124 (vo.9,No.4) ANALY SIS ll. Cooperation Requirements thorities are targeting with this rule. In the past, there were two scenarios in which german ers argued In Section 2 of the draft guidelines, the German tax foreign evidence and documents were irrelevant and authorities explain how they expect a taxpayer to coop- therefore did not have to be provided The first was when a foreign production company an extended obligation to cooperate with the tax au- supplied goods to a German distribution company, ased on the application of the resale price method with parties in foreign countries. The taxpayer would (RPM. The German authorities wanted to obtain docu have to provide materials that establish the facts and entation about the cost structure of the foreign pro- duction company. Taxpayers rejected the request for The taxpayer would be required to obtain evidence and foreign documents by arguing that the cost structure of documents from foreign countries and to use all legal the foreign production company was totally irrelevant and factual means to fulfill these obligations (Sec. for determining whether the price for the German dis- tribution company based on the RPM was arms length to cooperate, taxpayers must The foreign producers cost structure was irrelevant make available to german authorities evidence and because the RPM only requires the distributors resale documents that are contained in the books and records price and cost of goods to calculate the gross margin or on the electronic data processing(EDP) system of a This is because only the resale price and an arms- foreign affiliate(Sec. 2. 1. 2.) length gross margin are important to establish whether Ag in the past, many taxpayers in transfer pricing audits an RPM price is arm's length. One may speculate that claimed that they could not obtain foreign do the tax authorities have drafted the new rules to estab- ments because their foreign affiliate was not willing to lish a basis for also requesting the cost structure docu provide those documents to the German company. The ents of the foreign production company. Even under the draft rules it is questionable whether the foreig draft guidelines would make it explicit that the taxpayer producer's cost structure could be deemed relevant in evidence from a foreign affiliate. The German taxpayer would be required to direct The second situation covers cases in which. for ex the foreign affiliate to provide all necessary information ample, a central European production entity supplied to before entering into any transaction (Sec 1.3. That different related distrib might mean that a German taxpayer has to stipulate in French and a german distribution company. In such a its contracts with related parties for the delivery of ase the German tax authorities would request pricing goods or services that the related party will provide all information, documents, and records of the French af- relevant information, evidence, and documentation filiate. This request was rejected for two reasons request a the information was totally irrelevant for establish ing the arm' s-length character of the prices for the Ger Retaining Affiliates'Documentation man affliates: and a since the affiliated production company and the The draft guidelines makes no exceptions for secrecy French distribution company were related parties,the ganization for Economic Cooperation and Development be required to provide the information, even if provid- (OECD) Model Treaty because it was not third-party in ing it to the german taxpayer would be a criminal of- organon fense abroad. The obligation of foreign affiliates to pro The provision in the draft guidelines could be inter vide documentation also is not affected if foreign docu- preted as strengthening the German authorities' activ mentation retention periods have elapsed before the ity to request foreign related-party transaction informa German retention period is over. The German taxpayer tion, such as the French pricing information in the case is required to secure full access to the foreign data The draft guidelines, however do not make clear ex ctly how a german taxpayer is supposed to fulfill this I Profit-Based Methods obligation. It hardly seems realistic to expect a foreign taxpayer to ship its entire documentation to Germany The draft guidelines also contain specific rules for after domestic retention laws have expired solely to pre taxpayers who use either a combination of transaction serve access for the german authorities Such a re based methods or a profit-based method. widely use quirement would probably not be admissible under the CPM-or the OECD's transactional net margin method German constitutional rule of proportional measures (TNMM-is not considered an acceptable method in Therefore, even a limited requirement to retain foreign Germany and therefore these draft rules will be appli documentation will likely pose a substantial additional cable in all cases where CPM is used to set transfer burden on the german taxpayer. prices. The draft guidelines state that when non transactional methods are used, the taxpayer must take Determining Documents'Relevance reater care to ensure that the necessary documents and evidence are collected and can be easily verified by The draft guidelines also claim that if the facts and the tax authorities circumstances at a foreign affiliated company are rel- Under the draft document the tax authorities can re- vant for the audit of the transfer pricing of a german quest that the taxpayer cooperate in verifying that the axpayer, the extended obligation to cooperate also in prices determined under the non-transaction-based ludes those foreign facts and circumstances(Sec. method would also be plausible using a transaction 2. 1. 4. ) It is not entirely clear which cases the tax au based method (Sec. 2.2.4.) 61400 pyright o 2000 TAX MANAGEMENT INC. a subsidiary of The Bureau of National Affairs, Inc. TMTR ISSN 1063-2069