JANUARY /FEBRUARY 2004 ITPJ ation for the services is arms length. Any other criteria merely indicative and not conclusive. 26 It needs to be would not be feasible under Art. 9 of the OECD Model determined whether the actual conditions of the respective Treaty. Because Art. 9 limits the application of domestic transaction are in line with the arms length principle. The tax law, any sub-criteria would be inapplicable under Federal Tax Court also follows this interpretation. Accord domestic tax law ing to the jurisprudence of the Federal Tax Court, not only This seems to be very different to the German approach to the formal aspects, but the totality of objective circum- use the prudent business manager principle that is also stances must be taken into account in dete mentioned in several sections in the ruling of the Lower appropriateness of the taxpayer's transfer pricing. In fact, Tax Court of Munich. For example the Court takes n the authors'opinion, that is the main point where the imposed"conditions or missing appendices as an indic Lower Tax Court of Munich failed, because it did not tion of non-arm's length transfer prices. Under the logic of yse the amount of the licence fee. 27 the Court, a prudent business manager would not be will- It should also be mentioned that the sub-criteria have all ing to pay consideration for its contractual obligations. been developed in German case law dealing with the rela Because of these reasons, the Court explicitly rejects test- tionship of a company and a natural person as a share ing whether the charges were arm's length. However, this holder of that company. In particular, the courts had exam- is not backed by the internationally accepted arms length ined the salary of a company's managing director who the prices might be imposed by the parent company, the pricing, however, focuses on the relationship between two only crucial determination is-again- whether the price arm s leng thus doubtful whether the sub-criteria, which might b Moreover, from a practical perspective the tax authorities correct in the aforementioned case of natural persons as shareholders, should in fact be used for the determination having jurisdiction over the other party to a transacton of transfer prices in the relationship between related enti likely will not be willing to grant a corresponding adju ment if services were in fact rendered and if the consider- ation is arms length. Again, the non-existence of a con- tract or the failure to meet a certain form will not be 4. CoNCLUSION accepted by the tax authorities of another country as a rea- son for reducing taxable income in their jurisdiction. 24 If this were to be the case, missing or incorrect agreement The formal requirements under German case law interfere could be used by the taxpayer as a planning tool. For with the interpretation of Art. 9 of the OECD Model Treaty. If tax auditors base an adjustment on the mere fact for management services in the country of the service that the taxpayer has not complied with formal require- provider would simply not conclude any contracts. The ments, there should be reasonable grounds for filing an country of the recipient would not allow a deduction at appeal against the findings of the tax authorities, provided year end and the country of the service provider could not that the transfer pricing is arm's length challenge the transfer prices because of the non-existence f a contract. 25 One additional argument needs to be considered. Even if 23. See also Federal Tax Court, 17 October 2001, DB 2001, 2474, Ill. A 2 d) the taxpayer provides a written agreement, the tax author- bb) ities are not barred from examining whether the transfer Cf. Eigelshoven and Nientimp. Der Betrieb 2003, at 2306, 2309 pricing is in line with the arm's length principle. There- Berlin: Verlag Neue Wirtschafts-Briefe, 1996), Art. 9. note 116: bellstedt fore, the taxpayer's compliance with the formal require- Finanzrundschau 1990. at 65: Eigelshoven and Nientimp, Tax Notes Inter- ments does not lead to positive evidence that the transfer national 18 August 2003, at 667: Schaumburg, Internationales prices are appropriate. On the other hand, there is also no Cologne: Verlag Dr. Otto Schmidt, 1998), Sec. 16.291;Knobbe-Keu evidence that the transfer pricing is incorrect solely d Unternehmenssteuerrecht(9th ed. )( Cologne: Verlag Dr. Otto 3). at 695; Schnieder, internationales Steuerrecht 1999. at 65 because the taxpayer has not prepared a written agree Federal Constitutional Court, 7 November 1995-2 BvR 802/90("Oder- ment. In both cases, it is important only that the transfer Konto-BeschluB"). Neue Juristische Wochenschrift 1196. at 833; see also pricing be arms length. As a result, one can conclude that Rasch, Konzernverrechnungspreise im national it is irrelevant whether the formal requirements have been Steuerrecht(Cologne: Dr. Otto-Schmidt Verlag, 2001), at 42 fulfilled, provided that the price is arms length. This pos See decision of Lower Tax Court of Munich, 16 July 2002, 6 K 1910/98 ition is also backed by the Federal Constitutional Court, Nientimp, Der Betrieb 2003, at 2306 and 2300> .953. See also Eigelshoven and which has emphasized that formal requirements are 28. See also Eigelshoven and Nientimp, Der Betrieb 2003. at 2306 and 2310 @2004 International Bureau of Fiscal Documentation