Special Reports evidence regarding the amount II Final remarks and It seems extremely strange to of wage expenses before Conclusions for practice us that the so-called safe harb At first sight. it seems advanta- rule included in the original draft benefit tests regarding wag geous that German tax authorities version has not been included in expenses and profit contribu- re at the cutting edge when it the final version, A substantial tions of the assigned employ comes to putting the allocation of number of enterprises are expected costs between related companies to make use of that regulation. The new regulation presupposes that There are two main problems on a basis that is at least binding in the scope of a standardized with those documents. First the n the tax authorities. however Federal Tax Court has clearly after a closer look, the final result approach, the cost between the tated that german tax law does is far from perfect. Also, it remains assigning and the receiving enter- unclear how other countries will prise would have been appropriate not require taxpayers to submit specific transfer pricing documen- react to the regulation of alloca- if the assigning enterprise had tation. Thus, taxpayers-in spite tions. German tax authorities also borne 20 percent of the total costs of the rule of evidence as must answer why they didn't first That rule had been particularly principles-are not obligated to OECD level. Surely it is permitted tives beca by business representa- mentioned in the administrative try to find a consensus at the ontroversial audit issue would prepare any additional transfer pricing documents. It should be have been scotched immediately. Moreover that standardization stressed once again that the would surely have been compatible taxpayer is only required to submit with the principle of taxation after books. records, and business efficiency. Such a regulation papers, and to answer questions. 0 certainly would have made things easier, given that a presentation of The Federal ministry of he operational interests would Finance, once again, has failed to It is encouraging that have entailed considerable effort consider that domestic subsidiaries there now exists the are usually unable to obtain It remains to be seen how tax information from foreign relate possibility to negotiate a authorities will use the new parties. The Federal Tax Court uniform allocation administrative principles. In light held, in a decision dated 10 May standard with tax of experiences from past audits, 2001,31 that an obligation of the taxpayers should be armed against taxpayer would only be acceptable authorities substantial conflicts with tax au if a third party would have thorities. Thus, taxpayers are wel requested the right to demand dvised to document secondment documents from the other party to issues in as much detail as possible, the transaction. Therefore it is and to show up operational likely that the taxpayer will not be interests, even if the legal basis of able to provide any information the documentation list is more than about the amount of wage questionable. But it expenses before the assignment that there now exists the possibility o negotiate a uniform allocation Moreover it should be stressed to make the point that such an standard with tax authorities. That that tax authorities ask for the important trading nation as will certainly help mitigate impossible. The taxpayer will Germany cannot allow itself to be arguments in audits probably face difficulties in underrepresented on the advisory performing a so-called benefit test. board of the OECD First of all, the taxpayer will not be The problem of secondments able to obtain the necessary data has really come to the fore in the Cf. Becker, in Becker/Kroppen(Edit) related to the particular employee national area of secondment of Handbuch internationale if the taxpayer does not prepare spreise(Koln: Dr pecific documentation in that employees of Japanese parents to Schmidt verlag, 1999/2001),U number German subsidiaries. However, the 5.1.1. note 3 with further references, and respect. Also, the assigned problem doesn't end there; in fact, Wassermeyer, in Flick/Wassermey employee often will perform just the opposite is true. The issue B: pensteuerrecht( Koln services that might not be reflected of"secondment" is becoming more Dr. Otto Schmidt Verlag 1997/2001) by any allocation keys That and more a discussion point in tax section 1 AStG note 821 applies in particular to adminis- audits, and the trend can only get trative services and to highl worse under the current admini for an in-depth analysis, see Krop Eigelshoven, International Transfer aggregated operational areas trative principles Pricing Journal 2001, p. 226 4 February 2002 Tax Notes International• evidence regarding the amount of wage expenses before assignment; and • benefit tests regarding wage expenses and profit contribu￾tions of the assigned employee. There are two main problems with those documents. First, the Federal Tax Court has clearly stated that German tax law does not require taxpayers to submit specific transfer pricing documen￾tation. Thus, taxpayers — in spite of the rule of evidence as mentioned in the administrative principles — are not obligated to prepare any additional transfer pricing documents. It should be stressed once again that the taxpayer is only required to submit books, records, and business papers, and to answer questions.30 The Federal Ministry of Finance, once again, has failed to consider that domestic subsidiaries are usually unable to obtain information from foreign related parties. The Federal Tax Court held, in a decision dated 10 May 2001,31 that an obligation of the taxpayer would only be acceptable if a third party would have requested the right to demand documents from the other party to the transaction. Therefore, it is likely that the taxpayer will not be able to provide any information about the amount of wage expenses before the assignment. Moreover, it should be stressed that tax authorities ask for the impossible. The taxpayer will probably face difficulties in performing a so-called benefit test. First of all, the taxpayer will not be able to obtain the necessary data related to the particular employee if the taxpayer does not prepare specific documentation in that respect. Also, the assigned employee often will perform services that might not be reflected by any allocation keys. That applies in particular to adminis￾trative services and to highly aggregated operational areas. III. Final Remarks and Conclusions for Practice At first sight, it seems advanta￾geous that German tax authorities are at the cutting edge when it comes to putting the allocation of costs between related companies on a basis that is at least binding on the tax authorities. However, after a closer look, the final result is far from perfect. Also, it remains unclear how other countries will react to the regulation of alloca￾tions. German tax authorities also must answer why they didn’t first try to find a consensus at the OECD level. Surely it is permitted to make the point that such an important trading nation as Germany cannot allow itself to be underrepresented on the advisory board of the OECD. The problem of secondments has really come to the fore in the national area of secondment of employees of Japanese parents to German subsidiaries. However, the problem doesn’t end there; in fact, just the opposite is true. The issue of “secondment” is becoming more and more a discussion point in tax audits, and the trend can only get worse under the current adminis￾trative principles. It seems extremely strange to us that the so-called safe harbor rule included in the original draft version has not been included in the final version. A substantial number of enterprises are expected to make use of that regulation. The new regulation presupposes that in the scope of a standardized approach, the cost between the assigning and the receiving enter￾prise would have been appropriate if the assigning enterprise had borne 20 percent of the total costs. That rule had been particularly welcome by business representa￾tives because an especially controversial audit issue would have been scotched immediately. Moreover, that standardization would surely have been compatible with the principle of taxation after efficiency. Such a regulation certainly would have made things easier, given that a presentation of the operational interests would have entailed considerable effort. It remains to be seen how tax authorities will use the new administrative principles. In light of experiences from past audits, taxpayers should be armed against substantial conflicts with tax au￾thorities. Thus, taxpayers are well advised to document secondment issues in as much detail as possible, and to show up operational interests, even if the legal basis of the documentation list is more than questionable. But it is encouraging that there now exists the possibility to negotiate a uniform allocation standard with tax authorities. That will certainly help mitigate arguments in audits. ✦ 518 • 4 February 2002 Tax Notes International Special Reports It is encouraging that there now exists the possibility to negotiate a uniform allocation standard with tax authorities. 30Cf. Becker, in Becker/Kroppen (Edit.), Handbuch Internationale Verrechnungspreise (Köln: Dr. Otto Schmidt Verlag, 1999/2001), U number 5.1.1, note 3 with further references, and Wassermeyer, in Flick/Wassermeyer/ Baumhoff (edit.), Außensteuerrecht (Köln Dr. Otto Schmidt Verlag 1997/2001), section 1 AStG note 821. 31Ref. No: I S3/01, DB 2001, p. 1180; for an in-depth analysis, see Kroppen/ Eigelshoven, International Transfer Pricing Journal 2001, p. 226