According to section 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 being 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 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 (sections 146 and 148 of the German General Tax Code – Abgabenordnung).
f) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?
According to section 90, para. 3 of the German General Tax Code (Abgabenordnung) and the GAufzV, 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, gross 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/Orbis, 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 needs to be comparable to the taxpayer’s particular case. This may not always be possible. Therefore, according to the 2005 Administrative Guidelines (VerwGr-Verfahren of 12 April 2005, BStBl I, 2005, p. 570, No. 188.8.131.52), comparable research based on a digital database is not mandatory in all cases.
Moreover, the German tax authorities state in No. 184.108.40.206 of their 2005 Administrative Guidelines that a calculation solely based 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 (section 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.