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 Internationalimportant 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