German Tax & Legal News - November 2004

Extract

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German Tax & Legal News - November 2004

PwC Reports

Draft guidelines on tax audit procedures on transfer pricing issues

Introduction

The Ministry of Finance has issued comprehensive draft guidelines to complement the German legislation on transfer pricing documentation. These guidelines provide the Ministry's interpretation of the new legislation with comments on a wide range of transfer pricing issues. These are summarised below and described in more detail under 'Detailed Provisions'.

Comments on the draft can be submitted until 20 November 2004. After this date, the Ministry will finalise and pass the guidelines.

It was also announced that the acceptability and application of transfer pricing methods will be the subject of separate guidelines, still to be issued.

Summary of the Guidelines

Unlike the decree on documentation, the guidelines have no legislative background and are therefore binding for the tax auditors, but not for the German tax courts. Taxpayers, therefore, may chose to disagree but would be wise to take the guidelines into account when planning the strategy for their transfer pricing documentation and for their next tax audit.

The main issues dealt with in the draft are as follows:

The different documentation requirements are outlined for fiscal years starting on or before 31 December 2002 (old rules) and after this date (new rules). It is acknowledged that under the old rules, the taxpayer does not have to prove the adequacy of his transfer pricing.

The guidelines provide information on how to document and evidence the serious endeavours, which, according to the new rules, have to be made by the taxpayer in applying the arm's length principle.

Benchmarking based on databases is accepted under restrictive conditions and narrowing of the range (i.e. use of the Interquartile Range) may be required.

A CPM based approach is explicitly rejected, as it is assumed that it uses net profits ...

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