Special Reports that under no circumstances is it mandatory for the The tax authorities also state that data obtained taxpayer to prepare a net margin analysis using from databanks very often will only have limited databanks. Therefore, the approach of the tax authori- comparability because of a lack in the reliability of the ties is balanced and provides the taxpayer with the data. In this case, the german tax authorities require necessary flexibility for its documentation. that the range of data obtained from the databank Taxpayers who for good reasons believe that a research be reduced using statistical methods. The databank net margin analysis is not appropriate in new draft ordinance explicitly mentions the their case have the ability to prepare the documenta- interquartile range as the means to reduce the range tion using other resources. Those taxpayers that of results. Again, the tax authorities follow an interna already prepared databank net margin analysis or tional trend, because the use of interquartile ranges is believe they are an effective and cost-efficient means of a widely accepted approach in many countries. 36 complying with the German documentation require- Taxpayers should welcome that development because ments also have the ability to do so. This rather large it again allows them in many cases to use approaches flexibility for taxpayers is particularly welcome, that they have already applied in preparin heir because the attitude towards profit- or net foreign documentation. This should help the taxpayers margin-based analyses might be rather different limit time and expense for preparing German tween German-based multinational groups and documentation foreign-based multinational groups. In particular, the latter often have vast experience using that kind of VI. Transfer Pricing Adjustments analysis in their home jurisdiction and the eretore wt be confronted with unnecessary additional documen- In the past, it was very common in German transfer tation burdens if they could not use large parts of the transfer pricing audit adjustment solely on the fact documentation they have prepared in their home that the taxpayer had used a method under which country year-end price adjustments were made if the result of for example, a german distribution company fell The most important area of discussion outside the interquartile range of acceptable results will probably be the obligation of the There were even cases when tax auditors stated that taxpayer to take contractual they acknowledged that those adjustments led to precautions for obtaining information arms-length result, but they still made an audit adjustment because they believed that under the German rules those year-end adjustments were not 8 If the taxpayer prepares documentation on the basis permissible. Here, the new German draft ordinance of databank data, the new draft ordinance requires includes some positive developments. The draft that the taxpayer makes those data available to the tax ordinance states that price adjustments made after the authorities in In electro nic form and that the medium transaction has been completed will only be acceptable (disk, diskettes, and so on) includes all relevant dat if they are made according to an agreement concluded available at the point in time of the search. 35 It is not beforehand. This agreement must be clear and clear what exactly the tax authorities require from the unequivocal and must include all factors that are taxpayer. If the request has to be understood in a way necessary to determine the final price so that the later that the taxpayer has to store all data that adjustment can be made solely through a calculation available at the time of the search in, for example, the without the discretion of the parties to the transaction. Amadeus Databank, the tax authorities need to recon- In addition, the draft ordinance provides that if a sider this requirement. At the moment, it is impossible taxpayer concludes a transaction based on a price that for legal reasons that the taxpayer copy all available is not at arm's length during the business year, but data from the Amadeus Databank on a disc and adjusts that non-arm's-length price for tax purposes in provide this disc to the tax authorities. That action the tax return, documentation needs to be prepared for would, in many cases, violate the usage agreements the price that was used for tax purposes. again, this that taxpayers or tax consultants have with providers statement of the draft ordinance can only refer to a of publicly available databases, such as Bureau Van situation in which the taxpayer has used a price in the Dijk providing the Amadeus Databank. The tax au- price setting during the year, but has adjusted that thorities should reconcile their request for the most price for tax purposes to comply with the arm's-length comprehensive data documentation with the legal principle bility of the taxpayer to provide data Note 3.4.9.3 lit. b of the draft ordinance 36Cf. U.S. Treas reg. 1.482-1(eX2 iii)(C) 202 January 10, 2005 Tax Notes Internationalthat under no circumstances is it mandatory for the taxpayer to prepare a net margin analysis using databanks. Therefore, the approach of the tax authori￾ties is balanced and provides the taxpayer with the necessary flexibility for its documentation. Taxpayers who for good reasons believe that a databank net margin analysis is not appropriate in their case have the ability to prepare the documenta￾tion using other resources. Those taxpayers that already prepared databank net margin analysis or believe they are an effective and cost-efficient means of complying with the German documentation require￾ments also have the ability to do so. This rather large flexibility for taxpayers is particularly welcome, because the attitude towards profit- or net margin-based analyses might be rather different between German-based multinational groups and foreign-based multinational groups. In particular, the latter often have vast experience using that kind of analysis in their home jurisdiction and therefore would be confronted with unnecessary additional documen￾tation burdens if they could not use large parts of the documentation they have prepared in their home country. The most important area of discussion will probably be the obligation of the taxpayer to take contractual precautions for obtaining information. If the taxpayer prepares documentation on the basis of databank data, the new draft ordinance requires that the taxpayer makes those data available to the tax authorities in electronic form and that the medium (disk, diskettes, and so on) includes all relevant data available at the point in time of the search.35 It is not clear what exactly the tax authorities require from the taxpayer. If the request has to be understood in a way that the taxpayer has to store all data that was available at the time of the search in, for example, the Amadeus Databank, the tax authorities need to recon￾sider this requirement. At the moment, it is impossible for legal reasons that the taxpayer copy all available data from the Amadeus Databank on a disc and provide this disc to the tax authorities. That action would, in many cases, violate the usage agreements that taxpayers or tax consultants have with providers of publicly available databases, such as Bureau Van Dijk providing the Amadeus Databank. The tax au￾thorities should reconcile their request for the most comprehensive data documentation with the legal ability of the taxpayer to provide data. The tax authorities also state that data obtained from databanks very often will only have limited comparability because of a lack in the reliability of the data. In this case, the German tax authorities require that the range of data obtained from the databank research be reduced using statistical methods. The new draft ordinance explicitly mentions the “interquartile range” as the means to reduce the range of results. Again, the tax authorities follow an interna￾tional trend, because the use of interquartile ranges is a widely accepted approach in many countries.36 Taxpayers should welcome that development because it again allows them in many cases to use approaches that they have already applied in preparing their foreign documentation.This should help the taxpayers limit time and expense for preparing German documentation. VII. Transfer Pricing Adjustments In the past, it was very common in German transfer pricing audits for the German auditor to base a transfer pricing audit adjustment solely on the fact that the taxpayer had used a method under which year-end price adjustments were made if the result of, for example, a German distribution company fell outside the interquartile range of acceptable results. There were even cases when tax auditors stated that they acknowledged that those adjustments led to an arm’s-length result, but they still made an audit adjustment because they believed that under the German rules those year-end adjustments were not permissible. Here, the new German draft ordinance includes some positive developments. The draft ordinance states that price adjustments made after the transaction has been completed will only be acceptable if they are made according to an agreement concluded beforehand. This agreement must be clear and unequivocal and must include all factors that are necessary to determine the final price so that the later adjustment can be made solely through a calculation without the discretion of the parties to the transaction. In addition, the draft ordinance provides that if a taxpayer concludes a transaction based on a price that is not at arm’s length during the business year, but adjusts that non-arm’s-length price for tax purposes in the tax return, documentation needs to be prepared for the price that was used for tax purposes. Again, this statement of the draft ordinance can only refer to a situation in which the taxpayer has used a price in the price setting during the year, but has adjusted that price for tax purposes to comply with the arm’s-length principle. 202 • January 10, 2005 Tax Notes International Special Reports 35Note 3.4.9.3 lit. b of the draft ordinance. 36Cf. U.S. Treas. reg. 1.482-1(e)(2)(iii)(C). (C) Tax Analysts 2005. 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