NOVEMBER/DECEMBER 2001 pricing advisors. Moreover, the draft guidelines were sent IV. DOCUMENTATION REQUIREI to industry representatives and to some other associ- ACCORDING TO THE SUPREME TAX COURT ations.The draft administrative principles require that DECISION taxpayers prepare extensive information as follows an overview of the taxpayer's business environment In its decision, the Federal Tax Court held that there are no in overview of the organizational structure of the tax tributions under Sec. 8 Paragraph 3 of the Corporate payer's business and of the group an overview of the activities performed by each entity for the adjustment of income. The Supreme Tax Court involved in a transaction with the taxpayer; investigated in detail all rules which might lead to an obli an overview of inte gation of the taxpayer to provide documentation. The an explanation of the contribution of each entity in the court concluded that under the existing law, the taxpayer is value added chain only obliged to keep accurate books and that the taxpayer the transfer prices that the 1 a description of the transfer pricing method or transfer is able to receive from abroad(e. g. from its parent com- pan where the company did not use the standard methods, However, according to the Federal Tax Court, there is no will allow the tax authorities to review the method obligation in the tax code that requires the taxpayer to pr chosen by the taxpayer pricing method is inng the extent to which the transter mentation if the taxpayer has prepared such documenta- fanatic herefore, the taxpayer must present transfer pricing doc he with the arm,'s length stan- tion anyway(i.e. not in response to any request of the tax thorities)and if it thus is available to the taxpayer Oth an analysis of the intercompany transaction and the erwise the taxpayer is only obliged to provide oral infor- As a result it will be much more difficult for the and delivery terms), intangibles employed by the par- with any documentation requirements imposed by them. If where the determination of the arm's length transfer the taxpayer is able to meet its relatively limited documen price is based on financial data of independent com- panies,all relevant information should be made avail. use their own tools to sanction the taxpayer. able The tax authorities will therefore be confronted with two an explanation of any special considerations(e.g busi- main problems. First, because the burden of proof rests ness strategies) with the tax authorities for an income adjustment, they are analysis of the comparable third-party transactions, at a disadvantage if the taxpayer's umstances cannot taking into account special factors such as financial be clarified with certainty. Only if the taxpayer does not information on finalized or intended advance pricing quality of the evidence that the tax auditors need to pro greements; and vide might be reduced. Second, as a general rule an esti- information which was provided by the taxpayer to mate of the tax base is only permissible if the taxpayer has ther tax authorities on intercompany transfer prices violated its duties to cooperate. If a taxpayer has not vio The documentation guidelines were intended to supple- ated an obligation to document its transfer prices, the tax ment the documentation rules which were already pul authorities will have to prove that the price set by the tax- lished for cost-sharing g arrangements payer was inappropriate. Up until now, the tax authorities have almost always adjusted the income based on rules of If the documentation requirements are not met or if the thumb. This type of income adjustment is hardly accept taxpayer applies an inappropriate transfer pricing method, able where the tax authorities are allowed to estimate the the tax authorities argue in their guidelines that their bur- income because of a violation of the documentation den to further investigate the case and the quality of the quirements; it is certainly unacceptable if the tax author evidence which is necessary to adjust the income, is ities have to determine the arm, s length transfer price reduced. Moreover, the tax authorities believe that the bur- However, under the Federal Tax Courts ruling the den of proof no longer rests with them. Finally, if the e tax- uirements for documentation are reduced significantly payer does not comply with its duty to provide informa- so that a violation will rarely occur and therefore the tion, the tax authorities might threaten to block the taxpayer from going to competent authority. As the list of tems is very extensive, it is evident that- if one would follow the interpretation of the law by the tax authorities pril 2000, WPg 2000, at 483: for further details see Kroppen, Eigelshoven the tax authorities can rather easily circumvent its burden Roeder, Internationale Wirtschaftsbriete, Fach 3 Gruppe 2, at 925: Kroppen and of proof and would be frequently allowed to estimate the goese, sx. sanfgemedminasser Pricing 2e o), atst arms length transfer price 1999, BStBI 1999I. at 1222: see Kroppen and Roeder, European Taxatio 2000).at381 @2001 IBFD Publications BV