732o.11,No.16) NALYSIS the circumstances and supply the necessary documen- sponse to the tax authorities' request If the authorities ary evidence Before the German Federal Tax Court's then argue the documentation should have been pre- decision,the tax authorities argued, based on section 90 pared when the transaction took place, the evidence paragraph 2, that the taxpayer must provide the neces- value of the prepared documentation could be chal sary documents for transfer pricing purposes. In the af- lenged Discussions with tax auditors indicate that they termath of the decision the german government began widely view retrospective documentation as less reli onsidering how to implement statutory documentation able. Organization for Economic Cooperation and De- equirements. The explanatory notes to the recent draft velopment Guidelines provide an appropriate approach legislation now state that whether the tax authorities n this context. Note 5, 15 of the guidelines states that are still able to demand documentation from the tax the tax authorities should limit the amount of informa payer is uncertain based on existing section 90 para ion requested at the stage of filing the tax return graph 2.6 Therefore, a new paragraph 3 should be in Moreover, the guidelines clearly state that it would be cluded in section 90. The proposed text of the new draft unreasonable to require the taxpayer to submit docu- provision in section 90 paragraph 3 reads as follows (3) In circumstances that concern transactions that the transfer pricing has been determined appropri with reference to matters abroad a taxpayer has to ately. Thus, the German legislator would be well ad generate contemporaneous documentation about vised to clarify the wording of a potential new section the manner and content of his business relation 90 paragraph 3 in light of the recommendation of note ships with related parties in the scope of 81 para- 5.15 in the oECD Guidelines graph 2 Foreign Tax Code. The documentation duty especially comprises those economic and le- Intercompany Transactions gal facts that are important for the determination of appropriate prices and other agreed terms of Sentence l of draft section 90 paragraph 3 stipulates usiness with related parties, To ensure a consis- that "in circumstances that concern transactions with tent jurisprudence the Federal Ministry of Finance reference to matters abroad" contemporaneous docu n accordance with the Federal Council will be ar mentation must be generated. It is not clear how"cir- horized to determine the manner and extent of the cumstances that concern transactions with reference to documentation requirements that will have to be matters abroad"are defined provided, The submission of the documentatio The draft. also fails to clarify whether the taxpayer conforms to section 97 provided that paragraph 2 must prepare documentation about third parties'com parable data. Sentence: 2 of draft section 90 paragraph documentation: should be submitted within a pe 3 points: out only that the documentation duty: espe- cially comprises those.. facts that are important for the determination of appropriate prices"(emphasis Thus, the proposed regulation would require the tax- added). According to the explanatory notes to the draft payer to s generate contemporaneous documentation bill, the German government takes the position that the a record all details regarding the economic and legal taxpayer should provide third party comparables to jus- m submit its documentation within 60 days of the tax If the draft tax legislation becomes law, the request authorities’ request of the business community have not been successful Based on the Federal Tax Court decision, companies It should be pointed out that the current wording is should only be required to document the considerations inexplicit and undetermined in content they used at the time when setting their prices. The Fed- Documentation eral Tax Court ruled that the taxpayer is obligated only to proving the facts: to show the price agreed on, how If the tax law requires the taxpayer to provide docu the parties agreed on it, and which functions and risks mentation contemporaneously, it is not entirely clear vere assumed by which party. However, according to from the bill whether the documentation must be pre the Federal Tax Court, the taxpayer need not prove its pared when the transaction takes place, when the tax rices are arms length. Instead it held that the tax au payer files its tax return, or when the tax authorities ini thorities must prove prices are not arms length before tiate an audit. In a number of countries the deadline to aking an adjustment. This would require the tax audi. prepare the documentation coincides with that for filing r to collect the comparable data and undertake th the annual tax return. pricing analysis The German legislator should clarify its understand Obviously, the draft legislation will overrule the ing of the term"contemporaneous "Alack of guidance court's position. The German government intends to ef- in this area could lead to long disputes with the German fectively reverse the burden of proof and shift the re tax authorities-particularly because it is not clear what sponsibility for determining and documenting its trans sanctions the tax authorities would impose when the r prices. Thus, the taxpayer will have to provide com taxpayer has prepared its documentation only in re- parable data by using databanks, external consultants and other sources. The underlying problem when using databanks is the availabilit hird party compa- page 83 of the" Draft legi Australia, Brazil, Canada, China, India, Mexico, Portugal, South Africa, the United Kingdom, the United States, and ven International 2002, pp. 666 ff. Kroppen, Heinz-Klaus ezuela require documentation to be filed with the annual tax sch, Stephan, Internationale Wirtschaftsbriefe, 13 No