ITPJ JULYJAUGUST 2000 C. Practical experience approaches come close to the comparable profit meu od because eventually transfer prices are determined based on The practical relevance of the comparable profit method net margins.56 will increase in germany in the future for two reasons First, an increasing number of countries apply comparable profit methods and/or the transactional net margin meth- V. CONCLUSION ods and the german tax authorities are becoming more and more isolated in their objection to profit- oriented methods. The Federal Tax Court dealt with a variety of fundamental In the case of multinational enterprises, it is not accept issues that have so far not sufficiently been clarified in tax able, and in some cases almost impossible, to take into practice. This applies particularly to issues concerning the account national features in planning a worldwide transfer admissibility of secret comparables, comparability stan pricing system. This applies especially if an OECD Mem- dards, and the admissibility of the comparable profit ber country wants to deviate from the compromise reached method. Finally, the controversy resulting from the within the scope of the OECD Guidelines. In light of this, Court's ruling illustrates the impon ne Tax court did not ke advantage of the profit compan]son The priority of attach a fundamental importance to this decision and dis- the standard methods remains completely unaffected allowed an appeal. Therefore it is to be hoped that the Fed- Furthermore, it should be considered that the application eral Tax Court will seize this opportunity to comment of profit comparisons in tax audits might have both advan upon the core issues of the ruling and that it will admit the tages and disadvantages for the taxpayer. Tax auditors ften deal with distributors that face considerable difficul- For taxpayers, however, one lesson should be learned from ties in their markets. These companies are affected by low the Court' s ruling and from other court decisions concen- profits or even have to suffer losses, sometimes even over ing transfer pricing. No court has ever ruled 100 per cent several years. The tax auditors argue that the manufacturer in favour of the taxpayer. The courts have been unwilling bears these types of risk and that a prudent and diligent to develop sophisticated arguments, which are often ne- business manager always tries to achieve an appropriate cessary in light of the difficult issues linked with transfer profit. Loss periods of more than three years are not re- pricing cases. The taxpayer should therefore consider rely ognized by the auditors, being backed by the Federal Tax ing on competent authority or EU arbitration rather than Court ruling dated 17 February 1993. Empirical studies on court proceedings. The Court's decision also highlights on the basis of external analyses could provide evidence the arbitrariness of some German tax auditors, which is that other third party distributors also incurred losses for evidenced on a daily basis. Taxpayers should therefore try nore than three years or that other companies also gener- to provide sound documentation at the outset of an audit in used to more or less grant a profit guarantee to distributors a profit guarantee would be uncommon between unre- lated parties. Specific reasons for losses suffered by a tax payer must be thoroughly taken into account in applying mparable profit method Finally, an extemal analysis within the framework of note 6. a28-30 transfer pricing can also be performed in order to deter -. 56. See also Harald Kuckhoff and Rolf Schreiber, " Quo vadis Fremdver- mine appropriate cost plus mark-ups or to derive an arms gleich",8 IStR 16(1999), at 517. length gross margin for the resale price method. These See supra nou 9 2000 IBFD Publications BV