Reprinted from Worldwide Tax Daily, 13 November 2002,(2002 WTD 219-1 comparable data and provide other information rele- also states that the taxpayer may refute that vant to determining the arms-length character of the presumption prices. The taxpayer must also justify how the price was determined If the tax authorities are permitted to estimate ncome under amended section 162 paragraph 2 AO If the draft becomes law, industry demands will and there is a range of acceptable prices, the draft have been rejected. Industry demanded that compa- law allows the tax authorities to estimate the taxable nies should only be required to document their think- income up to the point in the range that is the most ng when they set the prices and should not be re- disadvantageous for the taxpayer This power raises quired to provide comparable data from data banks serious constitutional questions. When a law con- and external consultants. The explanatory notes flicts with the freedom rights of individuals, the Co state that the draft legislation is consistent with the stitution usually requires that anu f erned by the current documentation requirements of most oECd sure limiting those freedoms is gov d non-OECD countries' and some of the penalty re- principle of proportionality. The measure restricting imes. The current EU initiative is important in rec- the freedom rights of the taxpayers must be drafted onciling differing rules, at least within the European in the least restrictive manner ? Union, and in providing taxpayers with harmonized documentation rules. 6 If the draft law is enacted, taxpayers should con temporaneously prepare the documentation required The draft also requires the taxpayer to prepare under section 90 paragraph 3 AO. If the documenta contemporaneous documentation. Therefore, the tion satisfies the law, the tax authorities are then un question of whether to prepare documentation when able to estimate the tax base, and the burden of proof t is requested on audit would become moot because remains with the tax authorities. However, if the tax the draft law favors preparing current, ongoing docu- payer does not prepare documentation, the tax au mentation. The law also states that documentation thorities may estimate the income must be presented within 60 days after the authori ties issue their request It is unclear under the draft law how the tax au thorities will be able to adjust income to the highest t of the when the tax Noncompliance/Burden of Proof refute the presumption of non-arm's-length prices by The draft also changes the current section 162 proving that the prices are indeed at arms length paragraph 2 AO, which addresses the right of the tax Do the rights of the taxpayer to rebut the pre the tax authorities are also able to make an estima- sumption trump the rights of the tax authorities to tion when the taxpayer does not fulfill the documen- ties permitted to adjust to the highest point within tation requirements of proposed section 90 para- the range established by the taxpayer as the graph 3 AO arms-length range because the taxpayer has not ful The draft adds a new paragraph 3 to section 162 filled its documentation obligations under section 90 Ao that provides that if the taxpayer does not submit paragraph 3 Ao? It remains to be seen how this con the documentation required under section 90 para- flict is resolved graph 3 AO, there is a presumption that the income of the German taxpayer has been reduced because of Penalties related-party transactions. However, the draft law The draft law also includes a new paragraph 4 to section 162 Ao that contains a penalty provision. If the tax authorities have the right to estimate the tax base under section 162 paragraph 3 AO, they must also impose a surcharge ranging from 10 to 20 per 1111, 1113, 2001 WTD 237-11 or Doc 2001-30307(8 originai cent of the adjusted tax base. However, the tax au pages) thorities should refrain from imposing a surcharg Inter alia: Australia, Belgium, Canad the taxpayer was not at fault. rea. New Zealand. the Netherlands. Poland The surcharge provision raises serious questions States and Venezuela First, it is not based on a percentage of the additional Canada, china. nin dian. Kors. Poland Thailand. the United Kingdom, and the United States EU Commission"Company Taxation in the Internal Market, SEC(2001), pp 346 ff; see also: Kroppen/Rasch, Tax Management Transfer Pricing, Vol. 10(2002), no. 19, pp. 835, 836 f 'See Kroppen, in: Becker/Kroppen (eds )Handbuch Kroppen/Rasch, IWB F. 5 Niederlande Gr. 2, pp. 351, 359 Internationale Verrechnungspreise,(Koln: Dr. Otto-Schmidt Rasch/Roeder, IWB 28 Nov 2001, pp. 1081 f. Verlag, 1999), 0 7. 30, note 9 Tax Notes Internationalcomparable data and provide other information rele￾vant to determining the arm’s-length character of the prices. The taxpayer must also justify how the price was determined. If the draft becomes law, industry demands will have been rejected. Industry demanded that compa￾nies should only be required to document their think￾ing when they set the prices and should not be re￾quired to provide comparable data from data banks and external consultants.3 The explanatory notes state that the draft legislation is consistent with the current documentation requirements of most OECD and non-OECD countries4 and some of the penalty re￾gimes.5 The current EU initiative is important in rec￾onciling differing rules, at least within the European Union, and in providing taxpayers with harmonized documentation rules.6 The draft also requires the taxpayer to prepare contemporaneous documentation. Therefore, the question of whether to prepare documentation when it is requested on audit would become moot because the draft law favors preparing current, ongoing docu￾mentation. The law also states that documentation must be presented within 60 days after the authori￾ties issue their request. Noncompliance/Burden of Proof The draft also changes the current section 162 paragraph 2 AO, which addresses the right of the tax authorities to estimate the tax base. Under the draft the tax authorities are also able to make an estima￾tion when the taxpayer does not fulfill the documen￾tation requirements of proposed section 90 para￾graph 3 AO. The draft adds a new paragraph 3 to section 162 AO that provides that if the taxpayer does not submit the documentation required under section 90 para￾graph 3 AO, there is a presumption that the income of the German taxpayer has been reduced because of related-party transactions. However, the draft law also states that the taxpayer may refute that presumption. If the tax authorities are permitted to estimate income under amended section 162 paragraph 2 AO and there is a range of acceptable prices, the draft law allows the tax authorities to estimate the taxable income up to the point in the range that is the most disadvantageous for the taxpayer. This power raises serious constitutional questions. When a law con￾flicts with the freedom rights of individuals, the Con￾stitution usually requires that any government mea￾sure limiting those freedoms is governed by the principle of proportionality. The measure restricting the freedom rights of the taxpayers must be drafted in the least restrictive manner.7 If the draft law is enacted, taxpayers should con￾temporaneously prepare the documentation required under section 90 paragraph 3 AO. If the documenta￾tion satisfies the law, the tax authorities are then un￾able to estimate the tax base, and the burden of proof remains with the tax authorities. However, if the tax￾payer does not prepare documentation, the tax au￾thorities may estimate the income. It is unclear under the draft law how the tax au￾thorities will be able to adjust income to the highest point of the range when the taxpayer has the right to refute the presumption of non-arm’s-length prices by proving that the prices are indeed at arm’s length. Do the rights of the taxpayer to rebut the pre￾sumption trump the rights of the tax authorities to estimate and adjust income? Or are the tax authori￾ties permitted to adjust to the highest point within the range established by the taxpayer as the arm’s-length range, because the taxpayer has not ful￾filled its documentation obligations under section 90 paragraph 3 AO? It remains to be seen how this con￾flict is resolved. Penalties The draft law also includes a new paragraph 4 to section 162 AO that contains a penalty provision. If the tax authorities have the right to estimate the tax base under section 162 paragraph 3 AO, they must also impose a surcharge ranging from 10 to 20 per￾cent of the adjusted tax base. However, the tax au￾thorities should refrain from imposing a surcharge if the taxpayer was not at fault. The surcharge provision raises serious questions. First, it is not based on a percentage of the additional 2 Tax Notes International Reprinted from Worldwide Tax Daily, 13 November 2002, (2002 WTD 219-1) 3 Kroppen/Rasch/Roeder, Tax Notes Int’l, 10 Dec. 2001, pp. 1111, 1113, 2001 WTD 237-11 or Doc 2001-30307 (8 original pages). 4 Inter alia: Australia, Belgium, Canada, China, France, Ko￾rea, New Zealand, the Netherlands, Poland, Portugal, Slovak Re￾public, South Africa, Thailand, the United Kingdom, the United States, and Venezuela. 5 Specific transfer pricing penalties apply, for example, in: Australia, Canada, China, India, Korea, Poland, Thailand, the United Kingdom, and the United States. 6 EU Commission “Company Taxation in the Internal Market,” SEC(2001), pp. 346 ff; see also: Kroppen/Rasch, Tax Management Transfer Pricing, Vol. 10 (2002), no. 19, pp. 835, 836 f; Kroppen/Rasch, IWB F. 5 Niederlande Gr. 2, pp. 351, 359 f; Rasch/Roeder, IWB 28 Nov. 2001, pp. 1081 f. 7See Kroppen, in: Becker/Kroppen (eds.) Handbuch Internationale Verrechnungspreise, (Köln: Dr. Otto-Schmidt Verlag, 1999), O 7.30, note 9