Burden of proof Because the new tax law shifts the responsibility for determining and documenting the appropriateness of transfer prices to the taxpayer, it is up to the taxpayer to provide comparable data by using third-party data sources, such as databases. The underlying problem when seeking third-party comparable data is the limited availability of truly comparable data. A comparable uncontrolled price, for example requires a high degree of product and transactional comparability which in practice is almost nonexistent, even when internal third-party transactions are present. Other transactional methods also require a high level of comparability, including comparability of accounting practices, because accounting practices affect gross margins. However, the information required to make these accounting adjustments is almost never available. Thus, it is often difficult to apply a transactional method, and the cost to do so and to document the application is prohibitively high. Because of the difficulties inherent in applying transactional methods, the transactional net margin method (TNMM) is likely to be widely applied even though in the past the tax authorities have been reluctant to accept the use of this method Estimation of taxable income Failure to comply with the transfer pricing documentation requirements will expose taxpayers to severe consequences. If the taxpayer does not provide documentation, if the documentation submitted is insufficient or if the documentation for extraordinary transactions was not contemporaneously prepared, the tax authorities are entitled to assume that taxable income is higher than the income the taxpayer eported. One important"weapon"the tax authorities have in making an adjustment is that they can use the most disadvantageous point in the arm's length range of results when adjusting the taxpayer s income Penalties The law provides for the following penalties Minimum Range Maximum Documentation not E5,000 10% of the No absolute income adjustment maximum Submitted documentation does E 5,000 5 -10% of the No bsolute not comply with income adjustment maximum requirements Late submission of usable E 100 per day E 1 million documentation As noted d afte a 5-10% penalty would be applied to the income adjustment determined the tax authorities adjust taxable income. this could lead to significant penalties, particularly when the tax authorities put the taxpayer at the most disadvantageous point in the range. In practice, it has not been unusual for the German tax authorities to try to impose income adjustments that amount to severalBurden of proof Because the new tax law shifts the responsibility for determining and documenting the appropriateness of transfer prices to the taxpayer, it is up to the taxpayer to provide comparable data by using third-party data sources, such as databases. The underlying problem when seeking third-party comparable data is the limited availability of truly comparable data. A comparable uncontrolled price, for example, requires a high degree of product and transactional comparability, which in practice is almost nonexistent, even when internal third-party transactions are present. Other transactional methods also require a high level of comparability, including comparability of accounting practices, because accounting practices affect gross margins. However, the information required to make these accounting adjustments is almost never available. Thus, it is often difficult to apply a transactional method, and the cost to do so and to document the application is prohibitively high. Because of the difficulties inherent in applying transactional methods, the transactional net margin method (TNMM) is likely to be widely applied, even though in the past the tax authorities have been reluctant to accept the use of this method. Estimation of Taxable Income Failure to comply with the transfer pricing documentation requirements will expose taxpayers to severe consequences. If the taxpayer does not provide documentation, if the documentation submitted is insufficient, or if the documentation for extraordinary transactions was not contemporaneously prepared, the tax authorities are entitled to assume that taxable income is higher than the income the taxpayer reported. One important “weapon” the tax authorities have in making an adjustment is that they can use the most disadvantageous point in the arm’s length range of results when adjusting the taxpayer’s income. Penalties The law provides for the following penalties: Minimum Range Maximum Documentation not submitted € 5,000 5 – 10% of the income adjustment No absolute maximum Submitted documentation does not comply with requirements € 5,000 5 – 10% of the income adjustment No absolute maximum Late submission of usable documentation € 100 per day € 1 million As noted above, a 5-10% penalty would be applied to the income adjustment determined after the tax authorities adjust taxable income. This could lead to significant penalties, particularly when the tax authorities put the taxpayer at the most disadvantageous point in the range. In practice, it has not been unusual for the German tax authorities to try to impose income adjustments that amount to several million euro