《税法——转移定价》英文参考文献：02 Documentation_12 Federal Council to Decide on German Transfer Pricing Documentation Regulations

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 worldwide tax dail Federal council to Decide on german Transfer 级N8-0928或@8品2°9385g Pricing Documentation Regulations by Heinz-Klaus Kroppen and Stephan rasch fore. the future of the tax reform act and the transfer Heinz-Klaus Kroppen, LL.M. and Stephan pricing documentation rules remains unclear Rasch are with deloitte touche Nevertheless, the Federal Ministry of Finance Copyright o Deloitte & Touche, 2002 has prepared a first draft of the rechtsuerordnung (decree-law) regarding the manner, content, and doc umentation required under section 90, paragraph 3 The German Bundesrat (upper house of Parlia- of the General Tax Co ment, or Federal Council) will make a final decision on 14 March on whether to pass the tax reform bill Draft section 90, paragraph 3, sentence 5 of the which includes the transfer pricing documentatio General Tax Code reads as follows "To ensure a con sistent application of the law the Federal Ministry of regulations. The majority of the governing coalition Finance in accordance with the Federal Council will in the Bundestag (lower house of Parliament) ap- be authorized to determine the manner, content, ar proved the latest bill on 21 February 2 extent of the documentation in a decree-Lau emp? The conservative party, which holds a majority in sis added the Bundesrat, has indicated that they may reject the The decree-law therefore amends draft sections whole tax reform package, with the exception There- taxpayer documentation duties. However, draft sec- of pro- 90 and 162 of the General Tax Code which overn posed chang e co orporate tax system tions 90 and 162 only outline, in general terms, that a axpayer is required to prepare documentation for transfer pricing purposes. The Federal Ministry of Finance, under the proposed decree-law, is seeking to See Kroppen/Rasch, 11 Transfer 11 02; Kroppen/Rasch, Tax No See Kroppen/Rasch, Tax Notes Int'l, 18 Nov 2002, pp. 666 ff. 1035 f; Baumhoff, Internationales Steuerrecht 2003, pp. 1 ff. and Tax Notes Int', 10 Dec 2001, pp. 1111 ff for a discussion of For a first analysis see Kroppen/Rasch, 11 Transfer Pricing the reasons that caused the Federal Ministry of Finance to ena Report 885, 10 Feb. 2003; for an unofficial translation, see 11 statutory provisions regarding transfer pricing documentation Transfer Pricing Report 873, 19 Feb 2003 sues and penalties. Tax Analysts- Worldwide Tax Daily

Federal Council to Decide on German Transfer Pricing Documentation Regulations by Heinz-Klaus Kroppen and Stephan Rasch The German Bundesrat (upper house of Parlia￾ment, or Federal Council) will make a final decision on 14 March on whether to pass the tax reform bill, which includes the transfer pricing documentation regulations.1 The majority of the governing coalition in the Bundestag (lower house of Parliament) ap￾proved the latest bill on 21 February.2 The conservative party, which holds a majority in the Bundesrat, has indicated that they may reject the whole tax reform package, with the exception of pro￾posed changes to the corporate tax system. There￾fore, the future of the tax reform act and the transfer pricing documentation rules remains unclear. Nevertheless, the Federal Ministry of Finance has prepared a first draft of the Rechtsverordnung (decree-law) regarding the manner, content, and doc￾umentation required under section 90, paragraph 3 of the General Tax Code. Draft section 90, paragraph 3, sentence 5 of the General Tax Code reads as follows: “To ensure a con￾sistent application of the law the Federal Ministry of Finance in accordance with the Federal Council will be authorized to determine the manner, content, and extent of the documentation in a decree-law [empha￾sis added].” The decree-law therefore amends draft sections 90 and 162 of the General Tax Code, which govern taxpayer documentation duties.3 However, draft sec￾tions 90 and 162 only outline, in general terms, that a taxpayer is required to prepare documentation for transfer pricing purposes. The Federal Ministry of Finance, under the proposed decree-law, is seeking to Tax Analysts — Worldwide Tax Daily 1 Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 worldwide tax daily Heinz-Klaus Kroppen, LL.M. and Stephan Rasch are with Deloitte & Touche. Copyright © Deloitte & Touche, 2002 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 1 See Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003; Rasch/Roeder, 11 Transfer Pricing Report 731, 11 Dec. 2002; Kroppen/Rasch, Tax Notes Int’l, 18 Nov. 2002, pp. 666 ff.; Kroppen/Rasch, Internationale Wirtschaftsbriefe 13 Nov. 2002, pp. 1035 f.; Baumhoff, Internationales Steuerrecht 2003, pp. 1 ff. 2 For a first analysis see Kroppen/Rasch, 11 Transfer Pricing Report 885, 10 Feb. 2003; for an unofficial translation, see 11 Transfer Pricing Report 873, 19 Feb. 2003. 3 See Kroppen/Rasch, Tax Notes Int’l, 18 Nov. 2002, pp. 666 ff., and Tax Notes Int’l, 10 Dec. 2001, pp. 1111 ff for a discussion of the reasons that caused the Federal Ministry of Finance to enact statutory provisions regarding transfer pricing documentation is￾sues and penalties

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 clarify the documents that a taxpayer must prepare. length principle. To comply with the arm s-length The proposed decree-law also addresses timing, us- principle, the taxpayer must apply an appropriate bility, and storage requirements with which a tax- method to establish the transfer price must comply The taxpayer is therefore required to document, 或N8 Formal laws, including sections 90 and 162 of the before the transaction, how the conditions, including General Tax Code, are enacted by the bundestag, pricing, comply with the arms-length principle. The the usual legislative process, and, if necessary, by the taxpayer must consider, at the time the transaction Bundesrat takes place, any available information that the ta However, a decree-law is a specific source of law payer may obtain with a reasonable effort, including under the German legal system, and it may only be accessible data from transactions with third parties passed by the Federal Ministry of Finance. However, N22=× The draft decree-law stipulates that an internal under draft section 90 of the General Tax Code, the transfer pricing guideline, based on such consider- Bundesrat must also approve it before it becomes en- ations and the arms-length principle, is sufficient for acted.4 the cases covered by the guidelines The decree-law is one of the key components of the planned transfer pricing legislation because it Moreover, the taxpayer is required under section seeks to precisely define the taxpayers duties. 1 to gather additional information and data after the transaction has taken place. This enables the tax au The decree-law binds the tax authorities, the tax- thorities to ascertain whether a third party may have payer, and the courts. Therefore, it differs from tax made an adjustment because of changed facts and regulations that only bind the tax authorities This article analyzes the impact of the proposed Additionally, section 1 provides that the condi decree-law on transfer pricing documentation rules tions must be reviewed: if the taxpayer is making d the impact on German-based companies and losses from its total business relationships with re- subsidiaries, as well as permanent establishments of lated parties, or part of those relationships, which oreign-based multinational enterprises third parties would not have accepted on a continu ing basis; or if the parties subsequently agreed upon Outline of the decree-Law adjustments The draft decree-law includes 11 sections Section 2 provides that the documentation must Sections51 to 5 explain: that the taxpayer must de- be based on the terms and conditions of the actual 8939a品安 termine and document its transfer pricing under the arms-length test; the basic elements regarding man- transaction and must refer to the appropriateness of ner,content, and extent of the documentation; the tation duty depends on the facts and circumstances garding tax authorities' requests Section 6 details the documents that the taxpayer Under section 2. the documentation must detail must prepare Sections 7 to 11 cover: the appropriate the business relationships and economic facts. Re- companies; the manner of appropriate record- require data on the terms and conditions, including tion;and the application of the decree-law to allocat- that third parties in comparable transactions would ing head-office and Pe profits have agreed on or achieved. Application of the Arms-Length Principle, The taxpayer must document comparable data gregation, and Timing (prices, profit markups, gross margins, and net mar- mentation stating whether, and to what extent, the ties. To perform a plausibility check (hypothetical tionships with related parties, based on the arm's. ternal data, for example, forecasts and planning data. Third-party comparable data must be consid ered if it could be obtained with reasonable efforts Finally, the taxpayer must explain why the ap- plied transfer pricing method is appropriate. How dSee Rasch/Roeder, 11 Transfer Pricing Report 731, 12/11/02. ever, the taxpayer is not required to prepare docu- Unless otherwise noted, sections cited in the following refer mentation for more than one transfer pricing to the draft decree-law method Tax Analysts- Worldwide Tax Daily

clarify the documents that a taxpayer must prepare. The proposed decree-law also addresses timing, us￾ability, and storage requirements with which a tax￾payer must comply. Formal laws, including sections 90 and 162 of the General Tax Code, are enacted by the Bundestag, in the usual legislative process, and, if necessary, by the Bundesrat. However, a decree-law is a specific source of law under the German legal system, and it may only be passed by the Federal Ministry of Finance. However, under draft section 90 of the General Tax Code, the Bundesrat must also approve it before it becomes en￾acted.4 The decree-law is one of the key components of the planned transfer pricing legislation because it seeks to precisely define the taxpayer’s duties. The decree-law binds the tax authorities, the tax￾payer, and the courts. Therefore, it differs from tax regulations that only bind the tax authorities. This article analyzes the impact of the proposed decree-law on transfer pricing documentation rules and the impact on German-based companies and subsidiaries, as well as permanent establishments of foreign-based multinational enterprises. Outline of the Decree-Law The draft decree-law includes 11 sections. Sections5 1 to 5 explain: that the taxpayer must de￾termine and document its transfer pricing under the arm’s-length test; the basic elements regarding man￾ner, content, and extent of the documentation; the timing of the documentation; and the principles re￾garding tax authorities’ requests. Section 6 details the documents that the taxpayer must prepare. Sections 7 to 11 cover: the appropriate standard of documentation; exemptions for small companies; the manner of appropriate record￾keeping; the retention period for storing documenta￾tion; and the application of the decree-law to allocat￾ing head-office and PE profits. Application of the Arm’s-Length Principle, Aggregation, and Timing Under section 1, the taxpayer must prepare docu￾mentation stating whether, and to what extent, the taxpayer has generated income from business rela￾tionships with related parties, based on the arm’s￾length principle. To comply with the arm’s-length principle, the taxpayer must apply an appropriate method to establish the transfer price. The taxpayer is therefore required to document, before the transaction, how the conditions, including pricing, comply with the arm’s-length principle. The taxpayer must consider, at the time the transaction takes place, any available information that the tax￾payer may obtain with a reasonable effort, including accessible data from transactions with third parties. The draft decree-law stipulates that an internal transfer pricing guideline, based on such consider￾ations and the arm’s-length principle, is sufficient for the cases covered by the guidelines. Moreover, the taxpayer is required under section 1 to gather additional information and data after the transaction has taken place. This enables the tax au￾thorities to ascertain whether a third party may have made an adjustment because of changed facts and circumstances. Additionally, section 1 provides that the condi￾tions must be reviewed: if the taxpayer is making losses from its total business relationships with re￾lated parties, or part of those relationships, which third parties would not have accepted on a continu￾ing basis; or if the parties subsequently agreed upon adjustments. Section 2 provides that the documentation must be based on the terms and conditions of the actual transaction and must refer to the appropriateness of the related transfer price. The extent of the documen￾tation duty depends on the facts and circumstances of each case and the transfer pricing method used. Under section 2, the documentation must detail the business relationships and economic facts. Re￾cords detailing the appropriateness of transfer prices require data on the terms and conditions, including agreed prices, cost allocations, and profit margins that third parties in comparable transactions would have agreed on or achieved. The taxpayer must document comparable data (prices, profit markups, gross margins, and net mar￾gins) from transactions with or between third par￾ties. To perform a plausibility check (hypothetical arm’s-length test), the taxpayer must also record in￾ternal data, for example, forecasts and planning data. Third-party comparable data must be consid￾ered if it could be obtained with reasonable efforts. Finally, the taxpayer must explain why the ap￾plied transfer pricing method is appropriate. How￾ever, the taxpayer is not required to prepare docu￾mentation for more than one transfer pricing method. 2 Tax Analysts — Worldwide Tax Daily Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 4 See Rasch/Roeder, 11 Transfer Pricing Report 731, 12/11/02. 5 Unless otherwise noted, sections cited in the following refer to the draft decree-law

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 Generally, the taxpayer must keep records for a description of the taxpayers individual activi each transaction. Transactions that take place dur ties, for example, provision of services, manufac- ing a fiscal year may be gathered in groups of trans- turing, and distribution of assets actions if they: are of similar type and are processed N8 based on clear terms that have been agreed upon in a summary of contracts regarding business rela- advance; are linked to each other; or are partial tionships with related parties transactions within a total transaction. Further when examining the appropriateness of transactions information regarding the enterprises business that have been aggregated the examination must be strategies able to be done without having to separate each information regarding set-offs applied; and transaction Section 3 entitles the taxpayer to prepare doc a summary of the taxpayers transfer pricing N82928或 rulings and advance pricing agreements with uments either in writing or electronic form, and sec- tion 4 deals with contemporaneous documentation. foreign tax authorities, and competent authori- Draft section 90 paragraph 3 of the General Tax Code ty proceedings. currently states that contemporaneous documenta The taxpayer must also prepare documentation tion is only required for extraordinary transactions eg elationships with related p Documentation, under section 4, is prepared contem- ties. The taxpayers summary must address the kind poraneous if it is prepared in close timely connection and amount of transactions with individual related with the transaction. There is a presumption that parties, including procurement of goods, services, documentation has been prepared contemporane- lending activities, and assignment of intangible ously if it was prepared within six months after the property transaction was concluded The taxpayers functional and risk analysis must Section 4 defines"extraordinary transaction"as a address: the functions performed and risks ansaction that is not in the ordinary business and by the taxpayer and related parties, intangible as has a substantial impact on the amount of the tax- sets, contractual conditions, and market conditions payers income. Examples of extraordinary transac tions include: asset transfers in the context of re- The taxpayers transfer pricing analysis must clude structuring measures; substantial changes in functions performed by the taxpayer; business trans- Information about the transfer pricing method actions after a change in business strategy; and the its application, and the decisionmaking process conclusion or modification of significant long-term for determining a price or a cost allocation agreements When the cost plus method is applied, records Section 5 states that generally the documentation regarding the cost accounting are required. If a should only be demanded in the scope of a field audit. cost-sharing agreement is concluded, records as Section 5 is similar to draft section 90, paragraph 3, to the other participants, the cost allocation key, and the expected benefit from participating in sentence 6. of the general Tax Code. However. sec- the cost sharing are also tion 5 clarifies that the 60-day period for submitting the documents must be complied when the tax audit Reasons for the appropriateness of the price de- is postponed at the taxpayers request termination and the cost allocation based on the arms-length principle. Generally, a mere profit Mandatory Documentation comparison is insufficient to justify appropri Under section 6. the core of the draft decree-law ateness. If the taxpayer has used comparable prices and financial data from independent en- the taxpayer must prepare documentation regarding general information, percentage shareholdings, busi- terprises to determine transfer prices or a cost allocation, the prices and data, their compara ness operations, and organizational structure bility and any adjustments, will have to be pre including a description of the percentage shareholding between the taxpayer and related parties, with Records regarding adjustments at the taxpayer, particularly if these result fre m transie r pricing which the taxpayer maintains business rela adjustments or advance pricing agreements tionships within the meaning of section 1, para from a related party' s tax authorities graph 2 of the Foreign Tax Code Records regarding the reasons for losses and tional group structure, including modifications a description of the organizational and opera provisions for settling the loss situation, if the taxpayer accounts for a negative result on its tax Tax Analysts- Worldwide Tax Daily

Generally, the taxpayer must keep records for each transaction. Transactions that take place dur￾ing a fiscal year may be gathered in groups of trans￾actions if they: are of similar type and are processed based on clear terms that have been agreed upon in advance; are linked to each other; or are partial transactions within a total transaction. Further, when examining the appropriateness of transactions that have been aggregated, the examination must be able to be done without having to separate each transaction. Section 3 entitles the taxpayer to prepare doc￾uments either in writing or electronic form, and sec￾tion 4 deals with contemporaneous documentation. Draft section 90 paragraph 3 of the General Tax Code currently states that contemporaneous documenta￾tion is only required for extraordinary transactions. Documentation, under section 4, is prepared contem￾poraneous if it is prepared in close timely connection with the transaction. There is a presumption that documentation has been prepared contemporane￾ously if it was prepared within six months after the transaction was concluded. Section 4 defines “extraordinary transaction” as a transaction that is not in the ordinary business and has a substantial impact on the amount of the tax￾payer’s income. Examples of extraordinary transac￾tions include: asset transfers in the context of re￾structuring measures; substantial changes in functions performed by the taxpayer; business trans￾actions after a change in business strategy; and the conclusion or modification of significant long-term agreements. Section 5 states that generally the documentation should only be demanded in the scope of a field audit. Section 5 is similar to draft section 90, paragraph 3, sentence 6, of the General Tax Code. However, sec￾tion 5 clarifies that the 60-day period for submitting the documents must be complied when the tax audit is postponed at the taxpayer’s request. Mandatory Documentation Under section 6, the core of the draft decree-law, the taxpayer must prepare documentation regarding general information, percentage shareholdings, busi￾ness operations, and organizational structure, including: • a description of the percentage shareholdings between the taxpayer and related parties, with which the taxpayer maintains business rela￾tionships within the meaning of section 1, para￾graph 2 of the Foreign Tax Code; • a description of the organizational and opera￾tional group structure,including modifications; • a description of the taxpayer’s individual activi￾ties, for example, provision of services, manufac￾turing, and distribution of assets; • a summary of contracts regarding business rela￾tionships with related parties; • information regarding the enterprise’s business strategies; • information regarding set-offs applied; and • a summary of the taxpayer’s transfer pricing rulings and advance pricing agreements with foreign tax authorities, and competent authori￾ty proceedings. The taxpayer must also prepare documentation regarding business relationships with related par￾ties. The taxpayer’s summary must address the kind and amount of transactions with individual related parties, including procurement of goods, services, lending activities, and assignment of intangible property. The taxpayer’s functional and risk analysis must address: the functions performed and risks assumed by the taxpayer and related parties, intangible as￾sets, contractual conditions, and market conditions. The taxpayer’s transfer pricing analysis must include: • Information about the transfer pricing method, its application, and the decisionmaking process for determining a price or a cost allocation. When the cost plus method is applied, records regarding the cost accounting are required. If a cost-sharing agreement is concluded, records as to the other participants, the cost allocation key, and the expected benefit from participating in the cost sharing are also necessary. • Reasons for the appropriateness of the price de￾termination and the cost allocation based on the arm’s-length principle. Generally, a mere profit comparison is insufficient to justify appropri￾ateness. If the taxpayer has used comparable prices and financial data from independent en￾terprises to determine transfer prices or a cost allocation, the prices and data, their compara￾bility and any adjustments, will have to be pre￾sented. • Records regarding adjustments at the taxpayer, particularly if these result from transfer pricing adjustments or advance pricing agreements from a related party’s tax authorities. • Records regarding the reasons for losses and provisions for settling the loss situation, if the taxpayer accounts for a negative result on its tax Tax Analysts — Worldwide Tax Daily 3 Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Reprinted from 10 March 2003, Worldwide Tax daily, 2003 WTD 46-6 balance sheet for more than three successive fis- fied when determining transfer prices for transac- tions between the taxpayer and related parties. Al- Appropriate Standard of Documentation though the clarification is correct, it remains doubtful? whether the arms-length test may be en N8 Section 7 addresses the usability of records. The acted by changing the procedural law in the general decree-law requires that the records must permit a Tax Code. The arm's-length principle should be in competent third party to get an overview, within a corporated into the income tax law reasonable period of time, of the facts and circum- tances of the transactions between the taxpayer and Third-Party Comparable Data related parties, and whether the taxpayer acted in ndustry demanded that companies should only accordance with the arm,s-length principle be required to document their thinking at the time Records that do not fulfil that criterion are prices were set. This is now explicitly stated in sec N82928或 deemed to be unusable. which occurs when the re- tion 1 improper transfer pricing method, or the documenta- that the taxpayer should not be required to provide a comparable data from data banks and external con- Section 8 provides special rules for small enter sultants. 8 Taking into account the current wording of prises, which apply when: the sum of the arms section 1, industry was only partly successful on this Issue length prices for the supply of goods from related party transactions does not exceed 5 million euros; or Under section 2, the taxpayer must use when the sum of arms-length remuneration for the third-party data if the taxpayer is able to obtain the supply of services from related party transactions data by making reasonable efforts. It remains, how amounts does not exceed 500 000 euros. The docu- ever. unclear as to what constitutes reasonable ef- mentation duties set forth in draft section 90, para- forts. There is no clear guidance on what the tax au- graph 3 of the General Tax Code, and in the draft de- thorities will require in future tax audits cree-law, are deemed to be satisfied if the taxpayer provides information and submits documents upon The taxpayer must also collect information after the transaction has occurred. to enable the tax au- request of the tax authorities within the 60-day peri- thorities to check whether the situation has changed and an adjustment is required under the arms- Finally, sections 9 to 11 address recordkeeping, length test. This obligation is an unacceptable bur- the application of the provisions to profit allocation den for the taxpayer because the documentation duty between head offices and PEs, and when the de- goes beyond the considerations that caused the cree-law becomes effective transaction. It unclear when the obligation termi- Section 9 emphasizes that the documentation the traditional German view. which has conde must be stored as appropriate books or electronically. the U.S. commensurate-with-income standard ned Generally, the taxpayer must retain the records for 10 years. However, the retention period keeps run Although the decree-law does not explicitly re- ning so long as the records are important for taxation quire transfer pricing guidelines, such guidelines purposes for which the period of determination provide considerable benefits for documentation obli (festsetzungsfrist) is unexpired. The storage of doc- gations and will therefore be more common in the uments may also take place abroad future The decree-law requires that all comparable data Analysis used by the taxpayer must be documented, including Arms-Length Principle prices, markup, gross margins, net margins, and Similar to the latest version of draft section 90, German authorities will become more receptive to paragraph 3 of the General Tax Code, section 1 pro- profit-based methods than they have been in the vides that the arm s- length standard must be satis past. Such a step would be appropriate, taking into bThe 60-day period might be extended in exceptional cases, cf. an unofficial translation see 11 Transfer Pricing Report 873, 19 Feb. 2003; for an analysis see Kroppen/Rasch, 11 Transfer icing Report 885, 19 Feb 2003 Kroppen/Rasch, Tax Notes Int'l, 18 Nov 2002, pp 666 ff. Tax Analysts- Worldwide Tax Daily

balance sheet for more than three successive fis￾cal years. Appropriate Standard of Documentation Section 7 addresses the usability of records. The decree-law requires that the records must permit a competent third party to get an overview, within a reasonable period of time, of the facts and circum￾stances of the transactions between the taxpayer and related parties, and whether the taxpayer acted in accordance with the arm’s-length principle. Records that do not fulfil that criterion are deemed to be unusable, which occurs when the re￾cords are incomplete, the taxpayer uses an evidently improper transfer pricing method, or the documenta￾tion is contradictory. Section 8 provides special rules for small enter￾prises, which apply when: the sum of the arm’s￾length prices for the supply of goods from related party transactions does not exceed 5 million euros; or when the sum of arm’s-length remuneration for the supply of services from related party transactions amounts does not exceed 500,000 euros. The docu￾mentation duties set forth in draft section 90, para￾graph 3 of the General Tax Code, and in the draft de￾cree-law, are deemed to be satisfied if the taxpayer provides information and submits documents upon request of the tax authorities’ within the 60-day peri￾od.6 Finally, sections 9 to 11 address recordkeeping, the application of the provisions to profit allocation between head offices and PEs, and when the de￾cree-law becomes effective. Section 9 emphasizes that the documentation must be stored as appropriate books or electronically. Generally, the taxpayer must retain the records for 10 years. However, the retention period keeps run￾ning so long as the records are important for taxation purposes for which the period of determination (Festsetzungsfrist) is unexpired. The storage of doc￾uments may also take place abroad. Analysis Arm’s-Length Principle Similar to the latest version of draft section 90, paragraph 3 of the General Tax Code, section 1 pro￾vides that the arm’s-length standard must be satis￾fied when determining transfer prices for transac￾tions between the taxpayer and related parties. Al￾though the clarification is correct, it remains doubtful7 whether the arm’s-length test may be en￾acted by changing the procedural law in the General Tax Code. The arm’s-length principle should be in￾corporated into the income tax law. Third-Party Comparable Data Industry demanded that companies should only be required to document their thinking at the time prices were set. This is now explicitly stated in sec￾tion 1. However, the business community also argued that the taxpayer should not be required to provide comparable data from data banks and external con￾sultants.8 Taking into account the current wording of section 1, industry was only partly successful on this issue. Under section 2, the taxpayer must use third-party data if the taxpayer is able to obtain the data by making reasonable efforts. It remains, how￾ever, unclear as to what constitutes reasonable ef￾forts. There is no clear guidance on what the tax au￾thorities will require in future tax audits. The taxpayer must also collect information after the transaction has occurred, to enable the tax au￾thorities to check whether the situation has changed and an adjustment is required under the arm’s￾length test. This obligation is an unacceptable bur￾den for the taxpayer because the documentation duty goes beyond the considerations that caused the transaction. It unclear when the obligation termi￾nates. Also, the requirement seems to deviate from the traditional German view, which has condemned the U.S. commensurate-with-income standard. Although the decree-law does not explicitly re￾quire transfer pricing guidelines, such guidelines provide considerable benefits for documentation obli￾gations and will therefore be more common in the future. The decree-law requires that all comparable data used by the taxpayer must be documented, including prices, markup, gross margins, net margins, and profit splits. This could support the view that the German authorities will become more receptive to profit-based methods than they have been in the past. Such a step would be appropriate, taking into 4 Tax Analysts — Worldwide Tax Daily Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 6 The 60-day period might be extended in exceptional cases, cf. draft section 90, paragraph 3, sentence 9 General Tax Code. For an unofficial translation see 11 Transfer Pricing Report 873, 19 Feb. 2003; for an analysis see Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003. 7 Kroppen/Rasch, 11 Transfer Pricing Report 885, 19 Feb. 2003. 8 Kroppen/Rasch, Tax Notes Int’l, 18 Nov. 2002, pp. 666 ff

Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 account the importance of profit-based approaches in This shows that the tax authorities do not kne practice ow large MNEs work. It is impossible for MNEs to However, the decree-law states in section 6 that document every transaction. A reasonable documen ne taxpayer to doc- generally mere profit comparisons cannot justify the ument major transaction flows within the group 或N8 is again a sign that the german authorities are un Section 2 allows the aggregation of transactions willing to accept that, since 1995, when the oECd However, the Federal Ministry of Finance obviously principles were introduced, the world has changed does not want to acknowledge the use of a multi and often profit based approaches are the only ple-year analysis. Section 2 clearly states that the cost-effective means for a taxpayer to document transactions of a fiscal year may be aggregated under the conditions described above N82928或 Aggregation of Transactions Although the question of a multiple-year analysis The German tax administration has a clear pre should not be dealt with in the documentation regu erence for a transactional approach. Section 2.1.2. of lations, it is remarkable that the Federal Ministry of the Administrative Principles of 1983 already em Finance has limited the aggregation to transactions phasizes that the transfer price analysis should be within a fiscal year. This deviates from the multiple- based on every transaction. If one followed the word. year analysis, which, under certain conditions, is ing of the administrative principles, the administra supported by the oeCd, as well as by the u.stax tions preference would go much further than the administration. 10 OECD, which also allows companies to aggregate cer The multiple-year analysis is a tool for analyzing tain transactions(see paragraph 1. 42 of the OeCd the effects of business or product life cycles, currency 3 Guidelines) exchange risks, other business risk factors, or other influences that might affect the transfer prices It is fair to assume, however, that German princ- These influences might better be judged over a long aggregation is the only feasible approach to deter- period. If, for instance, a company incurs losses in the transactions are interrelated, multiple transac- a market slow down, and if the company derives ex- tions take place in a short period of time, or several traordinary profits in earlier or later years, the com transactions are part of a package deal pany's financials should be aggregated. 1 This is now acknowledged by The multiple-year analysis is sometimes rejected cree-law. However, the requirements set forth by tax auditors who argue that it violates a funda- mental precept of German tax law that requires tax the aggregated transactions must be based on terms to be based on the annual accounting period (Prinzip that have been agreed upon in advance. The taxpayer der Abschnittsbesteuerung). Therefore, in applying will have to submit these terms to the tax authori. the analysis, the taxpayer and the tax auditor have to ties.Thus, it appears that the taxpayer will need to make sure that the profit situation of other closed pe- riods does not lead to the conclusion that income is prepare written internal guidelines for aggregating too high or too low in the period under review. transactions, creating an additional administrative burden We believe, however, that the multiple-year anal te. It is frustrating that the tax authorities have dis- ysis should be seen as a tool to judge the transfer arded suggestions to introduce mi Inimum prices of the current year, for example, to judge amounts for transactions that need to be docu- start-up losses, a market penetration strategy, or the mented,which would have limited the administra- long-term influence of currency risks. Accordingly, it tive burden on taxpayers. To the contrary, the should not cause proble cree- law requires that, in principle, each transaction must be documented Administrative principles for the examination of income allo See paragraphs 1.49- 1.51 of the OECD guidelines; U.S the federal ministry of Finance dated 23 February 1983, BStBL. Treasury Reg. section 1.482-1())(2)(ii) Kroppen/Eigelshoven, Commentary on Transfer Pricing in Ger- tary on Transfer Pricing in Germany, in: Tax Treatme many, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002 Amsterdam, June 2002, chapter 8.2. ter 4.4 Tax Analysts- Worldwide Tax Daily

account the importance of profit-based approaches in practice. However, the decree-law states in section 6 that generally mere profit comparisons cannot justify the arm’s-length nature of transactions. This statement is again a sign that the German authorities are un￾willing to accept that, since 1995, when the OECD principles were introduced, the world has changed and often profit based approaches are the only cost-effective means for a taxpayer to document pricing. Aggregation of Transactions The German tax administration has a clear pref￾erence for a transactional approach. Section 2.1.2. of the Administrative Principles of 19839 already em￾phasizes that the transfer price analysis should be based on every transaction. If one followed the word￾ing of the administrative principles, the administra￾tion’s preference would go much further than the OECD, which also allows companies to aggregate cer￾tain transactions (see paragraph 1.42 of the OECD Guidelines). It is fair to assume, however, that German princi￾ples allow for aggregation, because in many cases, aggregation is the only feasible approach to deter￾mine the transfer price. This is especially true when the transactions are interrelated, multiple transac￾tions take place in a short period of time, or several transactions are part of a package deal. This is now acknowledged by the draft de￾cree-law. However, the requirements set forth in sec￾tion 2 seem stricter. It is specifically required that the aggregated transactions must be based on terms that have been agreed upon in advance. The taxpayer will have to submit these terms to the tax authori￾ties. Thus, it appears that the taxpayer will need to prepare written internal guidelines for aggregating transactions, creating an additional administrative burden. It is frustrating that the tax authorities have dis￾regarded suggestions to introduce minimum amounts for transactions that need to be docu￾mented, which would have limited the administra￾tive burden on taxpayers. To the contrary, the de￾cree-law requires that, in principle, each transaction must be documented. This shows that the tax authorities do not know how large MNEs work. It is impossible for MNEs to document every transaction. A reasonable documen￾tation law would only require the taxpayer to doc￾ument major transaction flows within the group. Section 2 allows the aggregation of transactions. However, the Federal Ministry of Finance obviously does not want to acknowledge the use of a multi￾ple-year analysis. Section 2 clearly states that the transactions of a fiscal year may be aggregated under the conditions described above. Although the question of a multiple-year analysis should not be dealt with in the documentation regu￾lations, it is remarkable that the Federal Ministry of Finance has limited the aggregation to transactions within a fiscal year. This deviates from the multiple￾year analysis, which, under certain conditions, is supported by the OECD, as well as by the U.S. tax administration.10 The multiple-year analysis is a tool for analyzing the effects of business or product life cycles, currency exchange risks, other business risk factors, or other influences that might affect the transfer prices. These influences might better be judged over a long period. If, for instance, a company incurs losses in one year because of certain risk factors or because of a market slow down, and if the company derives ex￾traordinary profits in earlier or later years, the com￾pany’s financials should be aggregated.11 The multiple-year analysis is sometimes rejected by tax auditors who argue that it violates a funda￾mental precept of German tax law that requires tax to be based on the annual accounting period (Prinzip der Abschnittsbesteuerung). Therefore, in applying the analysis, the taxpayer and the tax auditor have to make sure that the profit situation of other closed pe￾riods does not lead to the conclusion that income is too high or too low in the period under review. We believe, however, that the multiple-year anal￾ysis should be seen as a tool to judge the transfer prices of the current year, for example, to judge start-up losses, a market penetration strategy, or the long-term influence of currency risks. Accordingly, it should not cause problems. Tax Analysts — Worldwide Tax Daily 5 Reprinted from 10 March 2003, Worldwide Tax Daily, 2003 WTD 46-6 (C) Tax Analysts 2003. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. 9 Administrative principles for the examination of income allo￾cation in the case of internationally related enterprises, Decree of the Federal Ministry of Finance dated 23 February 1983, BStBl. I 1983, p. 218; for an English translation of the text see Kroppen/Eigelshoven, Commentary on Transfer Pricing in Ger￾many, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002, chapter 8.2. 10See paragraphs 1.49 - 1.51 of the OECD guidelines; U.S. Treasury Reg. section 1.482-1(f)(2)(iii). 11For a detailed analysis see Kroppen/Eigelshoven, Commen￾tary on Transfer Pricing in Germany, in: Tax Treatment of Transfer Pricing, IBFD, loose-leaf, Amsterdam, June 2002, chap￾ter 4.4