JULYIAUGUST 2000 ITPJ methods. Finally, it is claimed that independent parties comparables. Yet the availability of Us data is undeniable aling at arm's length do not negotiate profits but always Therefore, based on the Courts ruling it can at best be concluded that the application of comparable profit meth Guidelines,the Federal ministry of finance also rejected sible, whereas the issue of their general admissibility can- cases of sampling and estimation. However, the press In addition, one might consider whether European com- release flicts with the administrative principles, panies can be used as comparables for a profit comparison which- similar to the OECD Guidelines recognize a Although both the administrative principles and the profit comparison as a"last resort"s The administrative OECd Guidelines expressly emphasize the comparabilit principles specify that profit based methods are applicable of markets, it is another question how a market is to be if"on account of specific circumstances [. ] the applica- defined. A geographic market does not necessarily have to tion of the standard methods would not generate appropri- correspond with the national territory of a country. In a ate results".46 After the publication of the adn ninistrative variety of industries it would seem justified, when seeking principles, however, it was always made clear by the tax German comparables, to refer to data from other eU coun- thorities that the standard methods would in virtually all tries as well. Notably, on the European market, transaction cases generate appropriate results so that, in the end, the costs between the different countries decreased due to the exemption was meaningless abolition of customs duties and the establishment of a uni form currency, so that profits and prices between the coun- However, the official approach of the tax authorities tries should tend to align. In addition, similar economic stands in sharp contrast to the practice in tax audits, where the profit comparison often plays a central role. 47 The tax cycles are to be observed in a variety of industries. Euro- auditors use profits to determine whether an audit is pean comparisons are, however, inappropriate if the required with respect to transfer pricing. If a taxpayer real- results are distorted through accounting differences or izes losses or unusually low profits, the insufficient result through different competitive conditions( e.g. in the medi- is often regarded as prima facie evidence of inappropriate cal technology or telecommunications industry) transfer pricing. If the taxpayer fails to convince the tax. Eventually, it can be concluded that comparable profit ditors or the courts that the transfer pricing is appropri- methods are generally admissible and possible in Ger- ate, an estimate is often made on the basis of the operating many. However, the Court seems to be very tolerant with margin. For example, in its ruling dated 18 December respect to the comparability standards within the scope of 1996. the Tax Court of Saarland estimated a wholesaler's the methods and suggests that, hence, the com transfer prices through reference to an operating margin of para fit method is a method of last resort and of five per cent, which it considers to be common in the minor importance industry. 48 In a ruling concerning a loss-generating distri bution company, the Federal Tax Court also took a result oriented approach, completely ignoring a comparable transaction of the distributor with an unrelated party. 4g B. Statements of the dusseldorf tax court 43. See OECD Guidelines, notes 3.27-3.33(a further discussion ): Klaus er, in Doppelbesteuerung, eds. Helmut Debatin and Franz Wassermeyer The Dusseldorf Tar Court ruling does not focus on the (Munchen: Beck verlag, 1999). Art.9 MA, notes 260 and 261 acceptability of comparable profit methods. From the 44. Press release of the Federal Ministry of Finance dated 13 July 1995, 4 ISIR Courts perspective, the admissibility did not have to be 8, at 384 verified because the Court was able to properly determine See OECD Guidelines note 3. 50; see also Klaus Sieker, in Dop. the amount of the transfer prices by applying the resale verlag. 1999). Art. 9 MA, mote 25s9 and franz Wassermeyer,(Munchen:Beck price method. Nevertheless, the Court emphasized in an 46. See adminis obiter dictum that profit-oriented methods could also be 47. Heinz-Klaus Kroppen and Axel Eigelshoven, Transfer pricing planning in applied in determining appropriate transfer prices, so In this Germany", 7 Tar Management Transfer Pricing Report.4(1998),at 107; Eugen respect the ruling follows the oeCd Guidelines and the Bogenschutz, Verdeckte Gewinnsausschuttung, verdekte Einlage, Verrech- in Jahrbuch der Fachanwalte fiir Steuerrecht 199711998 administrative principles because it accepts the admissibil-.(Heme/Berlin: Neue Wirtschafts-Briefe, 1998). at 655: Wolf-Dieter Hoffmann ity of comparable profit methods. 1 nd Edgar Schnitzer, " Globale Gewinnschatzung im Aussensteuerbereich"8 at 74 Some authors, however, drew the conclusion from the rul- 48. EFG 1997. at 486 ing that a profit comparison was not admissible in Ger- 49. See Federal Tax Court Opinion dated 17 February 1993, BSrBL I(1993), many. 2 This conclusion was reached based on the rejec- at 457 tion of secret comparables and the lack of publicly available financial information in Germany. However, the verrechnungspreise in Deutschland?", 8 / 16(1999),at 524 method does not necessarily have to be applied to German ables", 10 Intemational Tax Review 4(1999),at l court bans secret compar- e comparable pre 2. Thomas Borstel and Michael Prick, "Germa enterprises. If, for example, a German manufacturer dis- 53. See also Stephan Schnorberger, "Unzulassingkeit gewinnvergleichender tributes its products via a Us distributor, the comparable errechnungspreis in Deutschland, 8 /StR 16(1999), at 524 profit method could properly be applied on the basis of Us eds. Helmut Becker and Heinz-Klaus Kroppen, (K]in: Dr. Otto Schmidt verlag, 1999), note W 24: US Treas Reg. Sec. 1.482-1(d)(3)(iD)(A). 2000 IBFD Publications BV