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1. In your jurisdiction, what are the legal bases for eliminating double taxation further to a transfer pricing reassessment (European Arbitration Convention, mutual agreement procedures provided for by tax treaties)? In addition to the procedures set forth by such tax treaties, is there any other (formal or informal) domestic procedure in your jurisdiction?
In Germany, the legal bases for eliminating double taxation due to a transfer pricing reassessment are either the mutual agreement procedure agreed in a tax treaty, or the European Arbitration Convention. It is possible to directly apply the tax treaty clause or the European Arbitration Convention, as both have been approved by local law, and sec. 2 German General Tax Code (Abgabenordnung) provides for a primacy of international law over national law.
As most of the tax treaties concluded by Germany include a clause on a mutual agreement procedure, the tax treaty may be applied in order to eliminate the double taxation.
To the extent that the other country is located within the European Union, the European Arbitration Convention can alternatively be applied in case of a transfer pricing reassessment resulting in a double taxation.
Consequently, as Germany is part of the European Union and has concluded more than 90 tax treaties, a bilateral procedure (or even multilateral procedure in case of the European Arbitration Convention) should be available in most cases.
In practice, a unilateral procedure is generally not carried out by the German tax authorities. Based on an explanatory document dated 5 October 2006, which has been issued in connection with advanced pricing agreements, it is stipulated that agreements on transfer pricing should not be granted to a German entity based on a unilateral procedure, if a tax treaty provides for a mutual agreement procedure. This rule seems to apply in general and to all procedures concerning cross-border transfer pricing issues. Therefore, it has to be assumed that a unilateral procedure cannot be achieved with the German tax authorities if a tax treaty including a mutual agreement procedure clause is available (which should very often be the case).
2. In addition – as the case may be – to the European Arbitration Convention, did your jurisdiction sign tax treaties with other States including an arbitration procedure? If yes, can you give the list of such States?
An arbitration procedure with the German tax authorities can be applied, in particular, based on the European Arbitration Convention. Besides this, however, some of the tax treaties concluded with Germany provide for an arbitration procedure as well. Such countries, which are partially located in the European Union, i.e. alternatively the European Arbitration Convention can be applied, are as follows:
German Tax Treaties with Arbitration Procedure
European Arbitration Convention for the Peaceful Settlement of Disputes; alternatively arbitration procedure
3. In your experience, in your jurisdiction, how long does it take generally to eliminate the double taxation under the European Arbitration Convention and/or mutual agreement procedures set forth by tax treaties (and/or the domestic procedure if it exists)?
In case of a mutual agreement procedure, German statistics show a broad range of time relating to the duration of a mutual agreement procedure. Depending on the calendar year concerned, the average may vary between 24 and more than 27 months. However, the total range may be between “very fast” and up to four or five years. Partially, so-called “preventing requests” negatively influence the duration of the procedure, as some procedures are only opened as a precaution.
The German entity seeking for a mutual agreement procedure may positively influence the duration of the procedure by filing an application as soon as possible and by submitting full information and documentation as requested under the relevant application.
4. In your jurisdiction, what are the starting point and time limit to initiate a procedure to eliminate double taxation resulting from a transfer pricing reassessment?
Based on Guidelines issued by the German tax authorities, the application for a mutual agreement procedure should be applied as soon as the detrimental double taxation becomes obvious. It is not necessary to wait until the tax assessment notice has been issued. In practice, it is recommended to also inform the tax auditor about the planned application for a mutual agreement procedure if the double taxation seems to become the result of an ongoing tax audit.
For calculating any time limit, generally the date of receiving the relevant taxation measure (in general tax assessment notice) is decisive. In case the tax treaty does not provide any time limitation, the German tax authorities do not accept any application if a time frame of four years is exceeded.
Considering the fact that in the other country the time limitation may be calculated differently, it is recommendable to initiate any mutual agreement procedure as soon as possible, in particular if it becomes obvious that no agreement can be reached with the tax auditor.
Generally, the time frame set in a tax treaty is in line with the OECD Guidelines, i.e. the time frame is three years. However, in some cases the time limit is only two years (e.g. Belgium, Indonesia, Italy, Canada, Pakistan, Portugal and Venezuela). Concerning the US tax treaty, the time frame is four years.
5. If a reassessment is issued by your tax authorities, which State must receive the application for the international procedure to eliminate double taxation 1 The terms “international procedure to eliminate double taxation” mean the European Arbitration Convention or a mutual agreement procedure set forth by a tax treaty. (your State? the other State concerned? both States?)
If a tax reassessment is issued by the German tax authorities, the application for a mutual agreement procedure can be filed by the German entity or by the entity of the other State. In case a double taxation relates to the parent company and a subsidiary, it is the suggestion of the German tax authorities that the application is filed in the country of the parent company. However, this is not mandatory.
In practice, it is recommendable to file an application in all States concerned.
6. What are the formal conditions to initiate an international procedure to eliminate double taxation? Is there a list of documents to provide? To which department of the tax authorities (name, address) must the request be sent?
German rules for a mutual agreement procedure require that an application is filed with the responsible tax authorities. Furthermore, the application has to be filed within the applicable time frame, which is determined by the tax treaty or European Arbitration Convention. If no time frame is set, an application has to be filed within four years at the latest, generally starting after the tax assessment notice resulting in the double taxation has been received.
In their explanatory document dated 13 July 2006, the German tax authorities have included a list of documents and information to be provided in order to initiate the mutual agreement procedure. In particular, this includes a detailed description of facts and circumstances, a description of the transactions between the related parties, copies of tax assessment notices, tax audit reports and other documents being relevant in the underlying case. Furthermore, information on administrative and judicial proceedings already initiated, the reasons why the taxation should not be in line with the underlying tax treaty or European Arbitration Convention and why a double taxation is given have to be provided.
Any application has to be submitted to the following address: Bundeszentralamt für Steuern (Federal Central Tax Office) An der Küppe 1 53225 Bonn
The Federal Central Tax Office (Bundeszentralamt für Steuern) is a “superordinate higher federal authority” in the jurisdiction of the German Federal Ministry of Finance. The German Federal Ministry of Finance has transferred the responsibility concerning the implementation of mutual agreement procedures to the Federal Central Tax Office.
7. In which cases would the competent authority of your jurisdiction refuse to engage/participate to the international procedure to eliminate double taxation?
The German tax authorities would generally not agree on a mutual agreement procedure if the requirements, in particular concerning a time limit set in the tax treaty or in the European Arbitration Convention are not met. Furthermore, a mutual agreement procedure would not be implemented if a double taxation is the result of a non-compliance with procedural rules which have not been fulfilled, e.g. non-compliance with preclusive period. Besides this, a mutual agreement procedure can generally not be initiated if a criminal tax proceeding has been opened.
Moreover, it is necessary that the taxpayer has not waived his/her/it rights to apply for a mutual agreement procedure, e.g. in the course of an agreement with the tax auditor concerning a solution of several tax audit findings.
8. Is tax collection suspended during the procedure?
During a mutual agreement procedure, the German entity has generally 2 options:
It may be applied for tax collection suspension during the procedure. However, the German tax authorities may ask for a guarantee. To the extent that the tax has to be paid later, an interest of 6% per year would become due.
Alternatively, the tax assessed may be paid. In case of a future refund, interest of 6% per year would be paid in addition to any tax refund.
Regarding the calculation of the above-mentioned interest, it should be noted that the interest period concerning taxes on income generally starts only 15 months after the end of the relevant calendar year under dispute.
9. Assuming the procedure results in an agreement on a way to cancel double taxation, how is generally such agreement implemented in your jurisdiction?
After a mutual agreement procedure has been successfully closed, the German tax authorities would issue adjusted tax assessment notices concerning the relevant fiscal years. To the extent that an additional tax payment becomes due, interest of 6% per year is generally assessed in addition. However, in case of a tax refund, such tax refund is generally increased by interest of 6% per year.
To the extent that the transfer pricing reassessment also results in the application of a withholding tax, e.g. based on a hidden dividend distribution, any withholding tax refund or reduction cannot be part of the mutual agreement procedure in Germany. Instead, the procedure concerning a refund or reduction of withholding tax has to be initiated in addition, which, however, requires that a reduction or exemption of withholding tax has finally been rejected by the other State or the application was made at least two years before.
Based on German law (sec. 175a German General Tax Code/Abgabenordnung), the relevant tax assessment period does not expire before one year after the result of the mutual agreement procedure has become effective. This ensures that the possibility to adjust a German tax does not expire as long as the mutual agreement procedure has not been settled.
10. In your jurisdiction, is it possible to engage concomitantly an international procedure to eliminate double taxation and litigation in front of courts? If yes, is it necessary at some stage to abandon the litigation in order to conclude/finalize the international procedure?
In Germany, it is possible to open an international mutual agreement procedure in parallel to a local procedure, e.g. administrative or judicial proceeding against a tax assessment. In practice, however, the local procedure is interrupted as long as the international procedure has not been finalized.
Under German law, any assessment, even a court decision, may become subject to an arbitration procedure and may be adjusted if this is required under the solution found through the mutual agreement procedure or the arbitration procedure (sec. 175a German General Tax Code/Abgabenordnung, sec. 110 (2) Code of Procedure of Fiscal Courts/Finanzgerichtsordnung).
11. Any other interesting aspect not addressed above?
Based on statistics of the German tax authorities, there are relatively few mutual agreement procedures concerning transfer pricing issues applied and initiated by Germany, compared to the total amount of mutual agreement procedures and considering the importance of transfer price adjustments in practice. For example, in 2012 about 77 (out of 277) and in 2013 about 60 (out of 267) new procedures were opened in relation to transfer pricing issues. However, the likelihood that the procedure will be implemented and finally be concluded is relatively high. Therefore, it seems to be worthwhile to go for a mutual agreement procedure if a substantial double taxation has occurred and the company wishes to eliminate such double taxation.