《税法——转移定价》英文参考文献：02 Documentation_04 Germany’s New Transfer Pricing Documentation Rules

Practitioners C orner Germany's New Transfer Pricing 90928-8巴0a32g38 DOcumentation rules y Axel eigelshoven and Roman Dawid taxpayers had access- at other related entities. I Axel eigelshoven is a partner and Roman dawid Because the german tax authorities have no spe a manager with Deloitte Touche in Dusseldorf cialized transfer pricing auditors, such as econo mists, they felt that they would not be capable of auditing transfer prices and adjusting the income if appropriate The german government released a law in Second, the german government indicated that April 2003 that requires taxpayers to doc Germany would follow an international trend, a ument their intercompany transfer prices. The numerous tax authorities have released documen new rules threaten noncompliant multinationals ation and penalty regimes. After the United estimate a taxpayers income, shifting the burden 1994, almost all European countries changed percent of the income adjustment As provided by A r transfer pricing laws and regulations. The of proof to the taxpayer and penalties of up to 10 countries that have not, including Spain and the new law, the german Ministry of Finance re Sweden, have said they will issue documentation leased a decree law to give more details about the requiremet documents the taxpayer must prepare. The Ger Germany has now extended section 90 of its man Parliament's upper house approved the de- General Tax Code (GTo), which deals with the cree law 17 October 2003 taxpayer's duty to cooperate and section 162 of the GTC, which previously dealt only with the L. New Transfer Pricing Law timation of the taxpayer's income Under the When Germany released the new law, it was motivated by two factors. First, the german Fed eral Tax Court had ruled in 2001 that taxpayers were not required to prepare any kind of transfer pricing documentation under Germany' s tax law; I See german Federal Tax Court, 17 Oct 2001, p 137; German Federal Tax Court, 10 May 2001, BFH/NV rather, taxpayers were required to provide all 58. See also Kroppen/Rasch/Roeder, Tax Notes Int'l, 1( formation available at the company and -if the 2001, p1111 Tax Notes international 12 January2004·18

Tax Notes International 12 January 2004 • 185 Germany’s New Transfer Pricing Documentation Rules by Axel Eigelshoven and Roman Dawid T he German government released a law in April 2003 that requires taxpayers to doc￾ument their intercompany transfer prices. The new rules threaten noncompliant multinationals with severe sanctions, such as increased ability to estimate a taxpayer’s income, shifting the burden of proof to the taxpayer, and penalties of up to 10 percent of the income adjustment. As provided by the new law, the German Ministry of Finance re￾leased a decree law to give more details about the documents the taxpayer must prepare. The Ger￾man Parliament’s upper house approved the de￾cree law 17 October 2003. I. New Transfer Pricing Law When Germany released the new law, it was motivated by two factors. First, the German Fed￾eral Tax Court had ruled in 2001 that taxpayers were not required to prepare any kind of transfer pricing documentation under Germany’s tax law; rather, taxpayers were required to provide all in￾formation available at the company and — if the taxpayers had access — at other related entities. 1 Because the German tax authorities have no spe￾cialized transfer pricing auditors, such as econo￾mists, they felt that they would not be capable of auditing transfer prices and adjusting the income if appropriate. Second, the German government indicated that Germany would follow an international trend, as numerous tax authorities have released documen￾tation and penalty regimes. After the United States released its transfer pricing regulations in 1994, almost all European countries changed their transfer pricing laws and regulations. The few countries that have not, including Spain and Sweden, have said they will issue documentation requirements soon. Germany has now extended section 90 of its General Tax Code (GTC), which deals with the taxpayer’s duty to cooperate, and section 162 of the GTC, which previously dealt only with the es￾timation of the taxpayer’s income. Under the new Axel Eigelshoven is a partner and Roman Dawid a manager with Deloitte & Touche in Düsseldorf. 1See German Federal Tax Court, 17 Oct. 2001, BFH/NV 2002, p. 137; German Federal Tax Court, 10 May 2001, BFH/NV 2001, p. 958. See also Kroppen/Rasch/Roeder, Tax Notes Int’l, 10 Dec. 2001, p. 1111. Practitioners’ Corner (C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Practitioners Corner rules, the taxpayer is not only obliged to provide Finally, the tax authorities will assess a relevant information but also must document the penalty of 5 to 10 percent on the income ad economic and legal basis for arms-length prices justment. The penalties are harsh because and conditions. For extraordinary transactions they relate to the income adjustment, rather 己 the documentation must be prepared contempora than the additional taxes as in the united neously. The documentation requirements apply States and the United Kingdom. The pen not only to the cases in article 9 of the oecD alty may be treated as a nondeductible model tax treaty, but also to the allocation of in item. The tax authorities may impose a come between the head office and a branch(article minimum penalty of E5,000 per year, even if 7 of the OECD model tax treaty). The new docu- they make no income adjustment. Finally, mentation requirements began in force for busi the law allows the tax authorities to assess ness years starting after 31 December 2002 a penalty if the taxpayer does not meet the 60-day deadline to provide documentation. The documentation requirements apply In cases of late submission the penalty will e at least E100 per day, with a maximum not only to the cases in article 9 of the amount of∈1 million. OECD model tax treaty, but also to the The penalties can be summarized with the fol allocation of income between the head owing example: U.s. Inc. supplies goods to its office and a branch German subsidiary, a distributor for the german market. The company has a turnover of E100 mil- 9092-8巴0a3 Section 162 of the GtC provides a detailed lion and has incurred a loss of E5 million. The tax tion requirements, the sanctions are applicable have earned an operating margin of2 to 5 percent for business years starting after 31 December 003, so noncompliance results in no negative con- sequences until then. After that, if the taxpayer Documentation Available Documentation provides no documentation or if the documenta- tion is not usable. the sanctions are threefold Income Adjustment First, the tax authorities may assume the Tax(40%0 taxpayers domestic income is higher than Penalty(10%) E1.000.000 the amount the taxpayer declared. This pro- 8 vision factually shifts the burden of proof to x Penalty the taxpayer · Second,ifth e tax au rs mu the taxpayers income, and if there is a range of prices, the tax auditors may choose The example demonstrates that the sanctions the point of the price range that is most dis have a double effect. If the taxpayer does not com advantageous to the taxpayer. This prov ply with its documentation obligations, the ad sion stands in contrast to several germa justment will be made to the most unfavorable Federal tax Court decisions that allow the point within a price range. The penalty is then lev tax authorities to make an income adjust ied not only on the adjustment ofE7 million (lower ment only to the most favorable point end of the price range), but to the entire amount of within a price range. 2 As a result, the favor E10 million. Of course. it is doubtful whether the able tax court rulings apply only if the tax German tax authorities can maintain their posi payer has complied with its documentation tion if the taxpayer asks for relief under the com bligations. The first two sanction measures petent authority article of a tax treaty or under also apply if the taxpayer does not doc- the eu arbitration convention ument its extraordinary transactions con- temporaneousl "See german Federal Tax Court. 17 Oct 2001. BFH/Nv 2002 p. 137; German Federal Tax Court, 4 June 2003(I R 24/02), DB 2003, p 2259; German Federal Tax Court, 4 June 2003(I R 38/ 3The deductibility is considered controversial in tax literat 02), DB 2003, p 2261; German Federal Tax Court, 27 Feb 2003 See Liidicke, IStR 2003, p. 436; Rodder/Schumacher, DStR 20 DB2003,p.19 p.818 186·12 January2004 Tax Notes international

rules, the taxpayer is not only obliged to provide relevant information, but also must document the economic and legal basis for arm’s-length prices and conditions. For extraordinary transactions the documentation must be prepared contempora￾neously. The documentation requirements apply not only to the cases in article 9 of the OECD model tax treaty, but also to the allocation of in￾come between the head office and a branch (article 7 of the OECD model tax treaty). The new docu￾mentation requirements began in force for busi￾ness years starting after 31 December 2002. The documentation requirements apply not only to the cases in article 9 of the OECD model tax treaty, but also to the allocation of income between the head office and a branch. Section 162 of the GTC provides a detailed framework of sanctions. Unlike the documenta￾tion requirements, the sanctions are applicable for business years starting after 31 December 2003, so noncompliance results in no negative con￾sequences until then. After that, if the taxpayer provides no documentation or if the documenta￾tion is not usable, the sanctions are threefold. • First, the tax authorities may assume the taxpayer’s domestic income is higher than the amount the taxpayer declared. This pro￾vision factually shifts the burden of proof to the taxpayer. • Second, if the tax auditors must estimate the taxpayer’s income, and if there is a range of prices, the tax auditors may choose the point of the price range that is most dis￾advantageous to the taxpayer. This provi￾sion stands in contrast to several German Federal Tax Court decisions that allow the tax authorities to make an income adjust￾ment only to the most favorable point within a price range. 2 As a result, the favor￾able tax court rulings apply only if the tax￾payer has complied with its documentation obligations. The first two sanction measures also apply if the taxpayer does not doc￾ument its extraordinary transactions con￾temporaneously. • Finally, the tax authorities will assess a penalty of 5 to 10 percent on the income ad￾justment. The penalties are harsh because they relate to the income adjustment, rather than the additional taxes as in the United States and the United Kingdom. The pen￾alty may be treated as a nondeductible item.3 The tax authorities may impose a minimum penalty of €5,000 per year, even if they make no income adjustment. Finally, the law allows the tax authorities to assess a penalty if the taxpayer does not meet the 60-day deadline to provide documentation. In cases of late submission the penalty will be at least €100 per day, with a maximum amount of €1 million. The penalties can be summarized with the fol￾lowing example: U.S. Inc. supplies goods to its German subsidiary, a distributor for the German market. The company has a turnover of €100 mil￾lion and has incurred a loss of €5 million. The tax office estimates that third-party distributors would have earned an operating margin of 2 to 5 percent. Documentation Available No Documentation Income Adjustment €7,000,000 €10,000,000 Tax (40%) €800,000 €2,000,000 Penalty (10%) — €1,000,000 Tax + Penalty = Cost €800,000 €3,000,000 The example demonstrates that the sanctions have a double effect. If the taxpayer does not com￾ply with its documentation obligations, the ad￾justment will be made to the most unfavorable point within a price range. The penalty is then lev￾ied not only on the adjustment of €7 million (lower end of the price range), but to the entire amount of €10 million. Of course, it is doubtful whether the German tax authorities can maintain their posi￾tion if the taxpayer asks for relief under the com￾petent authority article of a tax treaty or under the EU arbitration convention. 186 • 12 January 2004 Tax Notes International Practitioners’ Corner 2See German Federal Tax Court, 17 Oct. 2001, BFH/NV 2002, p. 137; German Federal Tax Court, 4 June 2003 (I R 24/02), DB 2003, p. 2259; German Federal Tax Court, 4 June 2003 (I R 38/ 02), DB 2003, p. 2261; German Federal Tax Court, 27 Feb. 2003, DB 2003, p. 1990. 3The deductibility is considered controversial in tax literature. See Lüdicke, IStR 2003, p. 436; Rödder/Schumacher, DStR 2003, p. 818. (C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Practitioners,Corner I. New Decree law obviously allows the use of the transactional net margin method, as the decree law mentions that Section 90 of the gtc allows the german min istry of Finance to release a decree law and deter third-party evidence may be provided through comparisons of prices, gross margins, and net 己 mine the documentation the taxpayer must margins. 7 The statement reflects the skepticism In the past the german Ministry of Finance has is- tax authorities and some tax practitioners to- sued numerous administrative orders on transfer methods, however, are very important to compa pricing. How unlike administrative orders, nies, because they are often the only methods that decree laws are binding on taxpayers and the allow the taxpayer to provide third-party evi courts and have nearly the same legal status as a dence and to receive legal certainty per house of the german Parliament, Bundesrat, 2. Provision of information From the Parent on 17 October 2003. It has eight sections covering C transfer pricing issues that include contempora In general, taxpayers should provide the tax neous documentation requirements the aggrega- authorities all information requested, even if it is tion of particular transactions, application to located at the parent company level. In our experi branches and partnerships, and relief for small ence, if the taxpayer does not provide that infor taxpayers. The sections are discussed below in mation it is difficult to settle the case because the more detail tax auditors will suspect that the taxpayer is hid ing substantial facts that would lead to a signifi A. General Principles(Section 1) cant income adjustment. 1. Insufficient Documentation The German Federal Tax Courts have ruled If a taxpayer provides no documentation or ifthe that taxpayers must provide documentation lo- documentation is insufficient the tax authorities cated abroad if they have access to it. If the tax will use the extensive sanction mechanism. Tax- payer has a foreign parent company, the taxpayer payers should have a good understanding of what has no legal means to access information unless it the tax authorities will consider to be insufficient. is publicly available. In those cases the courts Section 2, paragraph 1 of the decree law states that have ruled that the taxpayer must ensure, within tax auditors must be able to assess within a rea- its contractual relationships with the parent com sonable time whether the taxpayer has set its pany, that it receives access to data that are rele intercompany transfer prices in compliance with vant for tax purposes. However, in a May 2001 the arms-length standard. The explanatory notes ruling, the German Federal Tax Court empha to the decree law also state that the taxpayer is not sized that it is possible for a subsidiary to get that in compliance with its obligations if the documen access only if a third party would receive similar tation is incomprehensible, incomplete, or incon- access in its contractual relationships. 10 sistent. The documentation is also considered In theory, the decree law also requires that the an inappropriate transfer pricing method or if it If that documentation is not available, the taxpay uses no method and if data for an appropriate er may base the determination of an arms-length transfer pricing method are not available. This is, transfer price on information from other sources of course, a serious threat to the taxpayer If the taxpayer agrees with its parent company on <6 In another section of the explanatory notes to a cost-plus method, the tax auditors are likely to decree law, the german Ministry of Finance argue that a third party would have asked for ac- indicates that a simplified profit comparison cess to cost accounting information of the parent would not satisfy the documentation require- company and that for a reasonable application of ments. 6 However, the German tax administration the cost-plus method it is necessary to provide de- See section 1, paragraph 1 of the explanatory notes Bundesratsdrucksache 583/03 See press release of the german Ministry of Finance, 17 July sHowever, this statement is not binding to the taxpayer or the 1995, IStR 1995, p. 384; Baumhoff/ Sieker, IStR 1995, p 517 f. courts because it is just in the explanatory notes to the decree Becker, IWB Fach 10 Gruppe 2, P 1067; Runge, IStR 1995, p. 508 German Federal Tax Court, 16 Apr. 1980, BStBL. II 1981, p. See section 2, paragraph 3 of the explanatory notes 10German Federal Tax Court, 10 May 2001, BFH/NV 2001, p 'See section 1, paragraph 3 of the decree law. Tax Notes international 12 January2004·187

Tax Notes International 12 January 2004 • 187 II. New Decree Law Section 90 of the GTC allows the German Min￾istry of Finance to release a decree law and deter￾mine the documentation the taxpayer must prepare. Legislators rarely use such a decree law. In the past the German Ministry of Finance has is￾sued numerous administrative orders on transfer pricing. However, unlike administrative orders, decree laws are binding on taxpayers and the courts and have nearly the same legal status as a law. The new decree law was approved by the up￾per house of the German Parliament, Bundesrat, on 17 October 2003. It has eight sections covering transfer pricing issues that include contempora￾neous documentation requirements, the aggrega￾tion of particular transactions, application to branches and partnerships, and relief for small taxpayers. The sections are discussed below in more detail. A. General Principles (Section 1) 1. Insufficient Documentation If a taxpayer provides no documentation or if the documentation is insufficient, the tax authorities will use the extensive sanction mechanism. Tax￾payers should have a good understanding of what the tax authorities will consider to be insufficient. Section 2, paragraph 1 of the decree law states that tax auditors must be able to assess within a rea￾sonable time whether the taxpayer has set its intercompany transfer prices in compliance with the arm’s-length standard. The explanatory notes to the decree law also state that the taxpayer is not in compliance with its obligations if the documen￾tation is incomprehensible, incomplete, or incon￾sistent. 4 The documentation is also considered insufficient if it is obvious that the taxpayer uses an inappropriate transfer pricing method or if it uses no method and if data for an appropriate transfer pricing method are not available. This is, of course, a serious threat to the taxpayer. 5 In another section of the explanatory notes to the decree law, the German Ministry of Finance indicates that a simplified profit comparison would not satisfy the documentation require￾ments. 6 However, the German tax administration obviously allows the use of the transactional net margin method, as the decree law mentions that third-party evidence may be provided through comparisons of prices, gross margins, and net margins. 7 The statement reflects the skepticism of tax authorities and some tax practitioners to￾ward profit-oriented methods. 8 The profit-based methods, however, are very important to compa￾nies, because they are often the only methods that allow the taxpayer to provide third-party evi￾dence and to receive legal certainty. 2. Provision of Information From the Parent Company In general, taxpayers should provide the tax authorities all information requested, even if it is located at the parent company level. In our experi￾ence, if the taxpayer does not provide that infor￾mation it is difficult to settle the case because the tax auditors will suspect that the taxpayer is hid￾ing substantial facts that would lead to a signifi￾cant income adjustment. The German Federal Tax Courts have ruled that taxpayers must provide documentation lo￾cated abroad if they have access to it. 9 If the tax￾payer has a foreign parent company, the taxpayer has no legal means to access information unless it is publicly available. In those cases the courts have ruled that the taxpayer must ensure, within its contractual relationships with the parent com￾pany, that it receives access to data that are rele￾vant for tax purposes. However, in a May 2001 ruling, the German Federal Tax Court empha￾sized that it is possible for a subsidiary to get that access only if a third party would receive similar access in its contractual relationships. 10 In theory, the decree law also requires that the taxpayers provide documentation from affiliates. If that documentation is not available, the taxpay￾er may base the determination of an arm’s-length transfer price on information from other sources. If the taxpayer agrees with its parent company on a cost-plus method, the tax auditors are likely to argue that a third party would have asked for ac￾cess to cost accounting information of the parent company and that for a reasonable application of the cost-plus method it is necessary to provide de￾Practitioners’ Corner 4See section 1, paragraph 1 of the explanatory notes, Bundesratsdrucksache 583/03. 5However, this statement is not binding to the taxpayer or the courts because it is just in the explanatory notes to the decree law. 6See section 2, paragraph 3 of the explanatory notes, Bundesratsdrucksache 583/03. 7See section 1, paragraph 3 of the decree law. 8See press release of the German Ministry of Finance, 17 July 1995, IStR 1995, p. 384; Baumhoff/Sieker, IStR 1995, p. 517 f.; Becker, IWB Fach 10 Gruppe 2, p. 1067; Runge, IStR 1995, p. 508. 9German Federal Tax Court, 16 Apr. 1980, BStBl. II 1981, p. 493. 10German Federal Tax Court, 10 May 2001, BFH/NV 2001, p. 959. (C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Practitioners Corner tails of cost information of the entity applying the that the guidelines have clear obligatory cost-plus method price-setting rules for the group companies that B. The Aggregation of Transactions and are actually followed. Translation of Documents(Section 2) 2. Information Requests 己 Section 2 of the decree law deals with general In general, taxpayers must provide the infor issues. Documentation must be in written or elec- mation requested only during a tax audit. It is not tronic form. Oral explanations are not sufficient. necessary to provide the transfer pricing docu The taxpayer must keep and store the documenta- mentation when filing the tax return. Tax audi tion so that it can be audited within an adequate tors must give the details of the information they time period. The documentation should enable would like to review. The taxpayer then must pro specialized tax auditor to determine which trans- vide the information within 60 days. However, ex- actions were conducted with related parties and traordinary transactions must be documented whether they were at arm's length 11 The nature, contemporaneously. Other documents can theo- content, and extent of the required documentation retically be prepared at the time the tax auditors request the information. Of course, taxpayers cause the relevant comparability measure (for ex- should consider the likelihood that the German ample, market prices, cost-plus margins, or resale tax authorities will ask for detailed information minus margins)is contingent on the applied on transfer prices and consider their own ability 92-0 method. 12 The taxpayer must document its ratio to provide that information within 60 days. For nale for the chosen transfer pricing method, but it midsize and large companies it is likely that the is not obligated to prepare documentation for tax auditors will ask for transfer pricing docu more than one method mentation, so taxpayers should start the docu 1. Aggregation of Transactions mentation process early. Section 2, paragraph 3 of the decree law con- tains requirements for the aggregation oftransac The German tax authorities have the right to tions. an issue that portant for practical receive relevant information written in German reasons. The German tax administration s ap As a general tax law principle, the authorities proach traditionally focuses on single transac may ask for a translation only if it is reasonable. tions. Thus, in theory, every single transaction The interests of the tax authority must be bal- must be determined through documentation to anced with the taxpayer's If the tax auditor has comply with the arms-length standard 13 How foreign language skills it would be unreasonable 8 ever, preparing specific arms-length ranges for to ask for extensive translations the decree l every transaction would impose an excessive bur- allows taxpayers to ask the tax office up front if den on the taxpayer. For simplification, taxpayers language. In practice, the flexibility of the Ge the documentation may be prepared in a foreig are allowed to summarize tr ctions that are economically comparable or interdependent. How- man tax auditors depends on the auditor. Some- ever, aggregation of transactions is permitted only times the auditors are willing to review the If the aggregation is performed according to trans taxpayer's documentation in English. Given the parent rules established in advance. Also, aggre- volume of transfer pricing documentation, it is gation is allowed only if third parties in their hoped that tax auditors will be careful with their business dealings do not look only at single trans- requests for translations actions,but at bundles of transactions. This provi- C. Contemporaneous Documentation for sion allows significant flexibility regarding Extraordinary Business Transactions aggregation. Finally, documentation of single transactions may not be necessary if the taxpayer applies transfer pricing guidelines that are in line According to the gtC, contemporaneous docu mentation must be prepared for extraordinary with the arm's-length principle. This requires business transactions(see article 90, section 3 sentence 3). The definition of extraordinary busi ness transactions was not included in the gtc Section 3 of the decree law specifies what is con sidered an extraordinary business transaction isEe section 2, paragraph 3 of the explanatory notes Bundesratsdrucksache 583/03 See section 2, paragraph 2 of the explanatory notes Bundesratsdrucksache 583/03 See section 2, paragraph 3 of the explanatory note See Kroppen/Rasch, Tax Management Transfer Pricing Bundesratsdrucksache 583/03 2003. 188·12 January2004 Tax Notes international

tails of cost information of the entity applying the cost-plus method. B. The Aggregation of Transactions and Translation of Documents (Section 2) Section 2 of the decree law deals with general issues. Documentation must be in written or elec￾tronic form. Oral explanations are not sufficient. The taxpayer must keep and store the documenta￾tion so that it can be audited within an adequate time period. The documentation should enable a specialized tax auditor to determine which trans￾actions were conducted with related parties and whether they were at arm’s length. 11 The nature, content, and extent of the required documentation depend on the applied transfer pricing method be￾cause the relevant comparability measure (for ex￾ample, market prices, cost-plus margins, or resale minus margins) is contingent on the applied method. 12 The taxpayer must document its ratio￾nale for the chosen transfer pricing method, but it is not obligated to prepare documentation for more than one method. 1. Aggregation of Transactions Section 2, paragraph 3 of the decree law con￾tains requirements for the aggregation of transac￾tions, an issue that is important for practical reasons. The German tax administration’s ap￾proach traditionally focuses on single transac￾tions. Thus, in theory, every single transaction must be determined through documentation to comply with the arm’s-length standard. 13 How￾ever, preparing specific arm’s-length ranges for every transaction would impose an excessive bur￾den on the taxpayer. For simplification, taxpayers are allowed to summarize transactions that are economically comparable or interdependent. How￾ever, aggregation of transactions is permitted only if the aggregation is performed according to trans￾parent rules established in advance. Also, aggre￾gation is allowed only if third parties in their business dealings do not look only at single trans￾actions, but at bundles of transactions. This provi￾sion allows significant flexibility regarding aggregation. Finally, documentation of single transactions may not be necessary if the taxpayer applies transfer pricing guidelines that are in line with the arm’s-length principle. This requires that the guidelines have clear obligatory price-setting rules for the group companies that are actually followed. 14 2. Information Requests In general, taxpayers must provide the infor￾mation requested only during a tax audit. It is not necessary to provide the transfer pricing docu￾mentation when filing the tax return. Tax audi￾tors must give the details of the information they would like to review. The taxpayer then must pro￾vide the information within 60 days. However, ex￾traordinary transactions must be documented contemporaneously. Other documents can theo￾retically be prepared at the time the tax auditors request the information. Of course, taxpayers should consider the likelihood that the German tax authorities will ask for detailed information on transfer prices and consider their own ability to provide that information within 60 days. For midsize and large companies it is likely that the tax auditors will ask for transfer pricing docu￾mentation, so taxpayers should start the docu￾mentation process early. 3. Translation The German tax authorities have the right to receive relevant information written in German. As a general tax law principle, the authorities may ask for a translation only if it is reasonable. The interests of the tax authority must be bal￾anced with the taxpayer’s. If the tax auditor has foreign language skills it would be unreasonable to ask for extensive translations. The decree law allows taxpayers to ask the tax office up front if the documentation may be prepared in a foreign language. In practice, the flexibility of the Ger￾man tax auditors depends on the auditor. Some￾times the auditors are willing to review the taxpayer’s documentation in English. Given the volume of transfer pricing documentation, it is hoped that tax auditors will be careful with their requests for translations. C. Contemporaneous Documentation for Extraordinary Business Transactions (Section 3) According to the GTC, contemporaneous docu￾mentation must be prepared for extraordinary business transactions (see article 90, section 3, sentence 3). The definition of extraordinary busi￾ness transactions was not included in the GTC. Section 3 of the decree law specifies what is con￾sidered an extraordinary business transaction: 188 • 12 January 2004 Tax Notes International Practitioners’ Corner 11See section 2, paragraph 3 of the explanatory notes, Bundesratsdrucksache 583/03. 12See section 2, paragraph 2 of the explanatory notes, Bundesratsdrucksache 583/03. 13See section 2, paragraph 3 of the explanatory notes, Bundesratsdrucksache 583/03. 14See Kroppen/Rasch, Tax Management Transfer Pricing 2003. (C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content

Practitioners,Corner asset transfers during restructuring; The list of required documents is not very de- significant changes in functions and risks tailed, allowing taxpayers more flexibility to doc within the ument their transfer prices. It should be possible business transactions in connection with a for a taxpayer to choose a uniform approach glob change of the group,s business strategy with ally, which would bring it into compliance with the a significant impact on the setting of trans documentation requirements of the pertinent fer prices; and countries conclusion and amendment of significant 1. General Information on Shareholding per long-term contracts that have a substantial centages, Business Operations, and Organiza tional structure impact on the amount of income generated from the business with related parties. The required information on the taxpayer's These examples establish a broad definition of shareholding structure, business operations, and exceptional transactions. The last item, for in- organizational structure outlined in this subsec- stance, is not considered an extraordinary trans tion will provide the german tax administration action under German commercial law, but a with an overview of the general legal and econom- normal business event. The explanatory notes ic conditions in which the taxpayer conducts its business activities. The documentation on these state that the described cases do not constitute a items will mainly disclose which pa 90928- general and exhaustive definition because of the variety of possible fact patterns. 15 It should be ex- lated and the circumstances of the relationship. 18 pected that the german tax administration will 2. Business Relationships with related parties apply a broad definition of extraordinary busines Section 4, number 2 of the decree law requires transaction. For that reason taxpayers should pre the following from the taxpayer pare documentation for the cases mentioned in a description of its business relationships section 3, paragraph 2 with related parties According to section 3, paragraph 1, the docu an overview of the kind and extent of these mentation for extraordinary business transac lationships r example purchase of tions is deemed prepared contemporaneously if it goods, services, loans, guarantees, second is prepared within six months after the business ments, or cost-sharing year in which the transaction took place. That rule will afford some relief to taxpayers, because an overview of the contracts on which these they can prepare the documentation during year relationships are based; and 8 a list of the essential intangible assets the taxpayer owns, or those it uses or lends for D. Generally Required Documentation use to related parties in its business rela Section 4 of the decree law lists the documenta This information will give the german tax ad tion generally required. The explanatory notes to ministration an overview of the related-party the decree law call these items a catalogue of ne transactions and will enable the tax auditor to cessities. The list of necessary documentation identify the business relations that must be fur includes the following items ther examined in the transfer pricing context. 19It general information on shareholding per may be helpful for the taxpayer to provide charts centages, business operations, and organiza of the transactions tional structur The required list may be important for the tax business relationships with related parties; assessment because intangible assets are often function and risk analysis; and significant value drivers that are difficult to as transfer pricing analysis sign to the related parties For every transaction, the taxpayer should de onstrate the contractual relationships between the parties involved. It must be emphasised that arti- ee section 3 of the explanatory notes, Bundesrats- drucksache 583/03 See section 3, paragraph 2 of the explanatory notes 18See section 4, number 1 of the explanatory notes Bundesratsdrucksache 583/03 Bundesratsdrucksache 583/03 1'See section 4 of the explanatory notes, Bundesrats- See section 4, number 2 of the explanatory notes, Bunde- sratsdrucksache 583/03 Tax Notes international 12 January2004·189

Tax Notes International 12 January 2004 • 189 • asset transfers during restructuring; • significant changes in functions and risks within the company; • business transactions in connection with a change of the group’s business strategy with a significant impact on the setting of trans￾fer prices; and • conclusion and amendment of significant long-term contracts that have a substantial impact on the amount of income generated from the business with related parties. These examples establish a broad definition of exceptional transactions. The last item, for in￾stance, is not considered an extraordinary trans￾action under German commercial law, but a normal business event. The explanatory notes state that the described cases do not constitute a general and exhaustive definition because of the variety of possible fact patterns. 15 It should be ex￾pected that the German tax administration will apply a broad definition of extraordinary business transaction. For that reason taxpayers should pre￾pare documentation for the cases mentioned in section 3, paragraph 2. According to section 3, paragraph 1, the docu￾mentation for extraordinary business transac￾tions is deemed prepared contemporaneously if it is prepared within six months after the business year in which the transaction took place. That rule will afford some relief to taxpayers, because they can prepare the documentation during year￾end closing work. 16 D. Generally Required Documentation (Section 4) Section 4 of the decree law lists the documenta￾tion generally required. The explanatory notes to the decree law call these items a catalogue of ne￾cessities. 17 The list of necessary documentation includes the following items: • general information on shareholding per￾centages, business operations, and organiza￾tional structure; • business relationships with related parties; • function and risk analysis; and • transfer pricing analysis. The list of required documents is not very de￾tailed, allowing taxpayers more flexibility to doc￾ument their transfer prices. It should be possible for a taxpayer to choose a uniform approach glob￾ally, which would bring it into compliance with the documentation requirements of the pertinent countries. 1. General Information on Shareholding Per￾centages, Business Operations, and Organiza￾tional Structure The required information on the taxpayer’s shareholding structure, business operations, and organizational structure outlined in this subsec￾tion will provide the German tax administration with an overview of the general legal and econom￾ic conditions in which the taxpayer conducts its business activities. The documentation on these items will mainly disclose which parties are re￾lated and the circumstances of the relationship. 18 2. Business Relationships With Related Parties Section 4, number 2 of the decree law requires the following from the taxpayer: • a description of its business relationships with related parties; • an overview of the kind and extent of these relationships (for example, purchase of goods, services, loans, guarantees, second￾ments, or cost-sharing); • an overview of the contracts on which these relationships are based; and • a list of the essential intangible assets the taxpayer owns, or those it uses or lends for use to related parties in its business rela￾tionships. This information will give the German tax ad￾ministration an overview of the related-party transactions and will enable the tax auditor to identify the business relations that must be fur￾ther examined in the transfer pricing context. 19 It may be helpful for the taxpayer to provide charts of the transactions. The required list may be important for the tax assessment because intangible assets are often significant value drivers that are difficult to as￾sign to the related parties. For every transaction, the taxpayer should dem￾onstrate the contractual relationships between the parties involved. It must be emphasised that arti￾Practitioners’ Corner 15See section 3 of the explanatory notes, Bundesrats￾drucksache 583/03. 16See section 3, paragraph 2 of the explanatory notes, Bundesratsdrucksache 583/03. 17See section 4 of the explanatory notes, Bundesrats￾drucksache 583/03. 18See section 4, number 1 of the explanatory notes, Bundesratsdrucksache 583/03. 19See section 4, number 2 of the explanatory notes, Bunde￾sratsdrucksache 583/03. (C) Tax Analysts 2004. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content