225 ITPJ SEPTEMBER/OCTOBER 2004 Summing up, it seems that some taxpayers have tried to analyse their loss periods to ascertain reasons preted the Federal Tax Court decision in a highly which have caused the losses and which were independent sided way. Therefore, the Ministry of Finance has b from the transfer prices used cally followed the Federal Tax Court's finding, but it sought to stress that the taxpayer must provide sufficient information so that the tax authorities can assess the arm' s 3. 4. Concept of the arm s length range length nature of the transaction. 6 Again, the taxpayer is well advised to cooperate reas- arm s length range. stressed that German onably in order to avoid any negative consequences. If the transfer pricing legislation, although explicitly recogniz. taxpayer does not cooperate at all and does not even pro- ing the use of arm's length ranges, does not explain how vide available information and as a result the tax author- to determine the arms length range ities are not able to determine the facts and circumstances Once a range of acceptable prices by themselves, the tax authorities are ultimately author- has perhaps been refined due to mined and ized to estimate the taxpayers income. A one-sided atti- the ques tion arises as to the point in this tude of refusing to provide any information will most ment should be made if it is likely lead to negative consequences taxpayer s transfer price falls outside this range. The Federal Tax Court held that an adjustment is only possible to the most 3.3. Distribution companies with continuing losses advantageous point within this range for the taxpayer, which is either the high or low end of the range. The Court The Federal Tax Court as well as the Ministry of Finance stated that there is no legal basis for an adjustment to the has also addressed the issue of continuing losses suffered midpoint of the range and that tax law does not allow esti by a distribution subsidiary. The discussion had been initi- mates to punish the taxpayer ated through a widely recognized Federal Tax Court deci- However, the Ministry of Finance argues in the Letter that Tax Court had concluded that German distribution com- a price should be adjusted to the point within the range panies of foreign groups should not incur start-up losses which reflects the"most likely value"within the arms affirmed this rule in its 1993 decision and further refined authors opinion-not in line with existing law and is not it the decision of 17 October 2001. Generally, a distribu- acceptable. It is a logical assumption of an arms length range that each price or value within the range is by its tion company should make an adequate total profit within very nature"an arms length price or value". Based on this pond to the functions and risks assumed. The court stated premise, it is mandatory that a price outside the range that at a minimum, the total profit should be an appropri- tageous point within the range which is the high or low ate return on the invested capital based on market interest rates plus an appropriate risk mark-up end of the range. By adjusting a price to the"most likely value "of the range, the Ministry of Finance deals arbitrar The Court further ruled that substantial losses of a distri bution company for three years would lead to a rebuttable presumption that the transfer prices were not arm's length. 16. See H K Kroppen and S Rasch,, Internationale Wirtschaftsbriefe(2004) 3 Deutschland Gr. 1, at 2057. 2061: A. Eigelshoven and S, Rasch. 13 To The taxpayer may rebut this presumption by showing and Management Transfer Pricing Report 3(9 June 2004),at 114,115 proving that the agreed transfer prices were still arms 17 H K Handbuch Internationale Verrechnungspreise, eds. Becker and H.K. Kroppen (Cologne: Verlag Dr. Otto Schmidt 1997/2001) tion to cooperate by demonstrating that the transfer prices (2000). F: 3 Deutschland Gr. 1. at [5817 1602: H. Baumhoff and Sicker. intere are appropriate because the agreed transfer prices are nationales Steuerrecht(1995), at 517. 521: Becker, in Handbuch internationale within an arms length range of transfer prices. If the tax hmidt 1997/2001), note O Tz. 1.52 Anm. 12 et seq. C. Bellstedt, Interna payer demonstrates such appropriateness of its transfer tional Wirtschaftsbriefe F. 2. at 429: M. Famschlader, Internationale prices, the tax authorities then must-in the authors'opin Wirtschafisbriefe F. 2, at 565: R. Schreiber, Internationales Steuerrecht (1994) on- provide"counter-evidence"that the transfer prices at 315 are actually the reason for the losses. In the authors'exper- ience, the tax authorities are not in a position to disprove If a taxpayer does not meet its documentation requirements in the sense of an arm's length range established by the taxpayer. section 90, paragraph 3 in that it does not submit its documentation, or the submitted documentation is of no use. or if it is asserted that the tax In addition, if the taxpayer is not able to show that the payer has not made its documentation in the sense of section 90. paragraph agreed transfer 3. sentence 3 contemporaneously, there is a rebuttable presumption that its ces are within an arms length range. the domestic taxable income for which determination the documentation in the taxpayer may still, for example, show that misinvestment sense of section 90, paragraph 3 is needed, is higher than the income the or mismanagement took place, or that third-party distribu payer has reported itself. tors also incurred long-term losses at the same time because of difficult market conditions. If the taxpayer income can only be determined within a certain range, especially on the can show such reasons, losses may be accepted for a basis of price ranges. this range may be fully used to the disadvantage of the taxpayer in the event of an adjustment period longer than three years. It should be noted that in 20. The Federal Tax Court also emphasized in the decision of 17 Decem existing practical audit defences, taxpayers have alread ber 2001 that a transfer pricing analysis can only lead to a range of acceptable prices based on the available comparable data C 2004 International Bureau of Fiscal Documentation