Report III Cooperation Duties of Taxpayers and later have a substantial practical impact on prior And others tax years A Preservation of documents C Documents Prepared by Related Parties In this section, the tax authorities cover the general The draft ordinance put extensive obligations on the operation duties of the taxpayer. The tax authorities taxpayer to obtain documents and information from formulate rather extensive cooperation and document related parties. 19 However, those obligations are preservation duties for taxpayers. It is, for example limited by the legal or factual ability to obtain the required that the taxpayer, within his or her legal and documents or information from those parties. This is factual ability, assures that documents and data kept particularly relevant for a German subsidiary of a by a foreign related party and relevant to german foreign parent, because it might be legally and taxation will not be destroyed before the german time factually very difficult to obtain information from the limit for the preservation of files has elapsed. 1? This is a parent company or another related party. In that case, rather critical point, because the German time period it cannot be held against a German taxpayer if the for the preservation of documents is generally 10 years, taxpayer can show through pertinent correspondence which is often longer than the time periods in other that a foreign related party does not cooperat countries and can be extended for an audit it therefore can be a substantial burden for an international group The draft ordinance emphasizes that to ensure that the german preservation periods are tax authorities have a duty to observed by related parties in other countries. investigate and try to discover facts that B. Amendments of prior Tax Returns are beneficial for the taxpayer. A very important aspect of the new draft ordinance the stipulated requirement to amend previously ag品38 filed tax returns. That will have a substantial impact in For a German parent company, the draft ordinance practice. According to section 153 of the Code of assumes generally that the ability to obtain documents and information from foreign related parties exists Procedures, the taxpayer is required to amend prior because the German parent company can influence the decision process in the foreign subsidiaries. The draft in the German Code of Procedures for a long time, its ordinance also states that in the relationship between practical importance was rather limited. However a German subsidiary and its foreign parent, it will be with the explicit reference in the new draft ordinance presumed that a possibility to obtain information exists if the same person is a managing director of the In relatio on to the documentation and cooperation obli- gations, it can be expected that the importance of this German subsidiary and the parent company. 1 It therefore should be carefully considered for the future provision will largely increase in tax audits. It can whether foreign officers of the group become officers of easily be foreseen that a taxpayer who tries to fulfil the new documentation obligations for the year 2003 and following years may learn that for prior years that In addition, the draft ordinance stipulates cases in either a particular transaction was not charged at which independent third parties would have contrac- (for instance, headquarter services from a German tually agreed on the provision of information and parent company to its foreign subsidiary)or the prices documents, namely that were charged were clearly not at arm s length. In for the participation in a cost-sharing pool for that case, the draft ordinance requires that the tax the allocable cost and the allocation key; returns be amended for all open years. Failure to amend prior years' tax returns could lead to criminal for the charging of services on the cost basis proceedings. Taxpayers are therefore well advised to analyze what impact their documentation package, which they must prepare for the years 2003 and later, may have on their tax returns for prior years and take steps to prevent harsh consequences. Therefore, based 19Note 3.3.2 of the draft ordinance on section 153 of the Code of Procedures and the expla Roman Seer, Finanzrundschau 2002, pp 380, 281: Wolfgang nation in the tax authorities ordinance. the new docu Ritter, Finanzrundschau 1985, pp 34, 35; Michael Kemperman Finanzrundschau 1990, pp. 437, 438: Franz Wasse mentation requirements effective for the years 2003 note 822; for an analysis of notes 5.10 and 5.11 of the OECD guidelines, cf. Rasch, in Becker/Kroppen (eds ) Handbuch Internationale Verrechnungspreise(Koln: Dr. Otto Schmidt Verlag, 1999), O number 5.10 and 5.11 1 Note 3.4.1 of the draft ordinance INote 3.3.2 lit. b) draft ordinance 18Note 3.2.5 of the draft ordinance 22Note 3.3.2 lit. b) draft ordinance Tax Notes International January10,2005·199III. Cooperation Duties of Taxpayers And Others A. Preservation of Documents In this section, the tax authorities cover the general cooperation duties of the taxpayer. The tax authorities formulate rather extensive cooperation and document preservation duties for taxpayers. It is, for example, required that the taxpayer, within his or her legal and factual ability, assures that documents and data kept by a foreign related party and relevant to German taxation will not be destroyed before the German time limit for the preservation of files has elapsed.17This is a rather critical point, because the German time period for the preservation of documents is generally 10 years, which is often longer than the time periods in other countries and can be extended for an audit.It therefore can be a substantial burden for an international group to ensure that the German preservation periods are observed by related parties in other countries. B. Amendments of Prior Tax Returns A very important aspect of the new draft ordinance is the stipulated requirement to amend previously filed tax returns.That will have a substantial impact in practice.18 According to section 153 of the Code of Procedures, the taxpayer is required to amend prior year tax returns if the taxpayer learns that the tax return was incorrect. Although this provision has been in the German Code of Procedures for a long time, its practical importance was rather limited. However, with the explicit reference in the new draft ordinance in relation to the documentation and cooperation obli￾gations, it can be expected that the importance of this provision will largely increase in tax audits. It can easily be foreseen that a taxpayer who tries to fulfill the new documentation obligations for the year 2003 and following years may learn that for prior years that either a particular transaction was not charged at all (for instance, headquarter services from a German parent company to its foreign subsidiary) or the prices that were charged were clearly not at arm’s length. In that case, the draft ordinance requires that the tax returns be amended for all open years. Failure to amend prior years’ tax returns could lead to criminal proceedings. Taxpayers are therefore well advised to analyze what impact their documentation package, which they must prepare for the years 2003 and later, may have on their tax returns for prior years and take steps to prevent harsh consequences. Therefore, based on section 153 of the Code of Procedures and the expla￾nation in the tax authorities’ ordinance, the new docu￾mentation requirements effective for the years 2003 and later have a substantial practical impact on prior tax years. C. Documents Prepared by Related Parties The draft ordinance put extensive obligations on the taxpayer to obtain documents and information from related parties.19 However, those obligations are limited by the legal or factual ability to obtain the documents or information from those parties.20 This is particularly relevant for a German subsidiary of a foreign parent, because it might be legally and factually very difficult to obtain information from the parent company or another related party. In that case, it cannot be held against a German taxpayer if the taxpayer can show through pertinent correspondence that a foreign related party does not cooperate. The draft ordinance emphasizes that tax authorities have a duty to investigate and try to discover facts that are beneficial for the taxpayer. For a German parent company, the draft ordinance assumes generally that the ability to obtain documents and information from foreign related parties exists because the German parent company can influence the decision process in the foreign subsidiaries. The draft ordinance also states that in the relationship between a German subsidiary and its foreign parent, it will be presumed that a possibility to obtain information exists if the same person is a managing director of the German subsidiary and the parent company.21 It therefore should be carefully considered for the future whether foreign officers of the group become officers of the German subsidiary. In addition, the draft ordinance stipulates cases in which independent third parties would have contrac￾tually agreed on the provision of information and documents,22 namely: for the participation in a cost-sharing pool for the allocable cost and the allocation key; for the charging of services on the cost basis; Tax Notes International January 10, 2005 • 199 Special Reports 17Note 3.4.1 of the draft ordinance. 18Note 3.2.5 of the draft ordinance. 19Note 3.3.2 of the draft ordinance. 20Roman Seer, Finanzrundschau 2002, pp. 380, 281; Wolfgang Ritter, Finanzrundschau 1985, pp. 34, 35; Michael Kempermann, Finanzrundschau 1990, pp. 437, 438; Franz Wassermeyer, in Flick/Wassermeyer/Baumhoff, Außensteuerrecht, section 1 AStG, note 822; for an analysis of notes 5.10 and 5.11 of the OECD guidelines, cf. Rasch, in Becker/Kroppen (eds.) Handbuch Internationale Verrechnungspreise (Köln: Dr. Otto Schmidt Verlag, 1999), O number 5.10 and 5.11. 21Note 3.3.2 lit. b) draft ordinance. 22Note 3.3.2 lit. b) draft ordinance. (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content