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Co-operation Obligation in German Transfer Pricing Audits Axel Eigelshoven and Stephan Rasch Deloitte& Touche, Dusseldorf The German Supreme Tax Court in October 2001 issued The German tax authority's interpretation of the tax court its famous landmark decision that taxpayers cannot be sounds very theoretical and, in fact, in practice it is unusual to held liable for failing to document their transfer pricing discuss such precise distinction between the legal practices because German law does not specifically requirements and legal consequences in tax audits. More often, require it. In the aftermath, the German legislature the taxpayer and the tax authorities disagree on the questio question of introduced comprehensive transfer pricing the burden of proot to brineven this discussion is rarely the enacting severe penalties for cases of non-compliance. decisive argument to bring a tax audit to a satisfactory result. In general, it is recommended that taxpayers provide all relevant In Febr half years after the ocumentation that is requested by the tax authorities and that doc is available and to co ctively in tax audits. decision-the Germa Nevertheless, it should be considered th published a letter co obligation und ered that the co-operation Supreme Court tax de The letter, shown in Box A er the former law, ie., the period before the new documentation law has be overleaf, discusses th applicable, is restricted to Tax Court addres provide any existing transfer pricing documentation and to ysis deals with the most impo Ministry o respond to specific questions by the tax authorities, but not to prepare documentation for the tax audit. Mor Finance's letter and p ractical guidance on Supreme Tax Court decided that no obligation exists to provide how to deal how to react third-party information to show that the prices chosen by the to the letter. Summing up, the most important aspects relate to: non-compliance with co-operation obligation in ll. Burden of Proof German tax law; The Federal tax court also decided that-under the old transfer disposition of burden of proof; pricing regime- in the case of non-compliance the tax ■ use of arms' length ranges;and authorities bear the burden of proving the appropriate arm's length transfer pricing. In its letter, the Federal Ministry of requirements on the use of third-party- data under the arm's length test. Finance distinguishes between situations where the taxpayer does not co-operate at all and where the taxpayer provides documentation about the factual background, but is not able to submit information on the arm's length nature of its transte . Non-Compliance with prices. Co-operation Obligation The Supreme Tax Court ruled that if a taxpaye IlI. Basic Principles of Co-operation rdoes no spayer aoe ot comply with its duty to co-operate in the sense of sec. 90, The basic principles could be summarised as follows: para. 2 (see Box B) of Germany's General Tax Code, it must be determined whether the taxpayer's duty refers to the legal The obligation of the taxpayer for pricing of intercompany requirement or to the lega ences of a tax provision. transactions is limited to proving the facts, i.e., to showing which price has been agreed to, how the related If the taxpayer's non-c ers to the legal requirement. parties agreed to th tions and risks the evidence that m ere assumed by which party. H th or the relevant facts by the ording to the tax authorities is reduced. mplance reters to the Federai Tax Court, the taxpayer neith show nor legal consequences, the are in general entitled to to prove that the agreed-to prices are estimate the taxpayer's court states that it is a task that a price is not at a prove The Federal Mir make an letter that such differentiatic of Fiance took the position in its recent adjustment. Therefore, the onsible tax office has to income adjustment pro gal requirements of ble data and has to undertake the egal consequences is not in pricing analysis to sup lin he with the law because there is no basis in the law for such distinction.Th Even if the taxpayer does not co-operate at all in . Ine egal consequences are exclusively assessed explaining how the by the tax authorities without the taxpayer's involvement. e was determined, according to the Federal Tax Court, this will only lead to 07/04 Tax Planning International Transfer Pricing BNA ISSN1472-0841 13
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