Reports guished between the internal ssignments have a typical standard. if a tax audit reveals external, and hypothetical arms duration of three to five years; that the secondment of numerous length test in its application to secondments. For the internal certain management positions mployees served the receiving as ell as the assigning company, an omparison, the regulations propose at the receiving enterprise are established uniform allocation analyzing the expenses incurred by permanently filled with employees of other companies standard can be applied to all the receiving company for compa- employee assignments in the rable employees. For the external framework of a classifying tax arms-length test, the regulations the receiving enterprise does treatment. Tax authorities in coor. propose analyzing the expenses not seriously attempt(for dination with the company, can independent companies would be instance, by placing employ base the tax assessment for the illing to bear under comparable ment advertisements)to fill period under review and the circumstances, in the same country positions with employees from subsequent period on that alloca as the receiving company. Finally, the local labor market. includ- tion standard, if the situation has the hypothetical arms-length rule ing employees it has trained not changed materially. determines whether a prudent and itself diligent business manager of an Finally, section 5 of the new independent company, under compa- principles refers to the documen nces would have tation requirements that must be fulfilled to provide evidence borne the expense for the second- ment in full, or whether he would regarding the total expenses have demanded a cost-sharing incurred and the interests that agreement with the seconding The hypothetical arms guide the allocation of the employees work, as well as the company length rule determines potential allocation of the total It must be emphasized that whether a prudent and expenses. Taxpayers must provide even when adequate employees diligent business evidence regarding those interests are not available in the local labor by means of, for example: market, the prudent and diligent manager of an an assignment contract; business manager would have independent company, assumed additional expenses only e an additional service contract if he could expect an appropriate under comparable a description of the receiving within a circumstances. would enterprise's business activity frame. The authors of the adminis- have borne the expense and its products and/or trative principles consider a three- for the secondment year period reasonable in full correspondence justifying the Section 3.4 deals with so-called pecial cases. One of the issue job descriptions for the discussed is the implementation of assigned employees a rotation system. A rotation system typically exists if precise proof of activity, such company has an underlying staff as reports or minutes that the employment and development In the case of workplaces assigned employee has oncept of group management, so permanently filled by the prepared for the assigning chat the receiving enterprise assigning enterprise under a cannot freely decide to fill vacant rotation system, it should be positions as needed, but must fill assumed that the assignment also. employment advertisements certain positions with employees of serves the interests of the examinations of comparative the assigning enterprise. Whether assigning enterprise and that the salaries in the local labor ch a rotation system exists latter therefore must bear any market. decided on review of the overall expenses exceeding those that facts and circumstances. Indicators would have been incurred for a of the existence of a rotation comparable local employee of the system include the following receiving enterprise. That rule might also apply in the case of assignments are always one- sided, rather than reciprocal "Section 3. 2 of the administrative pr among group companies(from The final regulations include a ciples the parent company to subordi- new paragraph regarding the Section 3.5 of the administrative prin- nate companies) application of a uniform allocation ciples Tax Notes International February2002·513guished between the internal, external, and hypothetical arm’s￾length test in its application to secondments. For the internal comparison, the regulations propose analyzing the expenses incurred by the receiving company for compa￾rable employees. For the external arm’s-length test, the regulations propose analyzing the expenses independent companies would be willing to bear under comparable circumstances, in the same country as the receiving company. Finally, the hypothetical arm’s-length rule determines whether a prudent and diligent business manager of an independent company, under compa￾rable circumstances, would have borne the expense for the second￾ment in full, or whether he would have demanded a cost-sharing agreement with the seconding company. It must be emphasized that even when adequate employees are not available in the local labor market, the prudent and diligent business manager would have assumed additional expenses only if he could expect an appropriate benefit within a reasonable time frame. The authors of the adminis￾trative principles consider a three￾year period reasonable.7 Section 3.4 deals with so-called special cases. One of the issues discussed is the implementation of a rotation system. A rotation system typically exists if a company has an underlying staff employment and development concept of group management, so that the receiving enterprise cannot freely decide to fill vacant positions as needed, but must fill certain positions with employees of the assigning enterprise. Whether such a rotation system exists is decided on review of the overall facts and circumstances. Indicators of the existence of a rotation system include the following: • assignments are always one￾sided, rather than reciprocal among group companies (from the parent company to subordi￾nate companies); • assignments have a typical duration of three to five years; • certain management positions at the receiving enterprise are permanently filled with employees of other companies; and • the receiving enterprise does not seriously attempt (for instance, by placing employ￾ment advertisements) to fill positions with employees from the local labor market, includ￾ing employees it has trained itself. In the case of workplaces permanently filled by the assigning enterprise under a rotation system, it should be assumed that the assignment also serves the interests of the assigning enterprise and that the latter therefore must bear any expenses exceeding those that would have been incurred for a comparable local employee of the receiving enterprise. That rule might also apply in the case of expert secondments. The final regulations include a new paragraph8 regarding the application of a uniform allocation standard. If a tax audit reveals that the secondment of numerous employees served the receiving as well as the assigning company, an established uniform allocation standard can be applied to all employee assignments in the framework of a classifying tax treatment. Tax authorities, in coor￾dination with the company, can base the tax assessment for the period under review and the subsequent period on that alloca￾tion standard, if the situation has not changed materially. Finally, section 5 of the new principles refers to the documen￾tation requirements that must be fulfilled to provide evidence regarding the total expenses incurred and the interests that guide the allocation of the employee’s work, as well as the potential allocation of the total expenses. Taxpayers must provide evidence regarding those interests by means of, for example: • an assignment contract; • an additional service contract; • a description of the receiving enterprise’s business activity and its products and/or services; • correspondence justifying the assignment; • job descriptions for the assigned employees; • precise proof of activity, such as reports or minutes that the assigned employee has prepared for the assigning company; • employment advertisements; • examinations of comparative salaries in the local labor market; Tax Notes International 4 February 2002 • 513 Special Reports 7 Section 3.2 of the administrative prin￾ciples. 8 Section 3.5 of the administrative prin￾ciples. The hypothetical arm’s￾length rule determines whether a prudent and diligent business manager of an independent company, under comparable circumstances, would have borne the expense for the secondment in full