Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 account the importance of profit-based approaches in This shows that the tax authorities do not kne practice ow large MNEs work. It is impossible for MNEs to However, the decree-law states in section 6 that document every transaction. A reasonable documen ne taxpayer to doc- generally mere profit comparisons cannot justify the ument major transaction flows within the group 或N8 is again a sign that the german authorities are un Section 2 allows the aggregation of transactions willing to accept that, since 1995, when the oECd However, the Federal Ministry of Finance obviously principles were introduced, the world has changed does not want to acknowledge the use of a multi and often profit based approaches are the only ple-year analysis. Section 2 clearly states that the cost-effective means for a taxpayer to document transactions of a fiscal year may be aggregated under the conditions described above N82928或 Aggregation of Transactions Although the question of a multiple-year analysis The German tax administration has a clear pre should not be dealt with in the documentation regu erence for a transactional approach. Section 2.1.2. of lations, it is remarkable that the Federal Ministry of the Administrative Principles of 1983 already em Finance has limited the aggregation to transactions phasizes that the transfer price analysis should be within a fiscal year. This deviates from the multiple- based on every transaction. If one followed the word. year analysis, which, under certain conditions, is ing of the administrative principles, the administra supported by the oeCd, as well as by the u.stax tions preference would go much further than the administration. 10 OECD, which also allows companies to aggregate cer The multiple-year analysis is a tool for analyzing tain transactions(see paragraph 1. 42 of the OeCd the effects of business or product life cycles, currency 3 Guidelines) exchange risks, other business risk factors, or other influences that might affect the transfer prices It is fair to assume, however, that German princ- These influences might better be judged over a long aggregation is the only feasible approach to deter- period. If, for instance, a company incurs losses in the transactions are interrelated, multiple transac- a market slow down, and if the company derives ex- tions take place in a short period of time, or several traordinary profits in earlier or later years, the com transactions are part of a package deal pany's financials should be aggregated. 1 This is now acknowledged by The multiple-year analysis is sometimes rejected cree-law. However, the requirements set forth by tax auditors who argue that it violates a funda- mental precept of German tax law that requires tax the aggregated transactions must be based on terms to be based on the annual accounting period (Prinzip that have been agreed upon in advance. The taxpayer der Abschnittsbesteuerung). Therefore, in applying will have to submit these terms to the tax authori. the analysis, the taxpayer and the tax auditor have to ties.Thus, it appears that the taxpayer will need to make sure that the profit situation of other closed pe- riods does not lead to the conclusion that income is prepare written internal guidelines for aggregating too high or too low in the period under review. transactions, creating an additional administrative burden We believe, however, that the multiple-year anal te. It is frustrating that the tax authorities have dis- ysis should be seen as a tool to judge the transfer arded suggestions to introduce mi Inimum prices of the current year, for example, to judge amounts for transactions that need to be docu- start-up losses, a market penetration strategy, or the mented,which would have limited the administra- long-term influence of currency risks. Accordingly, it tive burden on taxpayers. To the contrary, the should not cause proble cree- law requires that, in principle, each transaction must be documented Administrative principles for the examination of income allo See paragraphs 1.49- 1.51 of the OECD guidelines; U.S the federal ministry of Finance dated 23 February 1983, BStBL. Treasury Reg. section 1.482-1())(2)(ii) Kroppen/Eigelshoven, Commentary on Transfer Pricing in Ger- tary on Transfer Pricing in Germany, in: Tax Treatme many, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002 Amsterdam, June 2002, chapter 8.2. ter 4.4 Tax Analysts- Worldwide Tax Dailyaccount the importance of profit-based approaches in practice. However, the decree-law states in section 6 that generally mere profit comparisons cannot justify the arm’s-length nature of transactions. This statement is again a sign that the German authorities are un￾willing to accept that, since 1995, when the OECD principles were introduced, the world has changed and often profit based approaches are the only cost-effective means for a taxpayer to document pricing. Aggregation of Transactions The German tax administration has a clear pref￾erence for a transactional approach. Section 2.1.2. of the Administrative Principles of 19839 already em￾phasizes that the transfer price analysis should be based on every transaction. If one followed the word￾ing of the administrative principles, the administra￾tion’s preference would go much further than the OECD, which also allows companies to aggregate cer￾tain transactions (see paragraph 1.42 of the OECD Guidelines). It is fair to assume, however, that German princi￾ples allow for aggregation, because in many cases, aggregation is the only feasible approach to deter￾mine the transfer price. This is especially true when the transactions are interrelated, multiple transac￾tions take place in a short period of time, or several transactions are part of a package deal. This is now acknowledged by the draft de￾cree-law. However, the requirements set forth in sec￾tion 2 seem stricter. It is specifically required that the aggregated transactions must be based on terms that have been agreed upon in advance. The taxpayer will have to submit these terms to the tax authori￾ties. Thus, it appears that the taxpayer will need to prepare written internal guidelines for aggregating transactions, creating an additional administrative burden. It is frustrating that the tax authorities have dis￾regarded suggestions to introduce minimum amounts for transactions that need to be docu￾mented, which would have limited the administra￾tive burden on taxpayers. To the contrary, the de￾cree-law requires that, in principle, each transaction must be documented. This shows that the tax authorities do not know how large MNEs work. It is impossible for MNEs to document every transaction. A reasonable documen￾tation law would only require the taxpayer to doc￾ument major transaction flows within the group. Section 2 allows the aggregation of transactions. However, the Federal Ministry of Finance obviously does not want to acknowledge the use of a multi￾ple-year analysis. Section 2 clearly states that the transactions of a fiscal year may be aggregated under the conditions described above. Although the question of a multiple-year analysis should not be dealt with in the documentation regu￾lations, it is remarkable that the Federal Ministry of Finance has limited the aggregation to transactions within a fiscal year. This deviates from the multiple￾year analysis, which, under certain conditions, is supported by the OECD, as well as by the U.S. tax administration.10 The multiple-year analysis is a tool for analyzing the effects of business or product life cycles, currency exchange risks, other business risk factors, or other influences that might affect the transfer prices. These influences might better be judged over a long period. If, for instance, a company incurs losses in one year because of certain risk factors or because of a market slow down, and if the company derives ex￾traordinary profits in earlier or later years, the com￾pany’s financials should be aggregated.11 The multiple-year analysis is sometimes rejected by tax auditors who argue that it violates a funda￾mental precept of German tax law that requires tax to be based on the annual accounting period (Prinzip der Abschnittsbesteuerung). Therefore, in applying the analysis, the taxpayer and the tax auditor have to make sure that the profit situation of other closed pe￾riods does not lead to the conclusion that income is too high or too low in the period under review. We believe, however, that the multiple-year anal￾ysis should be seen as a tool to judge the transfer prices of the current year, for example, to judge start-up losses, a market penetration strategy, or the long-term influence of currency risks. Accordingly, it should not cause problems. Tax Analysts — Worldwide Tax Daily 5 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. 9 Administrative principles for the examination of income allo￾cation in the case of internationally related enterprises, Decree of the Federal Ministry of Finance dated 23 February 1983, BStBl. I 1983, p. 218; for an English translation of the text see Kroppen/Eigelshoven, Commentary on Transfer Pricing in Ger￾many, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002, chapter 8.2. 10See paragraphs 1.49 - 1.51 of the OECD guidelines; U.S. Treasury Reg. section 1.482-1(f)(2)(iii). 11For a detailed analysis see Kroppen/Eigelshoven, Commen￾tary on Transfer Pricing in Germany, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002, chap￾ter 4.4