ITPJ JULY/AUGUST 2000 ully comply with the OECD approach, the Tax Court generally deemed not to be comparable to transactions that would at least have to analyse the reasons why an account for a much more significant percentage of total djustment was not deemed to be necessary; evenue. adjustments are also difficult if there are consid- inventory holding. According to the taxpayer, the Ger- erable differences in terms of risks, because these differ man distributor performed the warehousing function ences are often difficult to quantify for the unrelated the parent. If the. wholesaler performs additional one considers the alternatives to the gross margin method actions if transfer mined throu sonnel expenses, cost for warehouse space, and cap: gross margin comparison, the comparable profit method would inevitably have to be applied(because also in most cases the comparable uncontrolled price method and the housing usually involves a variety of risks, notably the cost-plus method are excluded on the side of the manufac- turer). The reliability of the comparable profit method is in risk of shrinkage, obsolescence and price risk. These large part an issue of comparabilit opposed to a service provider with selling functions, this view will change in future o yy standards. Yet this is risks are a main characteristic of a distributor hardly discussed in germany it remains to be seen if uch as, for example a commission agent. The ques tion is whether an adjustment for these types of risk can be made at all or whether it is impossible to anal se the transaction due to a lack of appropriate adjust- V. APPLICABILITY OF THE COMPARABLE PROFIT METHOD ments In addition, the quantification of the differences deter- A. Current discussion mined by the Tax Court seems to be arbitrary, as there is no obvious substantiation. 41 For example, it would have been The Dusseldorf Tax Court ruling revived the discussion ossible to adjust the different payment terms by adjusting about the admissibility of the comparable profit method, Court would have had to analyse the expense items in the application of this method in Germany. 42 profit and loss account in order to ensure an appropiate The comparable profit method, unlike the standard trans- determination of the functional differences. The suspicion actional methods, looks at a comparison of net margins, therefore arises that the Court intended to reach a compro- for example the operating margin, retum on asset s, or the mise at the expense of a full consideration of the impact of berry ratio. From a German perspective, the main weak clusions drawn in the unpublished sections of the Court ruling discloses that, with a gross margin of 24 per cent. profits of a company depend on a variety of influences, whereas the transfer price is the Court is almost exactly in the middle of the plaintiff's ber of factors. Hence, the profits of an enterprise do, not line with past court decisions in the area of transfer pric- comparable profit method is often treated as equivalent to n individual transaction but on the total profit of an enter- D. Conclusion regarding the application of the prise or a product segment). This objection, however, also resale price method applies to some degree to the resale price and the cost-plus The detailed discussion of the insufficient comparability analysis illustrates that transfer prices normally cannot be reliably determined on the basis of industry averages, ald Kuckhoff and Rolf Schreiber, "Quo vadis Fremdvergleic".8 ISIR 16 because comparability with unknown average enterprises (1999), at 519. But for a diffe Comr, 617 F2d, 942(2d Cir. 1980), rev'g 36TC M. 586(1977)(here a trans- cannot be properly established. In most cases a transac- action with an unrelated party accounting for only five per cent of intercompany tion-based analysis can be properly performed only if, transactions was deemed to be comparable he specific circumstances of the transaction (internal 42. Berndt runge, "Quo vadis, internationaler Verrechnungspreise, cui bono, gross margin comparison). Should comparable transac er OECD-Verrechnungspreisbericht?4 IStR 11(1995), at 507: Thomas tions be available, the question of the degree of compar- Borstell and Michael Prick, Grundsatzentscheidur ability arises. The comparability standards are generally aten in der Prufung von verrechnungspreisen". 8 IStR 10(1999), at 306; Klaus interpreted in a very tolerant manner. The Tax Court of (anchen: Beck verlag, 1999). Ar. 9 MA, note 260; Hubertus Baumhoff,in rucial importance for the planning of transfer pricing sy Baumhoff,(Koln:Dr. Otto Schmidt Verlag, 1996), Sec. 1 Astg. note 550: Moris tems: How and to what extent can adjustments for differ- Lehner, in Doppelbesteuerungsabkommen, ed. Klaus Vogel(Munchen: Beck nces between transactions of related and unrelated parties be properly made? In the United States, transactions: /StR 16(1999), at 527: Heinz-Klaus Kroppen and Axel Eigelshoven,"Die Be- accounting for up to five per cent of the total revenue are immun angemessener Vermechnungspreise mit Hilfe des extemen Betriebs- ergleichs", nWB 1(2000): Fach 3 Gruppe 1 Deutschland, at 1601 - 2000 1BFD Publications Bv