ANALYSIS (vo,9,No.4) This provision shows the German tax authorities issuing a ruling already presupposes that the applicant change of attitude. In the past, a taxpayer essentially has a vested interest in obtaining this ruling was free to use the method it found appropriate and had The tax authorities must therefore see that the re only to support the correctness of the method (includ sults of the ruling are necessary information to the ap ing a combination or mixture of standard methods) plicant. From the tax authorities'point of view, an ap The draft would put a substantial additional burden on plicant's interest, however, only exists when the future taxpayers that do not use a straightforward tr tax treatment of an event is legally unknown or uncer based method. The tax authorities'approach also can tain Judgment of the facts, taking into account official be viewed as a further deterrent against the widespread practice and case law, must appear doubtful from the use of CPM in Germany, even though CPM is widely perspective of an objective third party. The self sed in other countries. imposed restriction to basic cases is lifted only if, fol lowing a tax audit, the application of the transfer pric I. Advance Pricing Agreements ing method established as a result of the audit will be agreed upon for future fiscal years. The draft guidelines further contain one chapter with The draft guidelines also say that APAs should be two sections on APAs(Sec. 3. 1 and Sec. 3. 2.) that refer routinely bilateral. One hopes that this provision would not be applied in a strictly literal sense and will to the legal foundation for the accords and contain a tended to cover multilateral APAs as well. In this re- commentary on Germany's APA procedure. The gen eral perception among practitioners is that the German spect the German tax authority would view the tax authority provides a rather meager contribution to procedure as falling under Article 25, para. l of the an increasingly important issue OECD model treaty of 1992 APAs are receiving increasingly more attention by The draft guidelines' comments on the APa proce- dure mainly refer to the handling of the APa request on ments for avoiding transfer pricing disputes ar the level of the national tax authorities that are in volved. After the taxpayer applies for an APa by filing a assumptions in the OECD APA guidelines in Ne request at its local tax office, the Federal Ministry of fi nance as well as the Federal Tax Office would have to 1999 e involved This has been a major obstacle for APA ne- The German draft somewhat disappointingly does gotiations in the past because in some cases the tax au not really offer anything new on APAs. It would not change current policies in that German tax authorities thorities were represented by more than 20 persons would be entitled to negotiate an APA or, more pre- hich considerably hindered any progress. Though the draft guidelines concede that applications c cisely, to issue a ruling in the wake of a tax audit From made in both jurisdictions involved, a simultaneous au- the point of view of the tax authorities, issuing a ruling eems to be the main area of application for APAs dit should be avoided. Also, the taxpayer can at any However, the draft guidelines would also allow for time withdraw its application. However, the German APAs in cases that are not attached to or following a tax nd foreign tax authorities may decide to continue their audit. Therefore, the legal status quo remains negotiations and come to an agreement without further interest or involvement by the taxpayer In addition, the draft would require the tax authori ties to perform their own fact finding before issuing a transfer pricing APA. Thus, the authorities may need to V Consequences of Non-Compliance conduct almost a full-fledged audit if the last audit of he taxpayer's transfer pricing issues is outdated. It is The draft guidelines also would specify the conse- kely that requiring an audit will severely limit the quences should the taxpayer not fulfill the cooperation number of completed APA cases because there are not or documentation obligations under the new rules. The enough field audit staff at a local level to handle the in- draft document does not include penalties for non creased work compliance as specified in other countries, e.g., in the United States with Section 6662 regulations. However Determining Whether APA Can Be Granted the tax authorities ate that in a case of non compliance the taxpayers results can be estimated for +e The intention to limit work for the authorities is also tax purposes and that the burden of proof changes to flected in other parts of the chapter. According to the the taxpayer In normal transfer pricing cases, the burden of proof double taxation in individual cases only. That could be is usually with the tax authorities. The taxpayer can be interpreted to mean that APA negotiations are to be forced to comply with the regulations by using the mea- routine. This view seems to be supported by yet another sures described in the German code of procedures,e.g statement in the guidelines: " APAs are to be confined to fines(see Sec. 2.3 basic cases. Though the meaning of this statement is somewhat unclear, the expression "basic cases"could Rules for Income Adjustments The rules for income adjustments are detailed in the where high amounts of taxable income are at stake. first chapter of the draft guidelines(Sec.1.1.1.f) This interpretation would also correspond with the cur rent guideline covering tax authority rulings. Therefore, which enumerates the different legal provisions on which an income adjustment may be based. These pro- visions address the deemed dividend and the deeme 6 Cf Kropp Klaus, Eigelshoven, Axel, in: Interna- contribution issue if corporations and their sharehold tional wirtsch fe 2000, p. 163 f. Also see 8 Transfer rs are involved The draft guidelines would allow ger- Pricing Report man officials to accept an adjustment in the usually less TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069 BNA TAX 6-14-00