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).