SEPTEMBER/OCTOBER 2004 GERMANY Letter from Ministry of Finance: Cooperation Issues Regarding Transfer Pricing Heinz Klaus Kroppen and Stephan Rasch 1. INTRODUCTION ms length. The tax authorities must provide evi- In the letter of 26 February 2004(hereinafter: the Letter), 3 e if they believe the price is not arm's length the Federal Ministry of Finance(hereinafter: Ministry of Issue 3. The determination of an arm's length transfer Finance)provided an analysis regarding the application of price for a distribution company may not be based on a landmark 2001 decision of the Federal Tax Court(Bun the resale price method if (i) the gross margin can only desfinanzhof) 4 Many regard this decision as the most rec be derived from three independent manufacturers, (ii ognized one in the transfer pricing area in Germany, and the corresponding purchases do not refer to all years the decision was critically discussed in both German and under consideration and (iii) the purchases represent international tax literature. Because the Federal Tax Court only 5% of the turnover of the distribution company ruled that tax law does not provide a legal basis for the obligation to prepare specific transfer pricing documenta- 2.2. Analysis in the letter tion, the legislature subsequently introduced mandatory With regard to Issue 1, the Ministry of Finance asserts that transfer pricing documentation regulations.6 he increased duties to cooperate under Sec. 90(2)of the The new documentation obligation is in force for all fiscal GtC refer to all the facts and circumstances relevant to years commencing after 31 December 2002. However ixation in cases where the subject under discussion is a tax audits for former periods are not covered by the new hidden profit distribution of a domestic subsidiary to its law. Therefore, the Ministry of Finance obviously wanted foreign parent company. Compliance with these duties to to make known its position on the application of the Fed- eral Tax Court decision with regard to these audits cooperate will enable the tax authorities to ascertain 2. CONTENT OF THE LETTER Deloitte, Dusseldorf Senior manager, European Transfer Pricing Group, Deloitte, Dusseldorf. The Letter focuses on three main aspects as discussed by Letter of the Federal Ministry of Finance, IV B 4-S 1300-12/04of 26 the Federal Tax Court in its decision brary 2004. "Consequences of non-compliance with taxpayer's obligation to operate under section 90 paragraph 2 of the General Tax Code [Abgabenord. nung in case of a trans fer pricing audit of a domestic distribution company (cor- 2.1. Federal Tax Court decision of the Foreign Tax Code): Application of the Federal Tax Court decision of I7 Highlights of the Federal Tax Court include the following October 2001 -I R 103/00-, Bundessteuterblatr(hereinafter: BS:BI)(2004)L. 270. For an English translation, see 13 Tax Management Transfer Pricin Issue /. If a taxpayer does not comply with its duty to Rasch, Internationale wirtschafisbriefe(2004), F.3 Deutschland Gr. at 2057 (Abgabenordnung, hereinafter: GTC), it must be 4. Case of 17 October 2001(I R 103/00), BStBL (2004)II, at 171 determined whether the taxpayer's duty relates to the 5. See e.g. H K Kroppen, S Rasch and A Roeder, Tax Notes intemational (2001), at 11I1: H.K. Kroppen, S. Rasch and A. Roeder. internationale legal prerequisite or to the legal consequences of a tax Wirtschafisbriefe(2001),F 3 Deutschland, Gr. I, at 1787: F. Wassermeyer, Der provision. If the taxpayer's non-compliance relates to Betrieb(2001). at 2465: H. Kuckhoff and R. Schreiber. intenational the legal requirement, the level of evidence that the tax Wirischafisbriefe(2002), Fach 3 Deutschland. Gr. 1. at 1863; H Baumhoff. authorities must provide regarding the relevant facts is ntemationales Sieuerrecht(2001 ) at 745: W.D. Hoffmann, GmbH Rundschau reduced. If the non-compliance refers to the legal con- See Sec. 90, Para. 3, and Sec. 162, Paras. 3 and 4 General Tax code equences, the tax authorities are generally entitled to (Abgabenordnung ),BGBL(2003)I at 613; for an English translation see 1ITax estimate the taxpayer's income Management Transfer Pricing Report 24. (16 April 2003), at 108 For a detailed analysis see S. Rasch, in Handbuch international ary information regarding how transfer prices with its for- Schmidt 1997/2001): Chap. 5 OECD Guidelines, 0 5.2 note 4 et seg. A eign parent company were set, the tax authorities may Eigelshoven and R Dawid, Tax Notes International(2004),at 185:HKKrop- solely conclude that the agreed transfer prices were ber 2003). at 642: H K Kroppen and S Rasch, Il Tax Management Transfer n and S Rasch, 12 Tax Management Transfer Pricing Report 13(12 Novem determined based on the shareholder relationship. Pricing Report 20(19 February 2003). at 885; H.K. Kroppen and SRasch, Ta However, the agreed transfer prices may nevertheless Notes International(2002), at 666.SRasch, and ARoeder II Tar Manage anagement Transfer Pricing Report 24(16 April 2003). at 1080 @2004 International Bureau of Fiscal Documentation