Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 clarify the documents that a taxpayer must prepare. length principle. To comply with the arm s-length The proposed decree-law also addresses timing, us- principle, the taxpayer must apply an appropriate bility, and storage requirements with which a tax- method to establish the transfer price must comply The taxpayer is therefore required to document, 或N8 Formal laws, including sections 90 and 162 of the before the transaction, how the conditions, including General Tax Code, are enacted by the bundestag, pricing, comply with the arms-length principle. The the usual legislative process, and, if necessary, by the taxpayer must consider, at the time the transaction Bundesrat takes place, any available information that the ta However, a decree-law is a specific source of law payer may obtain with a reasonable effort, including under the German legal system, and it may only be accessible data from transactions with third parties passed by the Federal Ministry of Finance. However, N22=× The draft decree-law stipulates that an internal under draft section 90 of the General Tax Code, the transfer pricing guideline, based on such consider- Bundesrat must also approve it before it becomes en- ations and the arms-length principle, is sufficient for acted.4 the cases covered by the guidelines The decree-law is one of the key components of the planned transfer pricing legislation because it Moreover, the taxpayer is required under section seeks to precisely define the taxpayers duties. 1 to gather additional information and data after the transaction has taken place. This enables the tax au The decree-law binds the tax authorities, the tax- thorities to ascertain whether a third party may have payer, and the courts. Therefore, it differs from tax made an adjustment because of changed facts and regulations that only bind the tax authorities This article analyzes the impact of the proposed Additionally, section 1 provides that the condi decree-law on transfer pricing documentation rules tions must be reviewed: if the taxpayer is making d the impact on German-based companies and losses from its total business relationships with re- subsidiaries, as well as permanent establishments of lated parties, or part of those relationships, which oreign-based multinational enterprises third parties would not have accepted on a continu ing basis; or if the parties subsequently agreed upon Outline of the decree-Law adjustments The draft decree-law includes 11 sections Section 2 provides that the documentation must Sections51 to 5 explain: that the taxpayer must de- be based on the terms and conditions of the actual 8939a品安 termine and document its transfer pricing under the arms-length test; the basic elements regarding man- transaction and must refer to the appropriateness of ner,content, and extent of the documentation; the tation duty depends on the facts and circumstances garding tax authorities' requests Section 6 details the documents that the taxpayer Under section 2. the documentation must detail must prepare Sections 7 to 11 cover: the appropriate the business relationships and economic facts. Re- companies; the manner of appropriate record- require data on the terms and conditions, including tion;and the application of the decree-law to allocat- that third parties in comparable transactions would ing head-office and Pe profits have agreed on or achieved. Application of the Arms-Length Principle, The taxpayer must document comparable data gregation, and Timing (prices, profit markups, gross margins, and net mar- mentation stating whether, and to what extent, the ties. To perform a plausibility check (hypothetical tionships with related parties, based on the arm's. ternal data, for example, forecasts and planning data. Third-party comparable data must be consid ered if it could be obtained with reasonable efforts Finally, the taxpayer must explain why the ap- plied transfer pricing method is appropriate. How dSee Rasch/Roeder, 11 Transfer Pricing Report 731, 12/11/02. ever, the taxpayer is not required to prepare docu- Unless otherwise noted, sections cited in the following refer mentation for more than one transfer pricing to the draft decree-law method Tax Analysts- Worldwide Tax Dailyclarify the documents that a taxpayer must prepare. The proposed decree-law also addresses timing, us￾ability, and storage requirements with which a tax￾payer must comply. Formal laws, including sections 90 and 162 of the General Tax Code, are enacted by the Bundestag, in the usual legislative process, and, if necessary, by the Bundesrat. However, a decree-law is a specific source of law under the German legal system, and it may only be passed by the Federal Ministry of Finance. However, under draft section 90 of the General Tax Code, the Bundesrat must also approve it before it becomes en￾acted.4 The decree-law is one of the key components of the planned transfer pricing legislation because it seeks to precisely define the taxpayer’s duties. The decree-law binds the tax authorities, the tax￾payer, and the courts. Therefore, it differs from tax regulations that only bind the tax authorities. This article analyzes the impact of the proposed decree-law on transfer pricing documentation rules and the impact on German-based companies and subsidiaries, as well as permanent establishments of foreign-based multinational enterprises. Outline of the Decree-Law The draft decree-law includes 11 sections. Sections5 1 to 5 explain: that the taxpayer must de￾termine and document its transfer pricing under the arm’s-length test; the basic elements regarding man￾ner, content, and extent of the documentation; the timing of the documentation; and the principles re￾garding tax authorities’ requests. Section 6 details the documents that the taxpayer must prepare. Sections 7 to 11 cover: the appropriate standard of documentation; exemptions for small companies; the manner of appropriate record￾keeping; the retention period for storing documenta￾tion; and the application of the decree-law to allocat￾ing head-office and PE profits. Application of the Arm’s-Length Principle, Aggregation, and Timing Under section 1, the taxpayer must prepare docu￾mentation stating whether, and to what extent, the taxpayer has generated income from business rela￾tionships with related parties, based on the arm’s￾length principle. To comply with the arm’s-length principle, the taxpayer must apply an appropriate method to establish the transfer price. The taxpayer is therefore required to document, before the transaction, how the conditions, including pricing, comply with the arm’s-length principle. The taxpayer must consider, at the time the transaction takes place, any available information that the tax￾payer may obtain with a reasonable effort, including accessible data from transactions with third parties. The draft decree-law stipulates that an internal transfer pricing guideline, based on such consider￾ations and the arm’s-length principle, is sufficient for the cases covered by the guidelines. Moreover, the taxpayer is required under section 1 to gather additional information and data after the transaction has taken place. This enables the tax au￾thorities to ascertain whether a third party may have made an adjustment because of changed facts and circumstances. Additionally, section 1 provides that the condi￾tions must be reviewed: if the taxpayer is making losses from its total business relationships with re￾lated parties, or part of those relationships, which third parties would not have accepted on a continu￾ing basis; or if the parties subsequently agreed upon adjustments. Section 2 provides that the documentation must be based on the terms and conditions of the actual transaction and must refer to the appropriateness of the related transfer price. The extent of the documen￾tation duty depends on the facts and circumstances of each case and the transfer pricing method used. Under section 2, the documentation must detail the business relationships and economic facts. Re￾cords detailing the appropriateness of transfer prices require data on the terms and conditions, including agreed prices, cost allocations, and profit margins that third parties in comparable transactions would have agreed on or achieved. The taxpayer must document comparable data (prices, profit markups, gross margins, and net mar￾gins) from transactions with or between third par￾ties. To perform a plausibility check (hypothetical arm’s-length test), the taxpayer must also record in￾ternal data, for example, forecasts and planning data. Third-party comparable data must be consid￾ered if it could be obtained with reasonable efforts. Finally, the taxpayer must explain why the ap￾plied transfer pricing method is appropriate. How￾ever, the taxpayer is not required to prepare docu￾mentation for more than one transfer pricing method. 2 Tax Analysts — Worldwide Tax Daily Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 4 See Rasch/Roeder, 11 Transfer Pricing Report 731, 12/11/02. 5 Unless otherwise noted, sections cited in the following refer to the draft decree-law