Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 balance sheet for more than three successive fis- fied when determining transfer prices for transac- tions between the taxpayer and related parties. Al- Appropriate Standard of Documentation though the clarification is correct, it remains doubtful? whether the arms-length test may be en N8 Section 7 addresses the usability of records. The acted by changing the procedural law in the general decree-law requires that the records must permit a Tax Code. The arm's-length principle should be in competent third party to get an overview, within a corporated into the income tax law reasonable period of time, of the facts and circum- tances of the transactions between the taxpayer and Third-Party Comparable Data related parties, and whether the taxpayer acted in ndustry demanded that companies should only accordance with the arm,s-length principle be required to document their thinking at the time Records that do not fulfil that criterion are prices were set. This is now explicitly stated in sec N82928或 deemed to be unusable. which occurs when the re- tion 1 improper transfer pricing method, or the documenta- that the taxpayer should not be required to provide a comparable data from data banks and external con- Section 8 provides special rules for small enter sultants. 8 Taking into account the current wording of prises, which apply when: the sum of the arms section 1, industry was only partly successful on this Issue length prices for the supply of goods from related party transactions does not exceed 5 million euros; or Under section 2, the taxpayer must use when the sum of arms-length remuneration for the third-party data if the taxpayer is able to obtain the supply of services from related party transactions data by making reasonable efforts. It remains, how amounts does not exceed 500 000 euros. The docu- ever. unclear as to what constitutes reasonable ef- mentation duties set forth in draft section 90, para- forts. There is no clear guidance on what the tax au- graph 3 of the General Tax Code, and in the draft de- thorities will require in future tax audits cree-law, are deemed to be satisfied if the taxpayer provides information and submits documents upon The taxpayer must also collect information after the transaction has occurred. to enable the tax au- request of the tax authorities within the 60-day peri- thorities to check whether the situation has changed and an adjustment is required under the arms- Finally, sections 9 to 11 address recordkeeping, length test. This obligation is an unacceptable bur- the application of the provisions to profit allocation den for the taxpayer because the documentation duty between head offices and PEs, and when the de- goes beyond the considerations that caused the cree-law becomes effective transaction. It unclear when the obligation termi- Section 9 emphasizes that the documentation the traditional German view. which has conde must be stored as appropriate books or electronically. the U.S. commensurate-with-income standard ned Generally, the taxpayer must retain the records for 10 years. However, the retention period keeps run Although the decree-law does not explicitly re- ning so long as the records are important for taxation quire transfer pricing guidelines, such guidelines purposes for which the period of determination provide considerable benefits for documentation obli (festsetzungsfrist) is unexpired. The storage of doc- gations and will therefore be more common in the uments may also take place abroad future The decree-law requires that all comparable data Analysis used by the taxpayer must be documented, including Arms-Length Principle prices, markup, gross margins, net margins, and Similar to the latest version of draft section 90, German authorities will become more receptive to paragraph 3 of the General Tax Code, section 1 pro- profit-based methods than they have been in the vides that the arm s- length standard must be satis past. Such a step would be appropriate, taking into bThe 60-day period might be extended in exceptional cases, cf. an unofficial translation see 11 Transfer Pricing Report 873, 19 Feb. 2003; for an analysis see Kroppen/Rasch, 11 Transfer icing Report 885, 19 Feb 2003 Kroppen/Rasch, Tax Notes Int'l, 18 Nov 2002, pp 666 ff. Tax Analysts- Worldwide Tax Dailybalance sheet for more than three successive fis￾cal years. Appropriate Standard of Documentation Section 7 addresses the usability of records. The decree-law requires that the records must permit a competent third party to get an overview, within a reasonable period of time, of the facts and circum￾stances of the transactions between the taxpayer and related parties, and whether the taxpayer acted in accordance with the arm’s-length principle. Records that do not fulfil that criterion are deemed to be unusable, which occurs when the re￾cords are incomplete, the taxpayer uses an evidently improper transfer pricing method, or the documenta￾tion is contradictory. Section 8 provides special rules for small enter￾prises, which apply when: the sum of the arm’s￾length prices for the supply of goods from related party transactions does not exceed 5 million euros; or when the sum of arm’s-length remuneration for the supply of services from related party transactions amounts does not exceed 500,000 euros. The docu￾mentation duties set forth in draft section 90, para￾graph 3 of the General Tax Code, and in the draft de￾cree-law, are deemed to be satisfied if the taxpayer provides information and submits documents upon request of the tax authorities’ within the 60-day peri￾od.6 Finally, sections 9 to 11 address recordkeeping, the application of the provisions to profit allocation between head offices and PEs, and when the de￾cree-law becomes effective. Section 9 emphasizes that the documentation must be stored as appropriate books or electronically. Generally, the taxpayer must retain the records for 10 years. However, the retention period keeps run￾ning so long as the records are important for taxation purposes for which the period of determination (Festsetzungsfrist) is unexpired. The storage of doc￾uments may also take place abroad. Analysis Arm’s-Length Principle Similar to the latest version of draft section 90, paragraph 3 of the General Tax Code, section 1 pro￾vides that the arm’s-length standard must be satis￾fied when determining transfer prices for transac￾tions between the taxpayer and related parties. Al￾though the clarification is correct, it remains doubtful7 whether the arm’s-length test may be en￾acted by changing the procedural law in the General Tax Code. The arm’s-length principle should be in￾corporated into the income tax law. Third-Party Comparable Data Industry demanded that companies should only be required to document their thinking at the time prices were set. This is now explicitly stated in sec￾tion 1. However, the business community also argued that the taxpayer should not be required to provide comparable data from data banks and external con￾sultants.8 Taking into account the current wording of section 1, industry was only partly successful on this issue. Under section 2, the taxpayer must use third-party data if the taxpayer is able to obtain the data by making reasonable efforts. It remains, how￾ever, unclear as to what constitutes reasonable ef￾forts. There is no clear guidance on what the tax au￾thorities will require in future tax audits. The taxpayer must also collect information after the transaction has occurred, to enable the tax au￾thorities to check whether the situation has changed and an adjustment is required under the arm’s￾length test. This obligation is an unacceptable bur￾den for the taxpayer because the documentation duty goes beyond the considerations that caused the transaction. It unclear when the obligation termi￾nates. Also, the requirement seems to deviate from the traditional German view, which has condemned the U.S. commensurate-with-income standard. Although the decree-law does not explicitly re￾quire transfer pricing guidelines, such guidelines provide considerable benefits for documentation obli￾gations and will therefore be more common in the future. The decree-law requires that all comparable data used by the taxpayer must be documented, including prices, markup, gross margins, net margins, and profit splits. This could support the view that the German authorities will become more receptive to profit-based methods than they have been in the past. Such a step would be appropriate, taking into 4 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. 6 The 60-day period might be extended in exceptional cases, cf. draft section 90, paragraph 3, sentence 9 General Tax Code. For an unofficial translation see 11 Transfer Pricing Report 873, 19 Feb. 2003; for an analysis see Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003. 7 Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003. 8 Kroppen/Rasch, Tax Notes Int’l, 18 Nov. 2002, pp. 666 ff