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 January10,2005·201ment 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