The German Ministry of Finance (BMF) has published Administrative principles 2020 (Verwaltungsgrundsätze 2020), which contains updated guidance on audits/examinations of transfer pricing between related parties and the duty of taxpayers to cooperate as per Section 90 of the General Tax Code (GTC), as well as the estimation of taxable income and surcharges as per Section 162 of the GTC.
One of the key areas covered in Administrative Principles 2020 is the transfer pricing documentation requirements as per Section 90(3) of the GTC. Among other things, this includes the requirements for taxpayers with cross-border transactions with related parties to prepare a Master file and Local file as per the 2017 OECD Transfer Pricing Guidelines. With respect to Master file preparation, it is clarified that preparation is required where a company is part of an MNE group and turnover in the previous year was at least EUR 100 million including from domestic and foreign sales with related and third parties. In general, the documentation should be submitted in German, although a request may be made for submitting in another language (especially English). The ability to submit in another language applies for the Master file, in particular. In any case, requests for submitting in another language are subject to the condition that the tax authority may request a German translation, which must be submitted within a reasonable timeframe.
Further, it is provided that factual documentation must be drawn up on the nature, content, and extent of business relations with related parties, as well as of the economic and legal framework conditions. In this regard, an overview by activity type is provided on information that may be of particular importance, including for R&D, manufacturing, sales, corporate management, financing, and insurance activities. For this purpose, reference is made to the 2017 OECD guidelines, including that the documentation must provide an expert third party with a basic understanding of the value added within the group of companies within a reasonable period of time, including the business model and the functional and risk profile of a transaction.
Guidance is also provided on the adequacy of documentation. This includes that documentation must demonstrate the serious efforts of the taxpayer to comply with the arm's length principle for the purposes of taxable income assessment. Further, the documentation must reflect the considerations made and must be made available within a reasonable period of time. This includes justification of the transfer pricing method applied and the comparable prices used. Guidance is also provided on the use of other methods by the tax authority if determined to be more appropriate, as well as the use of comparable data and other matters related to the adequacy of documentation.
With respect to the estimation of taxable income (tax bases) and surcharges, Administrative Principles 2020 provides that the tax authority is entitled to make an estimation if the obligations to cooperate pursuant to Section 90 are not complied with. It is provided that, in principle, the tax authority bears the burden of establishing the facts that constitute or justify a tax claim increase. However, where a taxpayer fails to meet their obligations to cooperate and provide information, the burden on the tax authority to investigate is reduced accordingly, along with a reduction in the standards of evidence for making an estimate. The criteria and extent of the reduction in this regard cannot be defined in general and is determined on a case-by-case basis. In any case, an estimate must be based on facts closest to reality and the results must be conclusive, economically possible, and reasonable.
Lastly it is provided that the transfer pricing guidance provided in the BMF letter of 12 April 2005 (IV B 4 - S 1341 - 1/05; BStBl 2005 I s. 570) shall continue to apply, except for questions relating to the application of Sections 90 and 162 of the GTC.
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