Report Both statements of the draft ordinance help German tax authorities for transfer pr taxpayers overcome a problem that often exists in transfer pricing methods, this statement in the draft practice when implementing a transfer pricing system. ordinance is also a positive development In many cases, the tax department of a multinational group must struggle with the operational department IX. Transfer Pricing Guidelines in the various business units, because the business peoples' approach to the setting of prices often deviates The Documentation Law gives an important role to from what is required for tax purposes. In that case, it transfer pricing guidelines, because if those guidelines is frequently necessary to allow the operational are implemented within an international group and are departments to set their prices during the year in based on the arms-length principle, the law allows not way that satisfies their operational needs, but, at the documenting the business on a transactional basis. 8 same time, allow a price adjustment at the end of the For that transfer pricing guideline, the draft year based on arms-length criteria for taxes. It seems ordinance now clarifies that, even though those guide- that the new draft ordinance will allow that approach lines might exist, the other information that is if it is properly documented and the adjustment is required in sections 4 and 5 of the Documentation according to a clear agreement that describes all Decree Law must be prepared(that is, general infor djustment factors beforehand. This should lead to a mation, information on kind and size of business rela substantial simplification of transfer pricing discus- tionships with related parties). The draft ordinance sions within international groups also emphasizes that if the taxpayer deviates from its guideline in a particular case, special documentation VI. Aggregation must be prepared because the transfer pricing guideline is not applicable <A very important aspect for the preparation of nsfer pricing documentation is the aggregation of The draft ordinance requires the auditor to check, a832938 every transaction with a related party, but has to pricing guideline has actually been applied. If several the sale of a product or products to various distribution found without special documentation for those cases companies in different jurisdictions. The new German there is a large risk that the tax authorities will view the entire documentation as unusable with the conse- 是 draft ordinance generally allows an aggregation if quence(among others)of a shift of the burden of proof that aggregation of transactions is common and the possibility of transfer pricing penalties. between third parties (for example, the sale of a printer and its service and maintenance); X Documentation for Special Cases the aggregation is made according to reason able and understandable rules that have been The Transfer Pricing Law and Decree Law contain agreed on prior to the transactions; and specific requirements for documentation if a transac- tion was concluded under particular circumstances the transactions are economically comparable that is, the taxpayer changed business strategy or for the functions performed, the assets used claims that a result of a transaction should be set off and the risks assumed with the results of another transaction 39 The most Also, for aggregation, the german tax authorities have taken a reasonable approach, in particular, when allowing the aggregation of transactions that are not Cf sec. 2 paragraph 5 of the Decree Law(see footnote 5). It similar but are sold together in the market by third has already been stipul that the inclusion of transfer pricing parties. A separation of those transactions would be guidelines as a means of documenting a multinational's transfer overly burdensome and it would be very difficult to find pricing system has to be seen as a major step forward and as uitable comparables. In particular, when mentation with reasonable efforts. See heinz. Klaus kr databanks, it is hardly possible to separate the trans- Stephan Rasch, 12 Transfer Pricing Report 642, Nov 12, 2003 actions in the available information when, for example 39Cf. section 5 of the decree law(see footnote 5):"To the exten the product and the service of the product are sold that certain circumstances of the kind named in Sentence 2 are of ether if he relies -in respect of business conditions agreed by hin. o relevance for the agreed business relati In addition, the draft ordinance emphasizes that the for the establishment of an arm' s-length principle on certain axpayer has the ability to ask the tax authorities for a cumstances. then documentation about these circumstances ad ording to Sections 1 to 3 must be prepared. Depending on the in the pastit was rather difficult to get rulings froml individual circumstances, the following documentation might be binding ruling on the aggregation method. 37 Becaus necessary:..3. Information on transfer pricing consent or a taxpayer agreements with foreign tax autho with the taxpayer respectively and arbitration or 37Note 3.4.10 of the draft ordinance tries that relate to business transactions of the taxpayer oun ment proceedings applied for or already finished Tax Notes International January10,2005·203Both statements of the draft ordinance help taxpayers overcome a problem that often exists in practice when implementing a transfer pricing system. In many cases, the tax department of a multinational group must struggle with the operational departments in the various business units, because the business peoples’ approach to the setting of prices often deviates from what is required for tax purposes. In that case, it is frequently necessary to allow the operational departments to set their prices during the year in a way that satisfies their operational needs, but, at the same time, allow a price adjustment at the end of the year based on arm’s-length criteria for taxes. It seems that the new draft ordinance will allow that approach if it is properly documented and the adjustment is according to a clear agreement that describes all adjustment factors beforehand. This should lead to a substantial simplification of transfer pricing discus￾sions within international groups. VIII. Aggregation A very important aspect for the preparation of transfer pricing documentation is the aggregation of transactions.No taxpayer is able to document each and every transaction with a related party, but has to document similar transactions together, for example, the sale of a product or products to various distribution companies in different jurisdictions. The new German draft ordinance generally allows an aggregation if: that aggregation of transactions is common between third parties (for example, the sale of a printer and its service and maintenance); the aggregation is made according to reason￾able and understandable rules that have been agreed on prior to the transactions; and the transactions are economically comparable for the functions performed, the assets used, and the risks assumed. Also, for aggregation, the German tax authorities have taken a reasonable approach, in particular, when allowing the aggregation of transactions that are not similar but are sold together in the market by third parties. A separation of those transactions would be overly burdensome and it would be very difficult to find suitable comparables. In particular, when using databanks, it is hardly possible to separate the trans￾actions in the available information when,for example, the product and the service of the product are sold together. In addition,the draft ordinance emphasizes that the taxpayer has the ability to ask the tax authorities for a binding ruling on the aggregation method.37 Because in the past it was rather difficult to get rulings from the German tax authorities for transfer pricing and transfer pricing methods, this statement in the draft ordinance is also a positive development. IX. Transfer Pricing Guidelines The Documentation Law gives an important role to transfer pricing guidelines, because if those guidelines are implemented within an international group and are based on the arm’s-length principle, the law allows not documenting the business on a transactional basis.38 For that transfer pricing guideline, the draft ordinance now clarifies that, even though those guide￾lines might exist, the other information that is required in sections 4 and 5 of the Documentation Decree Law must be prepared (that is, general infor￾mation, information on kind and size of business rela￾tionships with related parties). The draft ordinance also emphasizes that if the taxpayer deviates from its guideline in a particular case, special documentation must be prepared because the transfer pricing guideline is not applicable. The draft ordinance requires the auditor to check, based on different samples, whether the transfer pricing guideline has actually been applied. If several deviations from the transfer pricing guideline are found without special documentation for those cases, there is a large risk that the tax authorities will view the entire documentation as unusable with the conse￾quence (among others) of a shift of the burden of proof and the possibility of transfer pricing penalties. X. Documentation for Special Cases The Transfer Pricing Law and Decree Law contain specific requirements for documentation if a transac￾tion was concluded under particular circumstances; that is, the taxpayer changed business strategy or claims that a result of a transaction should be set off with the results of another transaction.39 The most Tax Notes International January 10, 2005 • 203 Special Reports 37Note 3.4.10 of the draft ordinance. 38Cf. sec. 2 paragraph 5 of the Decree Law (see footnote 5). It has already been stipulated that the inclusion of transfer pricing guidelines as a means of documenting a multinational’s transfer pricing system has to be seen as a major step forward and as a helpful indication for larger companies how to structure their doc￾umentation with reasonable efforts. See Heinz-Klaus Kroppen and Stephan Rasch, 12 Transfer Pricing Report 642, Nov. 12, 2003. 39Cf. section 5 of the decree law (see footnote 5): “To the extent that certain circumstances of the kind named in Sentence 2 are of relevance for the agreed business relationships of the taxpayer or if he relies — in respect of business conditions agreed by him — for the establishment of an arm’s-length principle on certain cir￾cumstances, then documentation about these circumstances ac￾cording to Sections 1 to 3 must be prepared. Depending on the individual circumstances, the following documentation might be necessary: . . . . 3. Information on transfer pricing consent or a taxpayer agreements with foreign tax authorities towards and with the taxpayer respectively and arbitration or mutual agree￾ment proceedings applied for or already finished of other coun￾tries that relate to business transactions of the taxpayer.” (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content