24.2 Provisions for the determination of Transfer prices 24-3 (b German Tax Audit Issues At the same time, the German tax authorities'audit staff is increasingly becom- ing more aware and sophisticated as relates to transfer pricing matters. For exam- ple, in the mid 1990s, the German tax authorities started to improve the audit staff's transfer pricing training. Some senior tax inspectors recently announced that audits will focus on transfer pricing in the future Another recent development is the increasing aggressiveness of the tax audit staff, who are less prepared to negotiate audit results and increasingly are willing to test their position in the tax courts instead. The aim of this strategy is to use court rulings to establish a dense regulatory framework and precedent for their audit work. The auditors are encouraged by tax court decisions that in the past have re- sulted in sweeping judgments against taxpayers; for example, the Federal Tax Court ruled that distribution companies should in general not incur losses longer (c) Arbitration and Tax Changes a The taxpayer is well advised to find a solution through competent authorities and itration procedures instead of the court proceedings. Especially in Europe, arbitration procedure has proven to be a very powerful tool to avoid double taxa tion. Even the existence of the arbitration procedure is often very fruitful to achiev ng a solution at the audit level. It is not likely that the pressure on the taxpayer will decrease after the govern- ments tax reform plans will be implemented in 2001. However, the new legisla- tion will reduce the incentive for the taxpayer to shift profits abroad. According to the German government, it plans to reduce the effective tax rates from 56 percent in 1998 to about 39 percent beginning in 2001. The reduction in taxes will be fi nanced through a broader tax base. This regulatory framework will probably be ac- companied by increased audit activity. Thus, transfer pricing will remain a main concern of the taxpayer. 24.2 PROVISIONS FOR THE DETERMINATION OF TRANSFER PRICES (a) Administrative Principles for Transfer Prices The German Tax Administration issued guidelines in 1983 desig narize the principles governing the allocation of income between internationally related taxpayers under the provisions contained in Germany's domestic and treaty law. The administrative principles were intended to outline the view of the Kuckhoff/Schreiber, Verrechnung spreise in der Betriebspriifung, Munich: Beck, 1997, P. 8 See Federal Tax Court, February 17, 1993, BStBl. 1993, p. 457 ates are based on nondistributed profits, including municipal trade tax and solidarity surcharge, see press of the Federal Ministry of Finance, December 21, 1999