734 (vol.11,No.16) ANALYSIS in draft section 90 paragraph 3 are not fulfilled. Under According to draft section 162 paragraph 4, sentence the most recent draft, whether to impose a penalty is 2, if a taxpayer does not submit transfer pricing docu not left to the discretion of the tax authority. A penalty mentation as defined in section 90 paragraph 3 of the is mandatory if the compliance duty stemming from draft, the imposition of a surcharge would depend on draft section 90 paragraph 3 is not satisfied. This could the amount of the adjustment. If no income adjustment lead to the double burden of an unfavorable income es- was applicable, a penalty should not be considered. An timation and a comprehensive penalty. This undoubt income adjustment is, for instance, not applicable if the edly violates the principle of proportionality, and the transfer prices were correct. However, if under the pro- ax law encroaches upon the rights of the taxpayer. Any osed legislation the documentation was submitted af- intervention should be limited to the least possible bur- er the 60 days allowed in draft section 90 paragraph 3 den for the taxpayer, which obviously would not be the sentence 5, i.e., a delayed submission, the surcharge to case if a double sanction applies be imposed could be limited to a maximum amount of 2 If the taxpayer is able to present some documenta million euros tion that might reduce the determined range of prices the tax authorities are obliged to consider these docu The latter surcharge applies regardless of whether an income adjustment takes place. This conflicts with ments. The tax authorities are not allowed to perform arbitrary estimations the aforementioned penalty when documentation is not presented at all. If in such a case an adjustment does not apply a penalty is not imposed. a delay in submit Penalti ting transfer pricing documents is thus punishe harshly than not bringing forward any documents at all As already indicated, Germany's decision to luce penalties looks like a paradigm shift. In 1995, undetermined. Neither the tax authorities nor the tax called six country group-Austria, Belgium, France, payer know the amount at which the penalty should be ettled. Further, the penalty is not consistent with the Germany, Sweden, and Switzerland-strongly opposed surcharge for the late filing of a tax return. According the draft U.S. penalty regulations. The group argued to section 152, paragraph 2, in the latter case a maxi that income would shift into those countries with the mum surcharge of 25,000 euros might be imposed.This most comprehensive documentation and penalty regu- lation. Although the surcharge mentioned in draft sec- mount relates to the refusal of the tax return as a 0 e (steuerliche Nebenleistung) in the sense part of theta retum. Th吗at灯 er's refusal to pre lowing the compliance duties concerning transfer pric of the punishment a taxpayer is facing if it fails to pre- are and submit only parts, i.e., the transfer pricing paragraph 4 reads: documentation of the whole tax return This cannot be reconciled with the principle of proportionality If a taxpayer infringes his documentation require- urthermore, the german tax legislator should heed lents according to section 90 paragraph 3 a su the implications of European tax law. Section 152 con harge on tax has to be set. This comprises in the cerning the delayed submittal of the tax return relates sense of paragraph 3 at least 10% and at most 20% to the delayed presentation of documents for domestic of the surcharge on the income of the business re- income allocation, while the documentation for transfer lations according to section 90 paragraph 3, which pricing purposes is by its very nature related to cross result from the application of paragraph 3. In case border transactions. The harsh penalty for cross border of a delayed submission of the respective docu transactions compared with the domestic surcharge entation required by section 90 paragraph 3 sen- might therefore lead to a breach of the four fundamen- tences 1 and 2 the surcharge may amount to tal f ms provide hing the e 2, 000.000 Euro. When setting a surcharge in accor- ropean Union since fore taxpayers are treated less ance with sentence 3 not only its aim of making favorably than domestic ones the taxpayer fulfill his documentation require Systematically, the draft law itself treats the penalty ments on time in the scope of section 90 paragraph as so-called tax-related additional services. Taking into are to be taken into account, but especially the account the ratio legis of the draft penalty regulation, the taxpayer should be obliged to prepare its documen- prolonged delay, also the duration of the ex- tation. Again, section 152 seems to aim at the same ob. ceedance. The surcharge need not be set if the jective by requesting the taxpayer to timely file its tax non-fulfillment of the requirements seems justifi- return. It seems unjust that the latter leaves the imposi able according to section 90 paragraph 3. The neg- tion to the tax authorities'discretion while the former is ligence of a legal representative or of an assistant tive. Both regulations should be based on the equals the taxpayers own negligence. The sur- same principles charge should regularly be determined simulta Conclusion The penalty regulation is excessive and inconsistent with existing legislation Although the German government has formally ac- epted the draft, tax legislation must be enacted by the Lower House of the german Parliament and the Federal 13 Cf. Seer. Roman Council. The bill is now in Parliament, and additional Wilhelm, abgabenordnung,(Cologne: Dr. Otto Schmidt Ver- changes are expected before it is enacted. Some practi