JULY/AUGUST 2000 ITP 161 The adjustment to the comparative group is furthermore ferences that justified an adjustment. First, the payment justified by the higher distribution risk. The unreliable term granted by the affiliated supplier to the distributor delivery behaviour and the limited clientele in the upper was 120 days longer than the term granted to P. Second, market segment would, in the tax auditors'opinion, invoices to customers for intergroup transfers of products sk This is correct in principle because. were prepared by the parent, whereas this function was an independent distributor would request a risk premium performed by the distributor for P's products. The Court for a higher risk exposure in the market and therefore. estimated the allowance for the additional functions to be would also be likely to realize a higher gross margin. It is, four per cent, resulting in a comparable gross margin for however, not obvious to what extent the tax auditors this transaction of 24 per cent. The two other transactions examined whether the supplier was actually unreliable or with Q and O, for which the distributor realized gross mar- hether the adjustment was due only to a general preju- gins of 26 per cent and 30 per cent, respectively, were sim- dice ilarly estimated by the Court. The Court established that for these transactions, the distributor also performed addi In addition, it remains to be seen if the comparative group tional functions The time for payment agreed with the differs from the enterprise under review or whether enter prises included in the industry average possibly have a unrelated companies was shorter, but the distributor also Similar risk exposure. For example, most wholesalers are had to bear packaging costs and the cost of distribution to the customer. This difference was estimated by the Court likely to purchase their goods from low-wast finally, it to be two per cent. In the opinion of the Tax Court, the dis- which tend to have a lower delivery reliability. tribution risk related to O's products was, however, higher should be noted that the selection of the differences seems such that an allowance of four per cent was made arbitrary and that the quantification of these differences at five per cent is by no means substantiated. A reader of the The detailed description of the Court's analysis should justified in this case. However, the description of the audi- prices by using the resale price method, the Tax Court did tor's tax review provides a good insight for taxpayers of not perform a thorough comparability analysis. The the potential arbitrariness in everyday tax audits in Ger D emphasizes that all differences between transac tions with related and unrelated enterprises must be identi Apart from this approach, the tax auditors'result was also fied and quantified, 37 The Tax Court's analysis was, how differences; the selection again seems to be arbitrary. In inadmissible for formal legalistic reasons. However, the particular, the following differences, which would have to correctness of the procedure seems doubtful also for other be taken into account under both the administrative princi reasons. The analysis is based on only four comparative ples and the OECD Guidelines, were deemed to be irrele- enterprises. As gross margin is very sensitive to differ- vant ences in terms of functions, risks, and capitalization, it volume diferences. The transactions with the three seems doubtful that an analysis based on such a small sam ple would allow one to draw conclusions conceming the of the taxpayer ' es accounted for only five per cent he taxpayer s gross margin. In the this difference in purchase volume would not also authors'experience, the tax authorities have deemed ana result in a different gross margin. In this context, two lyses done by taxpayers to be inappropriate because the adverse effects should be taken into account: First, the comparative group was comprised of only 15 to 20 enter wholesaler may be willing to distribute additional products even if, with a relatively low gross margin no profit or only a low profit is realized with these oducts. From a business perspective, this can be rea- C. Resale price method applied by the Tax Court onable, for example if the products improve the repu tation of the distributor's product range or comple- The Tax Court rejected the determination of the transfer ment the product range, or if the distribution of the price by the tax auditors, and therefore determined the product contributes to cover fixed cost. Depending on onstructive dividends on the basis of its own considera- the market situation and the market structure the dis tions. The determination of the Court was also based on tributor could, however, also be in a position to nego- the resale price method, but the Court analysed the tax- tiate higher discounts(and correspondingly a higher payer's transactions with unrelated parties. The distributor gross margin). Whether and to what extent these purchased goods, to a very limited extent, from three unre- effects apply to the Dusseldorf Tax Court case was not lated companies. The Tax Court recognized the necessity to further discussed by the Court. According to prevail- adjust for differences between the transactions and also per- ing opinion, however, volume differences can have an formed a comparability analysis, The Tax Court analysed nfluence on market prices. Presumably, in order to three transactions with the unrelated parties O, P and Q The gross margin realized by the distributor for the trans- 37. See OECD Guidelines, note 1.15. See also US TreasReg. Sec. 1.482 action with P was 24 per cent. After adjusting for the cash 1(d)(1) discount granted to the taxpayer by P, the margin was SIR 16(1999), at519 8. See Harald Kuckhoff and Rolf Schreiber, "Quo vadis Fremdvergleich",8 increased to 28 per cent. Comparing the transaction with 39. See administrative Principles, Sec. 3.1.1 OECD Guidelines, notes 1.19 (d)()ii A)and(C); Heinz-Klaus Krop- pen, in Handbuch Internationale Verrechnungspreise, eds. Helmut Becker and 2000 IBFD Publications BV