Co-operation Obligation in German Transfer Pricing Audits tax authorities can assess the arm s length nature of the might only be determined by reference to commodity exchange prices. In other words, to determine a"most likely Again, the taxpayer is well advised to co-operate in order to point within a range means to reduce the range to"one avoid any negative consequences. In case the taxpayer does exclusive correct transfer price. This might only be applicable not co-operate and the tax authorities are not able to in exceptional cases determine the facts and circumstances by themselves, the tax authorities are ultimately authorised to estimate the taxpayer's Vil. Third-Party Data Under the income. a one-sided attitude of refusing any information will Arm's Length Test most likely lead to negative consequences In its decision, the Supreme Tax Court argued that a V. Use of Arm's Length Ranges determination of an arm's length transfer price for a distribution company cannot be based on the resale prce Third, and what concerns the authors the most, are the method if the Ministrys conclusions on the arms length range. The Federal Tax Court accepted in its 2001 decision that price ranges can a gross margin can only be derived from three independent suppliers be used to determine an arm's length price. If it is found that the taxpayer s prce is outside this range and once a range of a corresponding purchases do not refer to all years under acceptable prices has been determined, the question arises as onsideration; and to which point along this range an adjustment can be made a purchases represent only five percent of the turnover of The Federal Tax Court held that an adjustment is only possible he distribution company to the most advantageous point of this range for the taxpayer, These findings of the Supreme Tax Court are probably correct which is either the high or low end of the range. The court in the specific case of the tax court. They are in accordance elieves that no legal basis exists for an adjustment to the ith e.g., U.S. transfer pricing regulations, the OECD midpoint of the range and that German Tax Law does not Guidelines, and also the german administrative principles.5 allow estimates to punish the taxpayer. Any price chosen by However, the Ministry of Finance makes clear that in principle the taxpayer being within the arm's length range, principally is here is no minimum requirement for the number of an am s length price that cannot be adjusted. Subsequently, comparables. Each case has to be viewed separately. it is hardly conceivable why an adjustment of a price outside that range should then go to the mid-point of the range VIll. Conclusion without violating the German legal principle that punishment is Under the new legislation the taxpayer is now forced to only permissible under criminal but not under tax law make at least serious attempts"to provide an arms length Furthermore, constitutional principles support the courts view analysis. Again, it is recommended to prepare such analysis The Tax Law is a major interference with the freedom rights with due care in order to avoid lengthy disputes in tax audits any individual. Such interference is subject to the principle of and severe penalties for all fiscal years, starting after Dec. 31 dequate and proportional interference, which means that if 2003. It should also be taken into account that such analysis there are different measures for the authorities, they have to ight have to bear up in potential mutual agreement choose that measure that least affects citizens' freedoms and procedures. It might thus reduce the efforts to prepare such b Syd arm's length evidence right away. In situations where an arm's length range has been determined and the price is set outside Vl. Most Likely Value Within Range the range, the taxpayer should only accept an adjustment to the most advantageous point within the range However, the new letter argues that a price outside the range should be adjusted to the point within the range that is the Axel Eigelshoven and Stephan Rasch, Ph. D, are with Deloitte most likely value within the range"of appropriate prices. In Touche's European transfer pricing group in Dusseldorf the authors view, this is clearly not in line with existing law Aeige/shoven @deloitte.de The law itself does not provide any guidance for income rasch@deloitte. d e adjustments for such cases where a price is outside a range Thus, the principles set forth in the Federal Tax court udgment and mentioned above needs to be considered Moreover, it remains unclear how the"most likely point within a range"could be determined. Obviously the German Federal Ministry of Finance based its opinion on the Organisation for Economic Co-operation and Development transfer pncing guidelines. Section 1. 48 reads n general, and to the extent that it is possible to distinguish among the vanous points within the range, such adjustments should be made to the point within the range that best reflects the facts and circumstances of the articular controlled transaction Although the oECD guidelines favour some point within the range that fuly reflects the transaction, it seems that this point