sold together. In addition,the draft ordinance emphasizes that the taxpayer has the ability to ask the tax authorities for a binding ruling on the aggregation method.37 Because in the past it was rather difficult to get rulings from the German tax authorities for transfer pricing and transfer pricing methods, this statement in the draft ordinance is also a positive development. IX. Transfer Pricing Guidelines The Documentation Law gives an important role to transfer pricing guidelines, because if those guidelines are implemented within an international group and are based on the arm’s-length principle, the law allows not documenting the business on a transactional basis.38 For that transfer pricing guideline, the draft ordinance now clarifies that, even though those guide￾lines might exist, the other information that is required in sections 4 and 5 of the Documentation Decree Law must be prepared (that is, general infor￾mation, information on kind and size of business rela￾tionships with related parties). The draft ordinance also emphasizes that if the taxpayer deviates from its guideline in a particular case, special documentation must be prepared because the transfer pricing guideline is not applicable. The draft ordinance requires the auditor to check, based on different samples, whether the transfer pricing guideline has actually been applied. If several deviations from the transfer pricing guideline are found without special documentation for those cases, there is a large risk that the tax authorities will view the entire documentation as unusable with the conse￾quence (among others) of a shift of the burden of proof and the possibility of transfer pricing penalties. X. Documentation for Special Cases The Transfer Pricing Law and Decree Law contain specific requirements for documentation if a transac￾tion was concluded under particular circumstances; that is, the taxpayer changed business strategy or claims that a result of a transaction should be set off with the results of another transaction.39 The most Tax Notes International January 10, 2005 • 203 Special Reports 37Note 3.4.10 of the draft ordinance. 38Cf. sec. 2 paragraph 5 of the Decree Law (see footnote 5). It has already been stipulated that the inclusion of transfer pricing guidelines as a means of documenting a multinational’s transfer pricing system has to be seen as a major step forward and as a helpful indication for larger companies how to structure their doc￾umentation with reasonable efforts. See Heinz-Klaus Kroppen and Stephan Rasch, 12 Transfer Pricing Report 642, Nov. 12, 2003. 39Cf. section 5 of the decree law (see footnote 5): “To the extent that certain circumstances of the kind named in Sentence 2 are of relevance for the agreed business relationships of the taxpayer or if he relies — in respect of business conditions agreed by him — for the establishment of an arm’s-length principle on certain cir￾cumstances, then documentation about these circumstances ac￾cording to Sections 1 to 3 must be prepared. Depending on the individual circumstances, the following documentation might be necessary: . . . . 3. Information on transfer pricing consent or a taxpayer agreements with foreign tax authorities towards and with the taxpayer respectively and arbitration or mutual agree￾ment proceedings applied for or already finished of other coun￾tries that relate to business transactions of the taxpayer.” (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Special Reports mportant example of a special case, however, is the ordinance now claim that, in addition to the specific onclusion of a unilateral advance pricing agreement transfer pricing documentation penalties, general with a foreign tax authority. The German tax authori- penalties included in the Code of Procedures are appli ties have been very opposed to unilateral APAs in cable. Therefore, they want to apply the 25, 000 transfer pricing cases. They have seen this as an effort general penalty provided in section 328 of the Code of of the foreign jurisdiction to shift income to that foreign rocedures if documentation is missing for the first jurisdiction to the disadvantage of Germany. The year. That view of the tax authorities is rather doubtful German authorities therefore require as part of the because generally a specific law will supersede a more documentation that those unilateral APAs with general law 42 The legislature intentionally provided foreign tax authorities be disclosed. It can be antici- that the transfer pricing documentation penalties pated that the german tax authorities will review were effective one year later than the documentation those foreign unilateral APAs very critically and will requirement because the law was enacted very late in try to make a transfer pricing adjustment if they feel the year 2003, with retroactive effect to the beginning that the unilateral apa does not lead to a fair alloca- of the year. This clear intention of the legislature tion of income. That is rather critical for a German cannot be circumvented by the tax authorities through group having obtained a foreign unilateral APA, applying general penalties for a lack of documentation because in many cases a foreign unilateral aPa will be in the first year binding in the foreign jurisdiction even if Germany makes a transfer pricing adjustment. It is therefore XIL Usable and Unusable often very difficult to solve those cases in competent authority procedures, and the risk of double taxation is Documentation largely increased. The German taxpayer is well The distinction between usable and unusable docu advised to not only disclose the foreign aPa, but also to mentation is a critical element of the Documentation a832938 nilateral APA still is at arms length even though the burden of proof stays with the tax authorities, adjust German tax authorities did not take part in the negoti ments can only be made to the highest or lowest point ations of the unilateral aPa of a range, and no transfer pricing penalties can be applied. Of course, unusable documentation leads to XI. Transfer Pricing Penalties and the opposite consequences, in particular, that the Other penalties burden of proof shifts to the taxpayer and a transfer pricing penalty of 5 percent to 10 percent of the adjust The Documentation Law contains penalties of 5 ment can be imposed. In addition, tax authorities are percent to 10 percent of the income adjustment if docu- allowed to make estimation to the most disadvanta- mentation is not prepared or is unusable, and a geous point of a given arms-length range. 4 It is minimum of E100 per day with a maximum of El therefore critical to understand under what circum- million if transfer pricing documentation is submitted stances tax authorities view documentation as late. 0 However, under the law those specific documen- unusable tation penalties become effective only for business years starting after December 31, 2003. 1 Because the The German documentation requirements princi- pally contain two major parts: the documentation of new documentation requirements have already been in place for business years starting after December 31 2002, the question arose of what consequences would follow if the taxpayer did not prepare documentation for this first year: The tax authorities in the draft 42See, e.g., Lang, in Tipke/Lang, Steuerrecht, Cologne 2002 section 5. note 2 43See Heinz-Klaus Kroppen and Stephan Rasch Internationale Wirtschaftsbriefe, Fach 3 Deutschland, Gruppe 1 sEction 162, paragraph 4 of the General Tax Code provides "lf a taxpayer does not submit documentation in the sense of sec. 4Section 162, paragraph 3 of the General Tax Code: "If a tax tion 90, paragraph 3, or if the documentation is mostly of no use, a payer does not meet his documentation requirements in the sense urcharge on tax of 5,000 euros has to be set. The surcharge is at of section 90, paragraph 3 in that he does not submit his docu east 5 percent and at most 10 percent of the income paragraph tion is of no use. or if it is asserted that the taxpayer has made his documentation in the 3 has been made, and if thereafter a surcharge of more than 5,000 sense of section 90, paragraph 3, sentence 3 not contemporane ously, it is refutably assumed that his domestic taxable income for which determination the documentation in the sense of sec. the maximum, but at least to 100 euros for each full day of the shall serve, is higher than the income he ha exceedance of the deadline until the documentation has been sub- reported himself. If in such cases the tax authority has to make an estimation and if the income can only be determined within a certain range, especially on the basis of price ranges, this range aSee art. 22, section 97 of the introductory act to the code may be fully used to the disadvantage of the taxpayer in the event Procedures 204 January 10, 2005 Tax Notes International

important example of a special case, however, is the conclusion of a unilateral advance pricing agreement with a foreign tax authority. The German tax authori￾ties have been very opposed to unilateral APAs in transfer pricing cases. They have seen this as an effort of the foreign jurisdiction to shift income to that foreign jurisdiction to the disadvantage of Germany. The German authorities therefore require as part of the documentation that those unilateral APAs with foreign tax authorities be disclosed. It can be antici￾pated that the German tax authorities will review those foreign unilateral APAs very critically and will try to make a transfer pricing adjustment if they feel that the unilateral APA does not lead to a fair alloca￾tion of income. That is rather critical for a German group having obtained a foreign unilateral APA, because in many cases a foreign unilateral APA will be binding in the foreign jurisdiction even if Germany makes a transfer pricing adjustment. It is therefore often very difficult to solve those cases in competent authority procedures, and the risk of double taxation is largely increased. The German taxpayer is well advised to not only disclose the foreign APA, but also to carefully document why the result of the foreign unilateral APA still is at arm’s length even though the German tax authorities did not take part in the negoti￾ations of the unilateral APA. XI. Transfer Pricing Penalties and Other Penalties The Documentation Law contains penalties of 5 percent to 10 percent of the income adjustment if docu￾mentation is not prepared or is unusable, and a minimum of €100 per day with a maximum of €1 million if transfer pricing documentation is submitted late.40 However, under the law those specific documen￾tation penalties become effective only for business years starting after December 31, 2003.41 Because the new documentation requirements have already been in place for business years starting after December 31, 2002, the question arose of what consequences would follow if the taxpayer did not prepare documentation for this first year. The tax authorities in the draft ordinance now claim that, in addition to the specific transfer pricing documentation penalties, general penalties included in the Code of Procedures are appli￾cable. Therefore, they want to apply the €25,000 general penalty provided in section 328 of the Code of Procedures if documentation is missing for the first year. That view of the tax authorities is rather doubtful because generally a specific law will supersede a more general law.42 The legislature intentionally provided that the transfer pricing documentation penalties were effective one year later than the documentation requirement because the law was enacted very late in the year 2003, with retroactive effect to the beginning of the year. This clear intention of the legislature cannot be circumvented by the tax authorities through applying general penalties for a lack of documentation in the first year. XII. Usable and Unusable Documentation The distinction between usable and unusable docu￾mentation is a critical element of the Documentation Law. With usable documentation, for example, the burden of proof stays with the tax authorities, adjust￾ments can only be made to the highest or lowest point of a range, and no transfer pricing penalties can be applied.43 Of course, unusable documentation leads to the opposite consequences, in particular, that the burden of proof shifts to the taxpayer and a transfer pricing penalty of 5 percent to 10 percent of the adjust￾ment can be imposed. In addition, tax authorities are allowed to make estimation to the most disadvanta￾geous point of a given arm’s-length range.44 It is therefore critical to understand under what circum￾stances tax authorities view documentation as unusable. The German documentation requirements princi￾pally contain two major parts: the documentation of 204 • January 10, 2005 Tax Notes International Special Reports 40Section 162, paragraph 4 of the General Tax Code provides: “If a taxpayer does not submit documentation in the sense of sec￾tion 90, paragraph 3, or if the documentation is mostly of no use, a surcharge on tax of 5,000 euros has to be set. The surcharge is at least 5 percent and at most 10 percent of the income adjustment that is determined after the estimation in the sense of paragraph 3 has been made, and if thereafter a surcharge of more than 5,000 euros results. In case of a delayed submission of respective usable documentation the surcharge may amount to one million euros at the maximum, but at least to 100 euros for each full day of the exceedance of the deadline until the documentation has been sub￾mitted.” 41See art. 22, section 97 of the introductory act to the Code of Procedures. 42See, e.g., Lang, in Tipke/Lang, Steuerrecht, Cologne 2002, section 5, note 2. 43See Heinz-Klaus Kroppen and Stephan Rasch, Internationale Wirtschaftsbriefe, Fach 3 Deutschland, Gruppe 1, pp. 2057, 2066. 44Section 162, paragraph 3 of the General Tax Code: “If a tax￾payer does not meet his documentation requirements in the sense of section 90, paragraph 3 in that he does not submit his docu￾mentation, or if the submitted documentation is of no use, or if it is asserted that the taxpayer has made his documentation in the sense of section 90, paragraph 3, sentence 3 not contemporane￾ously, it is refutably assumed that his domestic taxable income for which determination the documentation in the sense of sec￾tion 90, paragraph 3 shall serve, is higher than the income he has reported himself. If in such cases the tax authority has to make an estimation and if the income can only be determined within a certain range, especially on the basis of price ranges, this range may be fully used to the disadvantage of the taxpayer in the event of an adjustment.” (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content