223 ITPJ SEPTEMBER/OCTOBER 2004 whether the legal requirements for a hidden profit distri- arms length price, an estimation under Sec bution are present 162(1)of the gtC will be made. In the course of According to the Letter, the distinction between duties to this estimation a determination must be made as cooperate with respect to the ascertainment of the legal to the minimum profit (overall profit)which requirements of a hidden profit distribution and such allows an appropriate return on the invested cap- duties with respect to the legal consequences is not rea- ital (including interest on interest and risk pre sonable and is not based on the la mium)or which allows an appropriate remuner- quences are judged by the tax authorities without the tax ation for rendered services based on the costs incurred within the period of estimation. The tax With regard to Issue 2, the Ministry of Finance provides authorities bear the burden of proof for the pre sumption of higher profits certain general principles that should be applied in testing In addition, the Ministry of Finance claims that in situ- whether the foreign parent company is appropriate. Basically, the Ge ations where the examination of transfer prices leads to an regard to the arms length nature of the price chosen by the used will be accepted if that price falls within this range. If taxpayer. In addition from its perspective than the range of arms length prices about factors having an impact on prices(facts and cir- will be applied. Only if there are several prices falling Icts, market and competitive situation), and as a result being appropriate, the price leading to the lowest tax bur the tax authorities are not able to determine arms den for the taxpayer will be applied length prices, the tax authorities may estimate the tax. Finally, with regard to Issue 3, the Letter deals with the tion and evidence that is available only to the taxpayer, based on the most reliable comparable data, which may be negative conclusions may be drawn from the tax payer's non-compliance. in the course of estimation submitted or determined taking into account the costs to he tax payer. It is not possible to define schematic min facts that increase and decrease the tax burden (limited prices (e.g. minimum number of comparable enterprises he taxpayer may not be to the advantage of the tax- pay 3. ANALYSIS If the subsidiary refuses to provide information on how prices were determined in dealings with the par- It has been argued in literature that the Letter should be ts duties to cooperate rpreted an order of Cd with regard to other requests, there is a rebuttable pre- dungserlass). In the authors'opinion, this is not the case holder relationship (factual requirement of a hidden cia ese the ministry of Finance obviously does not prin capital distribution). Nevertheless, in such cases it is seems that the Ministry of Finance wanted to clarify not excluded that the prices actually agreed may in fact number of issues that have come up in tax audits followed e be arms length. According to the Letter, the tax the decision in 2001 authorities will have to consider the following aspects if the tax authorities are able to determine the 3.1. Distinction between legal prerequisites and arm's length purchase price and if this arms length legal consequences price is less than the price that the subsidiary With regard to Issue 1, the Letter addresses the distinction applied, taxation will be based on the price deter mined by the tax authorities between a taxpayer's non-compliance regarding legal pre if the tax authorities are not able to provide evi- requisites on the one hand, and a taxpayer's non-compli dence regarding the arm's length price and if there ance regarding legal consequences on the other. The Min is no factual basis for the presumption that the pur- is not feasible because there is no legal basis for it in the with /erice that the subsidi S oo high, an adjust- applicable income adjustment clauses (e-g. hidden profit arm's length ment may not be made distribution) however, in cases where there is a serious indica- Although the explicit distinction does not play a decisive tion for the presumption that the purchase price is role in tax audits, the ministry of Fi nance obviously only too high(e.g. permanent loss situation, no evi- wanted to clarify that there are no specific compliance dence of mismanagement). but the tax authorities are not able to provide evidence with regard to the 8. Federal Tax Court decision of 15 February 1989. BSrBL Il(1989), at 462. 2004 International Bureau of Fiscal Documentation