ANALYSIS (vol.9,No.4)123 Customs, Insurance Documents written down their actual policy. Under the draft rules German companies should document the major pricing In the past, it was unusual for the German tax au factors in a formalized pricing policy, since the author thorities in a transfer pricing audit to review customs ties in fact expect a pricing policy audit documents as well. This was surprising, since the The authors have not seen a single german taxpayer customs value is determined on the basis of pricing who has a summary list of all related-party tangible for transfer pricing. The draft guidelines explicitly men ffiliate, readily available. The preparation of docu- tion customs audit reports as documents the e tax au ments that detail related-party transaction flows are tors may request so that the taxpayer should also study burdensome and make the related-party transactions and analyze the customs implications when setting transparent to the tax authoritic transfer prices for tax purposes and vice versa The conflicting goals of the customs and tax author ties may cause difficulties for taxpayers. While customs Pricing Methods authorities regularly like to establish a high sales price Taxpayers belonging to an international group of to the German affiliate as a basis for a higher customs companies sometimes take different transfer pricing value, a higher sales price will lead to higher acquisition positions in different countries and try to defend their costs for the German company and consequently a ing decisions on a country-by-country basis. It is wer profit for income taxation, which can lead to a so not unusual for those taxpayers to use profit-base transfer pricing problem The draft also explicitly mentions insurance docu hem into more traditional, transaction-based methods ments as a record that the tax auditor may request In- in countries where profit-based methods were not well surance documents can be dangerous in transfer pric accepted( e. g, to turn a comparable profits method ing audits because they often contain information about(CPM) into a modified resale price method) the value of assets that is based on totally different prin In the future, a taxpayer must use caution in defend- ciples than those used for setting prices for transfer ing its transfer prices in different countries and should ricing purposes. In past transfer pricing audits, even coordinate the approach, since under the new draft efore taxpayers were required to submit these docu guideline les, documents prepared for the tax authorities ments, the tax authorities confronted them with valua in other countries might end up in the hands of the Ger tions based on insurance documents to support an ad man tax authorities even without the german tax au- justment,e.g, when major assets or businesses had thorities explicitly asking for foreign transfer pricing documents. Taxpayers should prepare documentation Contemporaneous Documentation payers should use similar documentation reports to Requirements avoid major discrepancies-even in the format and the ording of the documentatio Taxpayer planning and budget process docume cluding explanations about the deviation between Timing of Documentation plan/budget and actual results and a description of the remedial measures taken by the taxpayer, are impor- Under the draft guidelines, documents not required tant in German transfer pricing audits. to be provided at the beginning of the audit must be The importance of planning and budgeting docu- submitted without undue delay within an "appropriate ments stems from a 1993 German Supreme Court deci- period of time. " However, the guidelines do not define ion in which the court held that a distributor had to be an appropriate period of time. able to provide budgeting and planning documents The draft guidelines also contain a major change in These documents must demonstrate that the taxpayer the approach of the tax authorities on when documen- planned for a reasonable profit within an appropriate tation must be prepared In the past, it was common(al timeframe following the introduction of a new product though it was never advisable) for taxpayers to start oo In a new approach for the German tax auditors, the preparing documentation and evidence for their pricing ft guidelines would require taxpayers to submit cer only after the tax auditor requested the information tain documents at the beginning of an audit even with- The documentation submitted was based specifically on out a specific request. It is questionable whether the tax the questions of the auditor. The draft guidelines would authorities have a sufficient legal basis under existing quire contemporaneous and ongoing documentation German tax law to request these documents. The docu- of all facts and circumstances that are relevant for the ments that may have to be submitted include allocation of income between affiliated companies (Sec ■ a group chart; 2.2.3.) a financial statements for gr The documentation would have to be prepared at the m the taxpayers pricing polic time the price was determined or, at the latest, when the aa summary of all deliverie d services with re- actual transaction took place, and not when the audit lated parties, separate for each year under audit and for had started and the documents had been requested each party; and Therefore the draft rules would require much more dis- a documents that have been prepared for tax au- cipline from taxpayers, who would have to set their thorities of other coun transfer prices in a transparent way. At the same time, The group chart and financial statements are usually taxpayers would have to consider how to document ailable in every international group. However, many their price setting process and how to ensure that the roups do not have formal, written pricing policies be- documents will be retained within the company until cause they set prices on an ad hoc basis or have not the tax auditor comes in several years later TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063.2069 BNA TAX