JULYIAUGUST 2000 ITPJ 157 the appropriate gross margin being determined based on the taxpayer was deprived of the possibility to put forward an external comparison of four distributors operating in its own arguments in support of its position. the same market as the taxpayer. Initially, comparable Ger database i as wel as industry codes and company profiles. were deleted. The Court also rejected this proposal available on a limited basis in the database. After identify f comparability and the tax office could influence the ing the comparable companies, the tax auditors obtained selection of comparable companies to the disadvantage of more detailed inform ffices which was then further analysed the taxpayer The efforts of the tax office to detemine appropriate trans- C. Position of the tax authorities and the OECD ate comparables are, in principle, to be welcomed In prac- In the opinion of the tax authorities, comparable com- n operating margins, even if the taxpayer has fully dis- anies can be used in court proceedings without disclosing the identity of the companies concerned. The tax author- closed all required information to the tax office, so that an ities. hence, follow the established practice of the Federal estimate is not admissible. The operating margins are not Tax court. l4 However, the Ministry of Finance deems the are often based on(inadmissible) rules of thumb. In the right to be heard before the courts to be violated if the files maintained regarding comparable companies are only dis- authors expenence, arm's length prices have so far hardly closed to the lax Court rather than to all participants in the ever been determined by tax auditors using a theoretically Court proceeding. Therefore, the ruling in the Dusseldorf databases). The main reason for this may be the lack of the Federal ministry of Finance. Yet, that ruling goes one (financial statements and balance sheets are currently only when used to determine transfer prices in Tax Court pro- available for 10,000 to 15,000 companies). In addition, both a lack of resources to the tax authorities and insuffi cient experience on the part of tax auditors in performing The oECd does not analyse in detail the issue of secret sis. However, in the case at hand the main concen is that Pricing Guidelines(hereinafter: OECD Guidelines ) the the tax auditors'determination is based on data that could oeCd discusses the net margin method, clearly rejectin not be disclosed to the taxpayer because of tax secrecy le he use of data that are not available to the taxpayer. It is gislation pressly made clear that these rules should be applicable to all transfer pricing methods, which would include the B. Holding of the Lower Tax Court of Dusseldorf resale price method. The OECD justifies its objection by The Dusseldorf Tax Court first stated that a disclosure of defang that the taxpayer must have the possibility to courts would otherwise not be ensured. The oeCd. like data of comparable companies to the taxpayer in the court the Lower Tax Court of Dusseldorf, therefore also goes proceedings would lead to a violation of the tax secrecy of the comparable companies. The Court noted that the tax- payer has the right to be heard before the Court, 0 and this ncludes the right to access to all evidence and facts rel- 6.. See Administrative Principles on Transfer Pricing of 23 February 1983 evant to the case. In the opinion of the Court, however, of the text, see Heinz-Klaus Kroppen and Axel Eigelshoven, cl there is no conflict between the taxpayer's right to access in The Tax Treatment of Transfer Pricing (Amsterdam: IBFD, 1987),1 all information and the strict tax secrecy legislation. Tipke and Heinrich Kruse,(Koln: Dr. Otto Schmidt Verlag, 1996), Sec. 162 AC crecy or the disclosure of data of the comparables, mey r d uers eurn hof keun: tr tko, schn ida verlig. 9a ess respectively, cannot be justified by the obligation of the AStG, note861 ourt to grant the taxpayer the right to access the Court' s 7. See also wolf-Dieter Hoffmann and edgar Schnitzer, "Globale file Kroppen, in Jahrbuch der fachanwdlte fir Steuerrecht 1999(Herne/Berlin The Court also rejected an exclusive disclosure to the Tax Neue Wirtschafts-Briefe, 2000), at 51 s y gl at 191 for an example. Court, which was suggested by the tax office. 12 The Tax 3. However, see Harald kuckhoff and rof schreiber, errechnungspreise in Court reasoned that the tax secrecy was, on the one hand also binding on the Court and, on the other, the exclusive 10 'Tax Court Code, Sec.96, Para.2. disclosure to the Court would again violate the taxpayer's 11. Tax Court Code, Sec. 78 right to access the files. moreover, the duty to grant the 12. This view differs from the Federal lesteuerblatt(hereinafter:BSiBL)I taxpayer the right to be heard before the Court was Court dated 18 December 1984, Bund (1986),at229 designed to put the parties in an equitable position in the 13. Letter of the Federal Ministry of Finance dated 7 April 1986, BSIBL I proceedings. This right would be infringed if the Tax (1986), at 128 Court had to rule on the comparability of companies and 14. See Federal Tax Court Opinion dated 24 September 1976, BSiBL n(1977), at 196; Federal Tax Court Opinion dated 21 May 1982, BStBL I (1982), at 604 eral Tax Court Opinion dated 18 December 1984, BStBL. I (1986), at 226 C 2000 IBFD Publications BV