Reprinted from Worldwide Tax Daily, 13 November 2002,(2002 WTD 219-1 taa daily Germany Introduces Draft Transfer Pricing Documentation and Penalties Legislation by Heinz-Klaus Kroppen and Stephan rasch price agreed to by the related parties is not an Heinz-Klaus Kroppen, LL.M. and arms-length price Stephan Rasch are with Deloitte & Touche The court also held that if price ranges exist and Copyright o Deloitte Touche, 2002 the tax authorities are entitled to make an adjust- ment because the agreed price is outside the range price may only be adjusted to the highest or low 3 The German legislature has published a compre- est point of the range that is the most beneficial to ensive draft tax law that includes new transfer pric- the taxpayer ng documentation requirements. The draft relates to It is not surprising the tax authorities opposed an important transfer pricing decision that Ger- the decision and have struggled to find an adequate many's Supreme Tax Court made in October 2001. response. 2 With the government's reelection, a first The court held that German law does not include doc- draft of a comprehensive revision of the German tax umentation requirements regarding how prices be law has been prepared and attempts to address the tween related parties are determined, and the bur-problem den of proof is on the tax authorities to show that the Documentation Requirements The draft law adds a new third paragraph to sec tion 90 of the General Tax Code(abgabenordnung AO). The new paragraph requires the taxpayer to DEcision dated 17October ref no: 103/00, Der Betrieb prepare documentation for transactions with related (hereinafter: DB)2001, pp 2474 ff; for an analysis of the decision 2001, pp. 1111 ff, 2001 WTD 237.11 or Doc 2001-30307 (8 origi. transactions and the economic and legal basis for set al pages), Kroppen/Rasch/Roeder, Internationale ting the price. according to the explanatory notes Wirtschaftsbriefe(hereinafter: IWB)F 3 Deutschland Gr. 1, pp. the taxpayer must prepare written documentation or 10(2002,no.19,pp.835,836f; Wassermeyer,DB2002 ff; Becker, IWB F 3 Deutschland Gr. 11, pp. 1765 ff Kuckhoff/Schreiber, IWB F. 3 Deutschland Gr. 1, pp. 1863 ff. Baumhoff, Internationales Steuerrecht, pp. 751 Bernhardt/Weinreich, International Transfer Pricing Journal 2002, pp 67 ff; Vogele/Bader, Tax Planning International Trans- Cf. Kuckhoff/Schreiber. IWB F. 3 Deutschland Gr. 1 1863,1881f Tax Notes InternationalGermany Introduces Draft Transfer Pricing Documentation and Penalties Legislation by Heinz-Klaus Kroppen and Stephan Rasch The German legislature has published a compre￾hensive draft tax law that includes new transfer pric￾ing documentation requirements. The draft relates to an important transfer pricing decision that Ger￾many’s Supreme Tax Court made in October 2001.1 The court held that German law does not include doc￾umentation requirements regarding how prices be￾tween related parties are determined, and the bur￾den of proof is on the tax authorities to show that the price agreed to by the related parties is not an arm’s-length price. The court also held that if price ranges exist and the tax authorities are entitled to make an adjust￾ment because the agreed price is outside the range, the price may only be adjusted to the highest or low￾est point of the range that is the most beneficial to the taxpayer. It is not surprising the tax authorities opposed the decision and have struggled to find an adequate response.2 With the government’s reelection, a first draft of a comprehensive revision of the German tax law has been prepared and attempts to address the problem. Documentation Requirements The draft law adds a new third paragraph to sec￾tion 90 of the General Tax Code (Abgabenordnung — AO). The new paragraph requires the taxpayer to prepare documentation for transactions with related parties addressing the facts and circumstances of the transactions and the economic and legal basis for set￾ting the price. According to the explanatory notes, the taxpayer must prepare written documentation on Tax Notes International 1 Reprinted from Worldwide Tax Daily, 13 November 2002, (2002 WTD 219-1) worldwide tax daily Heinz-Klaus Kroppen, LL.M. and Stephan Rasch are with Deloitte & Touche. Copyright © Deloitte & Touche, 2002. 1 Decision dated 17 October 2001, ref. no: 103/00, Der Betrieb (hereinafter: DB) 2001, pp. 2474 ff; for an analysis of the decision see, inter alia: Kroppen/Rasch/Roeder, Tax Notes Int’l, 10 Dec. 2001, pp. 1111 ff, 2001 WTD 237-11 or Doc 2001-30307 (8 origi￾nal pages), Kroppen/Rasch/Roeder, Internationale Wirtschaftsbriefe (hereinafter: IWB) F. 3 Deutschland Gr. 1, pp. 1787 ff; Kroppen/Rasch, Tax Management Transfer Pricing, Vol. 10 (2002), no. 19, pp. 835, 836 f; Wassermeyer, DB 2002, pp. 2465 ff; Becker, IWB F. 3 Deutschland Gr. 11, pp. 1765 ff; Kuckhoff/Schreiber, IWB F. 3 Deutschland Gr. 1, pp. 1863 ff. Baumhoff, Internationales Steuerrecht, pp. 751 f; Bernhardt/Weinreich, International Transfer Pricing Journal, 2002, pp. 67 ff; Vögele/Bader, Tax Planning International Trans￾fer Pricing 03/02, pp. 7 ff. 2 Cf. Kuckhoff/Schreiber, IWB F. 3 Deutschland Gr. 1, pp. 1863, 1881 f