Transfer Pricing Documentation

Status quo

Transfer pricing and its documentation is a topic of increasing relevance in tax audits when the company does business with related parties/ entities abroad (cross-border business transactions).

When the Tax auditor requests the transfer pricing documentation the deadline to provide the documentation is 60 days for ordinary transactions and 30 days for extraordinary transactions. When the transfer pricing documentation is not (yet) prepared it will be most likely submitted delayed or not at all. Thereby the taxpayer breaches his obligation to cooperate and this may be subject of penalties.

Therefore the transfer pricing documentation can be considered as a protection from penalty estimations or penalty surcharges.

Based on our know-how from longtime consulting of multinational and medium-sized enterprises as well as working for the tax authorities we can provide a needs based approach with focus on the audit relevant topics.

Submission deadlines

In cases of ordinary business transactions the transfer pricing documentation must be submitted on request within 60 days.

In cases of extraordinary business transactions the transfer pricing documentation must be submitted on request within 30 days. In addition it must be prepared contemporaneously. Extraordinary business transactions are in particular assumed in the cases of long-term contracts, restructurings, function and risks changes as well as in changes in the business strategy and cost allocation agreements. Documentation is deemed to be prepared contemporaneously if it is prepared within 6 months after the end of that fiscal year in which the business transaction took place.

Penalties

Delayed submission:

  • Surcharge 5-10% of the income increasement, at least 5.000 €
  • Reduction of tax authorities‘ obligation to investigate

No submission, unusable or delayed prepared documentation:

  • Income increasement (penalty estimation) as it will be refutably assumed that the income was declared too low; price ranges can be used to the disadvantage of the taxpayer
  • In addition Surcharge 5-10% of the income increasement, at least 5.000 €
  • Reduction of tax authorities‘ obligation to investigate

Related business transactions abroad

The transfer pricing documentation is based on a business transaction with a related party/ entity abroad (cross-border business transaction). Parties/ entities in particular are related if there is a shareholding of at least 25% or controlling influence could be exercised (related company).

Structure and content of the transfer pricing documentation

Under sec. 90 para. 3 AO and sec. 1-5 GAufzV the transfer pricing documentation includes the company-based recording of the cross-border business transaction with related companies (factual documentation) as well as the underlying transfer prices in the context of the  arm's length principle (arm's length documentation)*.

Factual documentation

  • General information
    • Group structure
    • Shareholdings
    • Organizational structure
    • Business description (products, customers, suppliers)
  • Business transactions
    • Kind and extent (e.g. transactions with goods, services, financings, licenses, cost allocation)
    • Intellectual property
    • Intercompany contracts
  • Functional- and risk analysis
    • Functional- and risk analysis
    • Description of the transactions, functions performed and risks born as well as contract terms
    • Assets used
    • Market and competition conditions
    • Value chain /-contribution

 

Arm's length documentation (transfer pricing analysis)

  • Functional- and risk analysis
  • Information records for transfer pricing determinations
  • Transfer pricing method employed, its application and appropriateness
  • Calculation basics
  • Comparable data

*For smaller companies (goods transactions < 6 Mio. € and other services < 0,6 Mio. €) under sec. 6 para. 1 GAufzV the documentation requirements are deemed to be fulfilled by providing information and by submitting documents; in this case a transfer pricing documentation as described above is not required.

Transfer prices and arm's length principle

For the transfer pricing documentation the arm's length documentation is essential to show if the income determination and thus the German taxation is based on arm's length transfer prices in the meaning of the arm's length principle according to sec. 1 para. 1 sent. 1 AStG.

Transfer prices

Transfer prices are prices for cross-border business transactions with related companies which are used for fiscal purposes to determine taxpayers income.

To ensure a reasonable income allocation transfer prices must be compared with prices for comparable business transactions between independent third parties.

Arm's length principle

According to the OECD the arm‘s length principle is the global standard and the basis to determine transfer prices for fiscal purposes.

Taxpayers income resulting from cross-border transactions with related companies shall be consistent with income which would be earned by independent third parties.

Burden of proof regarding the arm‘s length nature

In principle for an income increase (determination of an arm‘s length price) the burden of proof lies with the tax authorities. Because of the cross-border transactions the taxpayer has a higher obligation to cooperate; in this connection the transfer pricing documentation especially must show the serious effort that the transfer prices are at arm's length. None or a transfer pricing documentation whichsubstantially is of no use or delayed states a breaching of the obligation to cooperate and leads to the disadvantage of the taxpayer to a reversal of the burden of proof and allows the tax authorities to estimate an income increase (penalty estimation).

Obligation to submit: On tax auditors‘ request transfer pricing documentation shall be submitted within the 60 or 30 days deadline and where applicableshall be prepared contemporaneously.

Summary

Protection: Transfer pricing documentation may reduce the risk of penalties like income increasements (penalty estimations) and penalty surcharges (e.g. in cases of a delayed submission up to 1.000.000 €).

In tax auditors‘ focus: Transfer pricing topics are getting more and more focused in tax audits and getting adjusted in the lack of documentation.

Services

Our services include i.a.:

  • Preparation of transfer pricing documentation in German and/ or English language (entire preparation)
  • Support by preparing the transfer pricing documentation (partly preparation)
  • Update of a prior transfer pricing documentation for purposes of the current tax audit
  • Matching an existing, under foreign law and in English language prepared transfer pricing documentation with German requirements
  • Subject-specific translation of transfer pricing documentation (EN-DE as well as DE-EN)
  • Support in tax audits and defending an existing transfer pricing documentation
  • Preparation of statements and replyingtax auditors‘ requests and questions
  • Module for preparing the transfer pricing documentation by yourself (building kit)

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