1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?
In Germany, specific requirements for transfer pricing documentation have been enacted since 2003. Pursuant to s. 90, para. 3 of the German General Tax Code (Abgabenordnung), the taxpayer must prepare transfer pricing documentation concerning all cross-border transactions with related parties. Furthermore, the taxpayer must deliver supporting evidence for such transactions. Therefore, inter-company transactions generally have to be evidenced by written contracts in order to be accepted by the German tax authorities. These contracts must be concluded before the respective transaction is executed, and their terms must be complied with in full.
Besides this, for exceptional business transactions (e.g. internal restructurings or the conclusion of long-term agreements) documentation has to be prepared contemporaneously, which is defined to mean within six months of the conclusion of the fiscal year at the latest. This also applies in the case of a transfer of business functions out of Germany (s. 1, para. 3 of the German Foreign Tax Act (Außensteuergesetz); regulations thereon dated 12 August 2008, BGBl I, 2008, p. 1680; administrative decree of 13 October 2010, BStBl I, 2010, p. 774).
Less strict transfer pricing documentation requirements may apply in Germany, but only where:
- The value of all transactions concerning goods and products with all related parties does not exceed the amount of EUR 5 million per year; and
- The sum of all remuneration for all (other) services does not exceed an amount of EUR 500,000 per year.
However, even in such cases, documents (e.g. contracts), information and explanations have to be provided to the tax authorities upon request. Documentation of exceptional business transactions has to be prepared, but the transfer pricing documentation for general (ongoing) inter-company transactions is less formal.
2. What is the content of the documentation that must be prepared?
On the basis of s. 90, para. 3 of the German General Tax Code (Abgabenordnung), the German Ministry of Finance has enacted a decree (GAufzV, dated 13 November 2003, BStBI I, 2003, p. 2296) providing details as to what documentation is required. Further details are included in the 2005 Administrative Guidelines (Verwaltungsgrundsätze- Verfahren of 12 April 2005, BStBI I, 2005, p. 570). In general, the documentation must be based on the single transaction in question, but it is permissible to group comparable transactions if such grouping is determined before the occurrence of the transaction.
Under s. 90, para. 3 of the German General Tax Code (Abgabenordnung) and based on the above-mentioned decree, each separate German entity has to provide the following:
- General information about the group and ownership structure, the business and group organization, i.e. its legal and economic basis (facts and circumstances). This may include legal structure charts for the group, corporate details of related parties or permanent establishments, organizational and operative group structure charts, descriptions of business type (e.g. distribution, manufacturing services, etc.), business strategy, market situations, major competitors, an overview of inter-company contracts, information as to any set-off of benefits, a summary of any tax rulings, advance pricing agreements or mutual agreement procedures, financial statements, or the calculation of financial ratios;
- Information as to business relations with related parties, i.e. the type and extent of the business conducted with related parties (e.g. purchases, sales services, financing, and other use of assets), including an overview of flows of goods and services, all relevant agreements concluded (e.g. on goods, services, R&D, licenses, leases, loans), an overview of intangible assets owned by the taxpayer and licensed to related parties, information on how contractual agreements have actually been carried out, etc.;
- An analysis of functions and risks, and a description of the value production chain, including the function and associated risk undertaken by the taxpayer and related parties in respect of the particular business transaction, material assets, business strategy, the relevant market and competition;
- Analysis of transfer pricing policy, including a description and explanations of the appropriateness of the chosen transfer pricing method, explanation of the appropriateness of the transfer prices applied, calculation records, data about comparable third parties (comparable search), price adjustments and reasons for losses.
a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?
Pursuant to s. 90, para. 3 of the German General Tax Code (Abgabenordnung), the taxpayer must deliver transfer pricing documentation with respect to all cross-border transactions with associated enterprises or transactions outside Germany. This is subject to an exemption where the value of all associated party transactions concerning goods and products does not exceed EUR 5 million per year, and the sum of all remuneration for all (other) services does not exceed EUR 500,000 per year.
b) What is the definition of “associated enterprises” for the purposes of this requirement?
A definition of “associated enterprises” is included in s. 1 para. 2 of the German Foreign Tax Act (Außensteuergesetz). Pursuant to this, the term associated party (related party) may – in particular – be based on a direct or indirect shareholding of at least 25%, a dominating influence, any other possible influence, or it may be based on identical interests or acting in concert.
c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?
German tax legislation on transfer pricing and the decrees issued by the German tax authorities do not explicitly refer to the Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the EU (EU TPD). Therefore, the EU TPD cannot formally be chosen as an alternative to local German transfer pricing rules.
In particular, the German rules do not refer to a division between (i) a master-file containing common standardized information relevant for all EU group members and (ii) country-specific documentation. However, in practice such a split is generally accepted by the tax auditor, as long as the documentation as a whole includes all relevant information required under German transfer pricing documentation rules. Moreover, German transfer pricing regulations do not prevent the taxpayer from submitting separate reports as described above.
Furthermore, the content of country-specific documentation as set out in the EU TPD is basically also required under German law. However, some specific German rules (e.g. further details) may need to be observed in addition.
d) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?
According to s. 90, para. 2 of the German General Tax Code (Abgabenordnung), the taxpayer has the burden of delivering supporting evidence for all cross-border transactions or transactions outside Germany. This applies to all taxpayers subject to tax in Germany, irrespective of their location. The taxpayer is obliged to use all existing legal and practical options to achieve this. The requirement extends to requesting information from associated parties, if this is relevant for German tax purposes.
Besides this, the taxpayer must keep all the records and documentation (including electronic data) of the German entity in Germany, unless an exemption applies (e.g. records of a foreign branch are to be maintained at the premises of such branch based on the relevant foreign tax law), or the German tax authorities have agreed an exemption, e.g. allowing the taxpayer to maintain documents outside Germany (ss. 146 and 148 of the German General Tax Code – Abgabenordnung).
e) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?
According to s. 90, para. 3 of the German General Tax Code (Abgabenordnung) and the GAufzV (BStBl I, 2003, p. 2296), the taxpayer is obliged to collect, to the extent possible, comparable internal and publicly obtainable data supporting the transfer pricing method applied. In particular, the taxpayer has to document comparable data resulting from its own third-party transactions, e.g. pricing, general terms and conditions, cost quota, profit margin, cross margin and net margin. This is relevant for testing the transfer prices resulting from the resale price method or cost-plus method. Furthermore, such comparables become relevant in connection with cost sharing agreements, and the determination of interest rates or license fees.
If external (publicly obtainable) data is used, sufficient and comparable data has to be available in a database, e.g. Amadeus, which is generally accepted by the German tax authorities. Such data may be based on regional benchmark studies. However, the most important factor is that the data should be comparable to the taxpayer’s particular case. This may not always be the case. Therefore, according to the 2005 Administrative Guidelines (Verwaltungsgrundsätze- Verfahren of 12 April 2005, BStBl I, 2005, p. 570, No. 184.108.40.206), comparable research based on a digital data bank is not mandatory in all cases.
Furthermore, the German tax authorities state in No. 220.127.116.11 of their 2005 Administrative Guidelines that a calculation based solely on database research is not sufficient for determining the appropriate transfer price. The specific facts and circumstances of the underlying case have to be considered. External database information generally does not provide for such an individual approach, and the proper determination and documentation of transfer prices requires more detailed consideration.
If electronic database research is carried out, the taxpayer must document all data retrieved, as well as the research process by which the data was extracted. The German tax authorities must be able to review the whole research process, which also includes access to electronic data for carrying out their own alternative calculations (s. 147 paras. 5 and 6 of the German General Tax Code – Abgabenordnung). In particular, the function of the different entities included in the database needs to be comparable to the function of the tested entity. Furthermore, the German tax authorities often expect the products to be comparable as well as the functions. In practice, data is often averaged over three years in order to eliminate high variances.
f) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?
Generally, all documentation has to be in German. A translation of transfer pricing documentation has to be provided within a time frame of 60 days, unless the tax authorities have accepted the filing of the documents in another language (e.g. English).
3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?
Under s. 90, para. 3 of the German General Tax Code (Abgabenordnung), taxpayers have to submit appropriate transfer pricing documentation (which must not be essentially unusable) within 60 days of a request generally made by the tax authorities during a tax audit. It is not necessary to submit such documentation when filing tax returns. The time frame of 60 days is reduced to 30 days for exceptional business transactions (e.g. restructuring or change of sales systems) or similar matters of major importance; an extension may only be granted upon application, where good reason is shown.
4. In the event that the documentation is not provided within the applicable timescale, or is incomplete, do documentation-related penalties apply in your jurisdiction? If so, please detail the penalties and the circumstances in which they do and do not apply.
The German tax authorities are allowed to charge penalties if the documentation requirements are not fulfilled. Therefore, the taxpayer has to pay a penalty of EUR 5,000 if the documentation has not been produced or if the documentation is materially unusable. However, the penalty has to be 5% to 10% of the additional income that is assessed as a result of the non-production of the records, if this amount exceeds EUR 5,000. If proper documentation is delivered after the 60-day period or the 30-day period, a minimum penalty of EUR 100 per day will be due, up to EUR 1 million.
Such penalties do not qualify as taxes and are not tax deductible. The following table provides an overview of the penalties that can be imposed:
No or unusable documents provided
5 – 10% of the income increase
Late filing of usable documents
at least EUR 100 per day of delay
5. Does the absence or incompleteness of documentation reverse the burden of the proof as regards the arm’s length character of the transactions?
If all transfer pricing documentation requirements under German law are fulfilled and appropriate transfer prices have been used, no adjustment is possible by the tax authorities. In such a case, the burden of proof is on the tax authorities if they intend to change the income calculation.
However, if this is not the case, the German tax authorities may assume that the taxpayer’s income taxable in Germany is higher than the amount the taxpayer declared (s. 162 para. 3 of the German General Tax Code – Abgabenordnung). Thus, if the documentation is insufficient, the burden of proof is shifted to the taxpayer. The tax authorities are allowed to carry out their own calculations and to adjust the tax basis. If there is a range of prices, the tax authorities may choose the point of the price range that is most disadvantageous to the taxpayer.
6. In the event that the tax authorities (i) impose documentation-related penalties and (ii) make a transfer pricing reassessment, does the imposition of documentation-related penalties prevent the taxpayer from initiating any mutual agreement procedure which may be contained in an applicable tax treaty (or, for EU countries, the procedure contained in the EU Arbitration Convention) with a view to eliminating any double taxation resulting from the transfer pricing reassessment?
Many of the double tax treaties concluded by Germany include an equivalent of Art. 25 of the OECD Model Convention which describes the mutual agreement procedure. Under this procedure, two treaty partners can resolve discrepancies in the application of the double tax treaty. In practice, most cases deal with different interpretations of Art. 9 and the application of the arm’s length principle. Alternatively, in EU cases, the taxpayer can apply for a procedure under the EU Arbitration Convention.
However, the tax authorities have indicated in a published letter that the mutual agreement procedure will not be commenced if the taxpayer does not fully comply with its duty to provide information to the tax authorities (BMF of 13 July 2006, BStBl I, 2006, p. 461). Therefore, if no sufficient transfer pricing documentation is available, this can prevent the German taxpayer from a mutual agreement procedure or a procedure set forth in the EU Arbitration Convention.