OVEMBER/DECEMBER 2005 ITPJ 307 based methods in transfer pricing; other, profit-based, financial institutions in Germany involved in global trad transfer pricing regulations was note 2.4.6. of the Admin- trading functions, as well as for example structuring and circumstances the profit could be split between related thermore, all middle- and back-office functions can be parties if a third party had also agreed to such an alloca- found in German entities or branches as well tion. In practice, with reasonable economic justification The financial products for which the three pure or standard profit splits have been implemented within the transfer models are used are much the same in Germany as in other pricing system of multinationals in Germany and have also been accepted by the tax authorities major international banking locations. The integrated trad model is often used for foreign exchange(F/X) busi- The new Administrative Principles -Procedure of 2005 ness in the major currencies and certain derivatives, while are somewhat clearer on profit splits, as they now expli- the centralized product management and separate-enter- city allow the profit split method in cases where more prise trading model are often used for more localized prod than one entrepreneur is involved in a transaction. The ucts (e.g. European equities). However, the business tax authorities even mention global trading as an example model also strongly depends on the overall strategy of the o apply a profit split, and also refer to Secs. 3. I and 3. 5 of relevant bank, and particularly specialized institutions raster lines). From a German transfer pricing perspective, the application of a profit split is not limited to the global trad ing of financial instruments. A profit split could in princi- 3. FUNCTIONAL ANALYSIS AND ple apply to all other business models with more than one BENCHMARKING entrepreneur involved in initiating, conducting and com- pleting a transaction, but where the individual contribu- One of the basic transfer pricing documentation requir tions of a party could not be identified ments in Germany is a functional and risk analysis with a description of the value chain of the taxpayer's business As published rulings in German tax law, administrative Such an analysis would be the basis for any transfer pri- principles or tax court rulings on global trading are not ng analysis of a banks global trading business. There pricing regulations or PE profit allocation rules apply. exist only general rules for the functional analysis, which With the absence of specific German rules, the OECD should contain a description of the type, content and scope ipers are often used as guidance in day-to-day tax work. of related cross-border transactions, as well as indicating In competent authority or arbitration procedures and aPa the economic and legal conditions of such transactions negotiations, the tax authorities regularly take the oeCD articular, the functional analysis should enable the papers into consideration as well. As the tax authorities reader to understand the determination of the transfer put aside their former reluctance with regard to profit- prices employed by the taxpayer based methods, the acceptance of profit splits in global Despite the absence of more precise guidance in the Ger trading situations is expected to increase further in the man regulations. it is generally advisable for a taxpayer to future. The mentioning of global trading(without further take into account the model description used by the OECD guidance)as an example of a business model justifying a in the text of the draft. Practical experience suggests that profit split in the 2005 Administrative Principles- Proce- the majority of cases can in fact be described by using a dures should be regarded as very helpful in this context combination of the different activities and risks referred to o lished in Ger man tax ite apure ach and the opinions pub- an thys es will be addres ed ta sat least two iferent riax For tax purposes, the OECD Discussion Draft Part IIl3 authorities, a high degree of recognition of OECD guid distinguishes bety ween three types of global trading, ance will generally be helpful in discussions with local tax namely separate-enterprise trading, centralized product ditors. This will serve to minimize any appearance of all of these types of trading can be found within financial Institutions in Germany. In practice, often models other 10. Sce press release of the Federal Ministry of Finance. Internationales than these three pure or standard models are used: business Steuerrecht(1995). at 38 models, as well as the function and risk allocation between 12. Set ortner. w sceinsistrativhe Principles e Procedure. derbereichen, /nternationales Steuerrech(1995). at 549-551: Selling. "Global types and may even be more complex. The German bank- Trading", Internationales Steuerrecht(1998). at 417-423: Menzel, "Global ing environment is comprehensive, with various global Banking/Global Trading. Das Verrechnungspreissystem der Dresdner Bank national and international institutions operating in Ger dited by many. The variety of banking business ranges from small, aupach. (Herne- Berlin: NWB-Verlag. 1999) at 175-191: Hauselmann highly specialized banks acting in specialized markets, to sniederlassungen und Tochtergesellschatten". Internationales Steuerrechn the globally active banks doing business in virtually all (2003). at 139-1-44 markets. Banks present in Germany are active in the full 13. OECD Discussion Draft on the Atribution of Profits to Permanent Estab range of banking business and, in view of global trading, lishments (PEs: Part Ill( Enterprises Carrying on Global Trading of Financial perform all functions discussed in the OECD draft. Within nstruments) 14. 3.4.1 1. Administrative Principles- Procedures ②2005BFD