Special Reports for a license agreement for the sales as a basis request the documentation even for tax audits covering for the royalty; and years long before the effective date of the documentation for prices based on the resale price method for obligations, because that documentation could be of the prices charged to customers relevance even for those prior years. The draft ordinance contains an example in which the german For those mentioned cases, the draft ordinance is distribution subsidiary of an international group is probably in line with the pertinent jurisdiction of the audited in July 2004 for the years 1996 to 2000.The Supreme Tax Court. Also, the court has acknowledged distribution contract was concluded in 1994 and still that in some cases a foreign related party has to exists without any major amendments. The draft provide the basis for the determination of the prices to ordinance states that the auditor is entitled to request ts German affiliate because independent parties the documentation that should have been prepared would provide that information. until the end of 2003 for auditing the prior years 1996 to2000. Taxpayers are well advised to analyze That provision of the draft ordinance, in our view, what impact their documentation contradicts the pertinent sections of the law and package for 2003 and later may have on therefore is not valid. Section 90, paragraph 3 sentence 6 of the Code of Procedures provides that the their tax returns for prior years tax authorities shall, in principle, only request the submission of documentation for a tax audit section A The most important area of discussion in the future 22 of the introductory law in the Code of Procedures will probably be the rules of the draft ordinance on the provides that documentation obligations are only obligation of the taxpayer to take contractual precau effective for business years that start after December tions for obtaining information. 23 The draft ordinance 31, 2002. 27 ag品38 requires the taxpayer, if possible and reasonable, upon Those two provisions cannot be interpreted sepa the conclusion of a contract with arelated party, to take rately, but rather must be read together. It cannot be precautions in the contract that the related party will concluded that the obligation of the tax authorities to provide all necessary information to the German in principle, only request the documentation for an affiliate.24 It can be foreseen that the question of that audit refers to any audit, but is, of course, aimed at an provision in a contract being possible or reasonable will audit for those years for which the documentation obli lead to extensive discussions with german auditors gation was effective. It therefore must be concluded Auditors will principally take the position that the that the tax authorities can only request the documen- German taxpayer could have extensively provided for tation according to section 90, paragraph 3, sentence 6 all kinds of information in the contractual relation- for audits of those years for which, according to section ships with foreign affiliates. It is, therefore going to be 2, the obligation to document was in force. Those are interesting to see whether that position is sustainable, audits for the year 2003 and years following. However, particularly in cases other than the ones explicitly the draft ordinance clearly shows the strong tendency described in the draft ordinance and mentioned above. of the tax authorities to expand the documentation D. Extraordinary Long-Term Contracts obligation to prior open years, even though there is no The documentation law. and the documentatio legal basis for that extension Decree Law26 contain special provisions for extraordi- nary long-term intercompany relationships. If those I. Documentation of Compliance extraordinary long-term intercompany relationships With the arms-Length Principle were concluded prior to the effective date of the law A cornerstone of the documentation law and the (generally, January 1, 2003), they must be documented draft ordinance is the documentation on compliance until December 31, 2003. Therefore, principally for with the arms-length principle. Section 90, paragraph those relationships, the pertinent documentation would have to exist today. For that documentation, the 3, sentence 2 of the Code of Procedures requires the taxpayer to document that the arms-length principle draft ordinance now provides that the auditor can was observed when concluding contracts with related parties. There is a lot of controversy about that require 3Note 3.3.3 draft ordinance rt. 22, section 97 of the introductory act to the Code of Pro- Internationale Verrechnungspreise(Koln: Dr. Otto Schmidt Verlag, 1999),0 number 5.26 note 2 ff. cedures reads as follows: "Section 90, paragraph 3, and sectio 162, paragraph 4 of the general tax code in the version of article 9 25Sec 90 and 162 Code of procedures, see footnote 4 of the law dated 16 May 2003(BGBL I p 660) has to be applied for he first time to any fiscal years beginning after December 31 See footnotes 5 and 6 2002 January 10, 2005 Tax Notes Internationalfor a license agreement for the sales as a basis for the royalty; and for prices based on the resale price method for the prices charged to customers. For those mentioned cases, the draft ordinance is probably in line with the pertinent jurisdiction of the Supreme Tax Court. Also, the court has acknowledged that in some cases a foreign related party has to provide the basis for the determination of the prices to its German affiliate because independent parties would provide that information. Taxpayers are well advised to analyze what impact their documentation package for 2003 and later may have on their tax returns for prior years. The most important area of discussion in the future will probably be the rules of the draft ordinance on the obligation of the taxpayer to take contractual precau￾tions for obtaining information.23 The draft ordinance requires the taxpayer, if possible and reasonable, upon the conclusion of a contract with a related party,to take precautions in the contract that the related party will provide all necessary information to the German affiliate.24 It can be foreseen that the question of that provision in a contract being possible or reasonable will lead to extensive discussions with German auditors. Auditors will principally take the position that the German taxpayer could have extensively provided for all kinds of information in the contractual relation￾ships with foreign affiliates. It is, therefore, going to be interesting to see whether that position is sustainable, particularly in cases other than the ones explicitly described in the draft ordinance and mentioned above. D. Extraordinary Long-Term Contracts The Documentation Law25 and the Documentation Decree Law26 contain special provisions for extraordi￾nary long-term intercompany relationships. If those extraordinary long-term intercompany relationships were concluded prior to the effective date of the law (generally, January 1, 2003), they must be documented until December 31, 2003. Therefore, principally for those relationships, the pertinent documentation would have to exist today. For that documentation, the draft ordinance now provides that the auditor can request the documentation even for tax audits covering years long before the effective date of the documentation obligations, because that documentation could be of relevance even for those prior years. The draft ordinance contains an example in which the German distribution subsidiary of an international group is audited in July 2004 for the years 1996 to 2000. The distribution contract was concluded in 1994 and still exists without any major amendments. The draft ordinance states that the auditor is entitled to request the documentation that should have been prepared until the end of 2003 for auditing the prior years 1996 to 2000. That provision of the draft ordinance, in our view, contradicts the pertinent sections of the law and therefore is not valid. Section 90, paragraph 3, sentence 6 of the Code of Procedures provides that the tax authorities shall, in principle, only request the submission of documentation for a tax audit. Section 22 of the introductory law in the Code of Procedures provides that documentation obligations are only effective for business years that start after December 31, 2002.27 Those two provisions cannot be interpreted sepa￾rately, but rather must be read together. It cannot be concluded that the obligation of the tax authorities to, in principle, only request the documentation for an audit refers to any audit, but is, of course, aimed at an audit for those years for which the documentation obli￾gation was effective. It therefore must be concluded that the tax authorities can only request the documen￾tation according to section 90, paragraph 3, sentence 6 for audits of those years for which, according to section 22, the obligation to document was in force. Those are audits for the year 2003 and years following. However, the draft ordinance clearly shows the strong tendency of the tax authorities to expand the documentation obligation to prior open years, even though there is no legal basis for that extension. IV. Documentation of Compliance With the Arm’s-Length Principle A cornerstone of the Documentation Law and the draft ordinance is the documentation on compliance with the arm’s-length principle. Section 90, paragraph 3, sentence 2 of the Code of Procedures requires the taxpayer to document that the arm’s-length principle was observed when concluding contracts with related parties.There is a lot of controversy about that require- 200 • January 10, 2005 Tax Notes International Special Reports 23Note 3.3.3 draft ordinance. 24For a discussion of the arm’s-length character of those pre￾cautions, see Rasch, in Becker/Kroppen (eds.) Handbuch Internationale Verrechnungspreise (Köln: Dr. Otto Schmidt Verlag, 1999), O number 5.26 note 2 ff. 25Sec. 90 and 162 Code of Procedures, see footnote 4. 26See footnotes 5 and 6. 27Art. 22, section 97 of the introductory act to the Code of Pro￾cedures reads as follows: “Section 90, paragraph 3, and section 162, paragraph 4 of the general tax code in the version of article 9 of the law dated 16 May 2003 (BGBl. I p. 660) has to be applied for the first time to any fiscal years beginning after December 31, 2002.” (C) Tax Analysts 2005. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content