Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 uments. If a mandatory document is not prepared that the three-year period now seems to be estab- when requested by the tax authorities, severe lished in binding law penalties will most likely become due Standard of Documentation The requirement to provide a summary of rulings and APAs from other tax authorities is clearly aimed Provisions in section 7, regarding "mostly incom 或N8 against the practice of unilateral APAs, which were plete"records, "evidently improper"transfer pricing rather common in the United States, Japan, and other countries. The german tax authorities always took the view that unilateral apas hurt the german ding the harsh penalties, the taxpayer fisc.The German tax authorities will therefore criti- needs further guidance regarding which records will cally review unilateral APAs, which will become un- be treated as incomplete. In our experience, tax au be reluctant to accept a documentation package as Section 6 also requires information regarding cost being "complete"if only minor elements are missing allocations and details regarding cost-sharing agree- Hence, taxpayers and auditors would be helped by ments, including list of participants, cost allocatio clarifying the Federal Ministry of Finances under and expected benefit. Section 5 of the Administrativ Principles on cost-sharing agreements sets forth an standing of incomplete"documentation extensive list of documentation that the taxpayer Exemption for Small Companies should prepare and file. The above elements are also The threshold of 5 million euros for the supply of included in the administrative principles goods and 500,000 euros for other transactions seem 389三 It is unclear whether the legislature wants to fair. It aims to reduce the administrative burden for overrule the current administrative principles. It is small companies. However, these taxpayers still therefore unclear whether the taxpayer only has to have compliance duties. When requested by the tax provide the cost-sharing details mentioned in the de- authorities, they must provide adequate oral infor- cree-law and does not have to comply with the admin- mation and documentation within the 60-day period istrative principles on cost-sharing agreements. This would certainly decrease the administrative burden Storage Process Unfortunately, the Federal Ministry of Finance Finally, the taxpayer is required to explain a loss did not take a more progressive approach regarding situation. It appears from the draft decree-law that the storage process. However, documentation may be companies making losses for more than three years stored abroad, which is helpful because often compa <rl be targeted by the tax authorities. This has been nies prepare and file documents centrally been supported by the german Federal Tax Court de- However, it would have been helpful if the de ons In199317and2001.18 cree-law would have pointed out that the documenta tion could be prepared in English. Although section Although the taxpayer is well advised to explain 87 of the General Tax Code provides that the official the reasons for losses or low profits, it is remarkable language is German, the Federal Ministry of Finance should consider allowing the taxpayer to prepare English documents. This would clearly decrease the taxpayers administrative burden. Additionally, suc ch an approach would be in line with note 5.5 of the Cf. see Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 OECD Guidelines Feb 2003; Rasch/Roeder, 11 Transfer Pricing Report 731, 11 Dec. oo 15Administrative principles on auditing cost-sharing arrar The storage process should be subject to the tax payers discretion. A taxpayer should be able"to store ments between internationally related enterprises, Decree of th relevant documents in the form of unprocessed origi- Federal Ministry of Finance, dated 30 December 1999, BStBL I nals or in a well-compiled book. "1s Tax Management Transfer Pricing 2000, Vol 9 No 14, pp. 914 ff. Kroppen/Eigelshoven, Commentary on Transfer Pricing Fina emarks Germany, in: Tax Treatment of Transfer Pricing, I loose-leaf, Amsterdam, June 2002, chapter 3.1.1.1 Under draft section 90, paragraph 3 of the Gener The Federal Tax Court stipulated that a distributor in a al Tax Code for normal transactions, taxpayers may start-up phase should not incur losses for more than three ye see Federal Tax Court dated 17 February 1993, BStBl II For distributors of well-established products, the tax court believes the loss period should be even shorter, see Federal Tax Court dated 17 October 2001, DB 2001, p 2474. For coverage, Kroppen/Rasch/Roeder, Tax Notes Int'l, 10 Dec. 2001, pp. 1111 ff. See note 5.5 of the oecd guidelines Tax Analysts- Worldwide Tax Dailyuments. If a mandatory document is not prepared when requested by the tax authorities, severe penalties14 will most likely become due. The requirement to provide a summary of rulings and APAs from other tax authorities is clearly aimed against the practice of unilateral APAs, which were rather common in the United States, Japan, and other countries. The German tax authorities always took the view that unilateral APAs hurt the German fisc. The German tax authorities will therefore criti￾cally review unilateral APAs, which will become un￾attractive to German companies. Section 6 also requires information regarding cost allocations and details regarding cost-sharing agree￾ments, including list of participants, cost allocation, and expected benefit. Section 5 of the Administrative Principles on cost-sharing agreements15 sets forth an extensive list of documentation that the taxpayer should prepare and file. The above elements are also included in the administrative principles. It is unclear whether the legislature wants to overrule the current administrative principles. It is therefore unclear whether the taxpayer only has to provide the cost-sharing details mentioned in the de￾cree-law and does not have to comply with the admin￾istrative principles on cost-sharing agreements. This would certainly decrease the administrative burden. Finally, the taxpayer is required to explain a loss situation. It appears from the draft decree-law that companies making losses for more than three years will be targeted by the tax authorities. This has been the practice in the past.16 Moreover, this practice has been supported by the German Federal Tax Court de￾cisions in 199317 and 2001.18 Although the taxpayer is well advised to explain the reasons for losses or low profits, it is remarkable that the three-year period now seems to be estab￾lished in binding law. Standard of Documentation Provisions in section 7, regarding “mostly incom￾plete” records, “evidently improper” transfer pricing methods, and documentation “contradictory in terms,” remain unclear. Regarding the harsh penalties, the taxpayer needs further guidance regarding which records will be treated as incomplete. In our experience, tax au￾thorities often have a very formalistic view and may be reluctant to accept a documentation package as being “complete” if only minor elements are missing. Hence, taxpayers and auditors would be helped by clarifying the Federal Ministry of Finance’s under￾standing of “incomplete” documentation. Exemption for Small Companies The threshold of 5 million euros for the supply of goods and 500,000 euros for other transactions seems fair. It aims to reduce the administrative burden for small companies. However, these taxpayers still have compliance duties. When requested by the tax authorities, they must provide adequate oral infor￾mation and documentation within the 60-day period. Storage Process Unfortunately, the Federal Ministry of Finance did not take a more progressive approach regarding the storage process. However, documentation may be stored abroad, which is helpful because often compa￾nies prepare and file documents centrally. However, it would have been helpful if the de￾cree-law would have pointed out that the documenta￾tion could be prepared in English. Although section 87 of the General Tax Code provides that the official language is German, the Federal Ministry of Finance should consider allowing the taxpayer to prepare English documents. This would clearly decrease the taxpayer’s administrative burden. Additionally, such an approach would be in line with note 5.5 of the OECD Guidelines. The storage process should be subject to the tax￾payer’s discretion. A taxpayer should be able “to store relevant documents in the form of unprocessed origi￾nals or in a well-compiled book.”19 Final Remarks Under draft section 90, paragraph 3 of the Gener￾al Tax Code for normal transactions, taxpayers may Tax Analysts — Worldwide Tax Daily 7 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. 14Cf. see Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003; Rasch/Roeder, 11 Transfer Pricing Report 731, 11 Dec. 2003. 15Administrative principles on auditing cost-sharing arrange￾ments between internationally related enterprises, Decree of the Federal Ministry of Finance, dated 30 December 1999, BStBl. I 1999, p. 1122; for an English translation of the provisions, see Tax Management Transfer Pricing 2000, Vol. 9 No. 14, pp. 914 ff. 16Kroppen/Eigelshoven, Commentary on Transfer Pricing in Germany, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002, chapter 3.1.1.1. 17The Federal Tax Court stipulated that a distributor in a start-up phase should not incur losses for more than three years, see Federal Tax Court dated 17 February 1993, BStBl. II 1993, p. 457. 18For distributors of well-established products, the tax court believes the loss period should be even shorter, see Federal Tax Court dated 17 October 2001, DB 2001, p. 2474. For coverage, see Kroppen/Rasch/Roeder, Tax Notes Int’l, 10 Dec. 2001, pp. 1111 ff. 19See note 5.5 of the OECD Guidelines