Report receiving enterprise is not the service-that there is an actual part of the employees remunera employer. and economic connection to the tion (for instance when the It is obvious that all the rose. is decisive for the employee accepts special functions criticism directed at the first draft deduction of operational expenses. by order of the local assigning of the principles regarding the If the taxpayers operational origin subsidiary). It is then the correct can be clearly stated, the question result that the assigning foreign tion for the transfer of know-how regarding the amount of the opera- headquarters company accept part has been taken into account.15 An tional expenses is no longer of of the expenses of an employ assigned employees special interest. Thus the administrativ ho has been received by a local tion for know-how is then justified need not be functiona pense %yy knowledge does not necessarily principles go astray when they subsidiary. In the case of the local ad to a remunerative transfer of question the amount of receiving subsidiary, that means expenses for an employee; on th that possibly only part of the only if, for instance, samples, plans, or drafts are transferred. The appropriate If the local headquarters necessary remuneration resulting Regarding the evaluation of the company is the assigning company, from that transfer, however, is not cause of the assignment costs, the it should carry the burden of proof ted with the aployee s and documentation for the opera assignment. In fact, it would have tional origin of expenses that hay been paid regardless of the second been incurred locally. Otherwise ment. The drafters of the adminis- the local receiving subsidiary must trative principles have settled for rove that increased labor costs exactly that differentiation. (additional expenditures)for the received employee(for example B. Evaluation of Operational because he has special professional Interests The external arm’s skills) are actually in the interest The preliminary draft took length deal probably of the receiving subsidiary. operational origin as its starting will fail because of a There is an inconsistency in point for the apportionment of lack of comparable that argument, especially in the wage expenditures between the legal consequences, if appropriate assigning and the e receIve g enter- assignment situations proof cannot be furnished. If the orise. The operational origin, espe- among independent assigning local(German) company cially the question whether the receiving enterprise would accept third parties cannot prove the operational origin, the costs must be borne in a higher total equipment of an full by the receiving(foreign) assigned employee, should be subsidiary, even if they exceed the judged according to the arms- local wage level. Conversely, the length ole. The final draft no assigning (foreign)parent is longer emphasizes that approach. obligated to carry the additional In fact. the allocation of Income res now directly refers to the arm s length principle. The question of how the relationship between the inducement principle and the administrative principles only arms-length principle is to be differentiate between the case of a German company assigning an evaluated in a legal and system- employees and the opposite case atic way is certain ly not decisive for practical purposes. However when a german company receives See Kroppen/Roeder, supra note 1 at 435. the new administrative principles loyee are not as clear on that point as SEction 3 of the administra one wou The principles state appropri- tely that an assigned employee Still worth criticizing is the usually becomes active in the point that the arms-length interest of the receiving enterprise Schmidt-Heinicke principle is blurred with the That is postulated only for Einkommensteuergesetz(Munchen: Beck correct understanding of the term German assigning enterprises; Verlag 2001). section 4 note 480 “ operational expenses” for evalu- however, the assigning company Section 3.1.1 of the administrative ating the expenditures connected can also have an interest in the with the personnel secondment assignment of the employee and 20Section 3.1.2 of the administrative The operational cause of the will thus take on responsibility for Tax Notes International 4 February2002·515receiving enterprise is not the employer. It is obvious that all the criticism directed at the first draft of the principles regarding the question of additional remunera￾tion for the transfer of know-how has been taken into account.15 An assigned employee’s special knowledge does not necessarily lead to a remunerative transfer of know-how. A separate remunera￾tion for know-how is then justified only if, for instance, samples, plans, or drafts are transferred. The necessary remuneration resulting from that transfer, however, is not associated with the employee’s assignment. In fact, it would have been paid regardless of the second￾ment. The drafters of the adminis￾trative principles have settled for exactly that differentiation. B. Evaluation of Operational Interests16 The preliminary draft took operational origin as its starting point for the apportionment of wage expenditures between the assigning and the receiving enter￾prise. The operational origin, espe￾cially the question whether the receiving enterprise would accept a higher total equipment of an assigned employee, should be judged according to the arm’s￾length principle. The final draft no longer emphasizes that approach. In fact, the allocation of income now directly refers to the arm’s￾length principle. The question of how the relationship between the inducement principle and the arm’s-length principle is to be evaluated in a legal and system￾atic way is certainly not decisive for practical purposes. However, the new administrative principles are not as clear on that point as one would wish. Still worth criticizing is the point17 that the arm’s-length principle is blurred with the correct understanding of the term “operational expenses” for evalu￾ating the expenditures connected with the personnel secondment. The operational cause of the service — that there is an actual and economic connection to the enterprise18 — is decisive for the deduction of operational expenses. If the taxpayer’s operational origin can be clearly stated, the question regarding the amount of the opera￾tional expenses is no longer of interest. Thus, the administrative principles go astray when they question the amount of operational expenses for an employee; on the contrary, operational expenses need not be functional, common, or appropriate. Regarding the evaluation of the cause of the assignment costs, the administrative principles only differentiate between the case of a German company assigning an employee19 and the opposite case when a German company receives an employee.20 The principles state appropri￾ately that an assigned employee usually becomes active in the interest of the receiving enterprise. That is postulated only for German assigning enterprises; however, the assigning company can also have an interest in the assignment of the employee and will thus take on responsibility for part of the employee’s remunera￾tion (for instance when the employee accepts special functions by order of the local assigning subsidiary). It is then the correct result that the assigning foreign headquarters company accept part of the expenses of an employee who has been received by a local subsidiary. In the case of the local receiving subsidiary, that means that possibly only part of the operational expenses will be up for negotiation. If the local headquarters company is the assigning company, it should carry the burden of proof and documentation for the opera￾tional origin of expenses that have been incurred locally. Otherwise, the local receiving subsidiary must prove that increased labor costs (additional expenditures) for the received employee (for example, because he has special professional skills) are actually in the interest of the receiving subsidiary. There is an inconsistency in that argument, especially in the legal consequences, if appropriate proof cannot be furnished. If the assigning local (German) company cannot prove the operational origin, the costs must be borne in full by the receiving (foreign) subsidiary, even if they exceed the local wage level. Conversely, the assigning (foreign) parent is obligated to carry the additional expenditures if the local receiving Tax Notes International 4 February 2002 • 515 Special Reports 15See Kroppen/Roeder, supra note 1 at 435. 16Section 3 of the administrative princi￾ples. 17See Kroppen/Roeder, supra note 1 at 436. 18Schmidt-Heinicke, Einkommensteuergesetz (München: Beck Verlag 2001), section 4 note 480. 19Section 3.1.1 of the administrative principles. 20Section 3.1.2 of the administrative principles. The external arm’s￾length deal probably will fail because of a lack of comparable assignment situations among independent third parties