NOVEMBER/DECEMBER 2005 GERMANY Global Trading Axel Nientimp' and Achim Roeder 1 INTRODUCTION a very high level of operational integration of the var ous participants in one and the same transaction Germany's transfer pricing environment has changed dra- an inability to allocate costs or revenues to individual matically during the last three to four years. Although with transactions in an appropriate (i.e. arms length)man its original 1983 transfer pricing regulationsGermany ner, ol is one of the first OECD countries to deal with transfer an existence of more than one non-routine intangible was not before 2003 that the tax employed in such a transaction by more than one authorities were able to introduce transfer pricing docu ownet mentation requirements in tax law. This legislation is gen- Perhaps it took a sufficiently complex and apparently dif- mark Federal Tax Court ruling in October 2001+ which trading of financial institutions to justify a deviation from made it clear that, in essence, at time of the ruling German the extreme preference for standard methods at that time tax law did not provide for transfer pricing documentation In some cases, high-level representatives of the tax author requirements. 5 ities even seemed to be automatically endorsing the appli The new rules introduced in 2003 provide transfer pricing cability of the profit split method for any investment bank documentation requirements for fiscal years commencing ing activity, implicitly identifying global trading to the on or after I January 2003. For fiscal years beginning on latter. or after I January 2004, non-compliance with the docu These sanctions include penalties of up to 10% of the 2. EXPERIENCE WITH APPLICATION OF adjusted amount and a reversal of the burden of proof to the taxpayer. Documentation rules and sanctions are not limited to German taxpayers, but also apply to German Currently, no explicit regulation of global trading of finan permanent establishments(PEs) of foreign taxpayers. On cial instruments is found in German tax law, but the tax 12 April 2005. the Federal Ministry of Finance(BMF) authorities are supposed to work on industry-specific issued extensive administrative principles on transfer pi transfer pricing regulations (including the financial ser- cing documentation, describing the interpretation of the vices Before the enforcement of the new transfer tax authorities with regard to the documentation require- pricing mentation requirements, the tax author ments. 8 preference for the traditional transacti Against such a historical background, it should not be sur- prising that the legislative change is also reflected by a L. Manager, Deloitte Transfer Pricing Group, Dusseldorf change in the taxpayers'behaviour as well as in that of the 2. Partner, Deloitte Transfer Pricing Group,Dusseldorf tax authorities. German-based international financial insti- 3. Administrative Principles for the Examination of Income Allocation in the tutions, as large multinational enterprises, increasingly 4. See federal Tax Court decision of 17 October 2001, IR 103/00, Bundes. recognize the need to address transfer pricing and transfer steuerblatt 1 2004. at 171 pricing documentation in a coordinated and globally con- 5. Kroppen, Rasch and Roeder, " German Federal Tax Court Issues Landmark sistent fashion, while tax auditors increasingly focus on Transfer Pricing Decision", Tat Notes International (10 December 2001). transfer pricing in almost all tax audits. At the same time at lIll Cf Sec. 90. Para. 3 of the General Tax Code(AO) and the documentation the level of technical and economic sophistication of tax- Decree-Law Gewinnabgrenzungsanfeichnungsverordnung(GAufZ) payers and auditors alike is moving rapidly towards com Sec 162. Para. 3 and 4 General Tax Code(AO)and Art. 97, Sec. 22 of the mon international standare ds. A greater emphasis on profit- introductory act of General Tax Code(EGAO) related transfer pricing methods and the use of financial 8, Administrative Principles for the Examination of Income Allocatio between Related Parties with Cross-Border Business Relations in Respect of the benchmarking for net margins is the most prominent Duty of Determination, the Duty of Cooperation. Adjustments,Mutual Agree example of this development ment Procedures and EU Arbitration Procedures (12 April 2005)(Administr On the other hand, banks may be considered to have been tive Principles- Procedures). For a discussion, see Kroppen and Rasch. "New a vanguard of profit-oriented methods in Germany in the national (10 January 2005), at 197; Eigelshoven and Nientimp, "German Versus past. Typically, global trading served as one of the very OECD Transfer Pricing Principles -a Recipe for Double Taxation?, ax Notes few standard examples for the application of profit splits International (22 August 2005), at 725 or residual profit splits in German transfer pricing litera- derbereichen". Intemationaies Steuerrecht (1995). at 549: Selling. "Global ture. Traditionally the prerequisites for the application of Trading", Internationales Steuerrecht(1998). at 417; Wassermneyer and a profit split method used to b Baumhoff, Verrechnungspreise verbundener Unternehmen( Cologne: 2001) @2005BFD