On 14 July 2021, the tax authorities published new transfer pricing guidelines – and with them, a number of regulations concerning the Preparation of transfer pricing documentation set out in black and white for the first time. In the latest episode of „hsp live at 11“, Paul Liese and his guest Tobias Polka (ADKL) take a closer look at the new principles. What exactly is changing, and what consequences can advisory law firms and their clients expect?
There are two reasons why the tax authorities are suddenly becoming so active. Firstly, there is international pressure. Secondly, the German tax authorities are trying to keep up with international standards and stake out their territory. Paul asks whether it is in companies’ best interests to draw up transfer pricing documentation now for the next three years – or should documentation be prepared every year?
Tobias replies that transfer pricing is the area where the tax authorities are most assertive. Companies therefore need to be extremely careful. It starts with international pricing. Even at this stage, the tax authorities want to intervene and be able to understand the rationale behind the pricing. If someone commissions transfer pricing documentation years down the line, Tobias, speaking from a consultant’s perspective, is simply trying to save a situation that has already gone wrong. In other words: decisions should be documented at the time they are made – not years later.
Document it straight away rather than waiting
Up until now, companies have only addressed transfer pricing documentation when it has been requested. According to Tobias, this will no longer be possible in future. Prices can be used to steer and influence business units. For example, prices can influence the success or failure of a sales campaign. Here, Tobias mentions the popular tactical ploy whereby people in management roles tend to factor in various imputed costs so that the sales team does not sell at too low a price.
The OECD, however, states that costs and revenues along the value chain must be allocated according to the functions and risks actually undertaken. Establishing internal guidelines can help to streamline processes and documentation. If, for example, specific costs are set for marketing, documentation is only required when there is a deviation from these.
Key changes in detail
The new guidelines issued by the Federal Ministry of Finance (BMF) state that the comparability analysis – and thus the question of whether the price agreed is at arm’s length or not – relates not to the time at which the facts of the case occurred, but to the time of the agreement. It is therefore important to have a VPD in order to demonstrate that the agreement was reached on the basis of the information available at that time.
As no date is specified in the BMF letter, the principles apply with immediate effect. This also applies to all cases that are currently pending. Anyone currently preparing transfer pricing documentation should apply the content of the letter, regardless of which years are being documented. The current principles supersede the previous ones without replacement, for example those from 1983 or 2005. Other guidelines remain explicitly in force, for example the BMF letter on the secondment of employees – in particular regarding the transfer of functions – or the BMF letter on arbitration and mutual agreement procedures, which is essential for avoiding double taxation.
OECD guidelines are being implemented
Furthermore, the latest letter states: ‘In Germany, the OECD Transfer Pricing Guidelines apply by analogy.’ This means that the guidelines established by the OECD and the member states are now finally to apply in Germany as well. This means that, in future, transfer pricing documentation prepared in Germany will also be understood internationally – provided the translation is accurate.
The tax authorities wish to allocate profits to where the costs are incurred. In addition, the tax authorities have set out how an adjustment may be made if no arm’s-length prices have been agreed. Various adjustment rules compete with one another in this regard. In this context, the concept of a hidden profit distribution always takes precedence over Section 1a of the Income Tax Act (EStG). Only if a particular set of facts cannot be subsumed under the concept of a hidden profit distribution does Section 1a EStG apply. In this respect, there is a slight deviation from the OECD Guidelines.
Hybrids are a thing of the past
Another significant change concerns the previous classification of companies. The Federal Ministry of Finance (BMF) had defined three types: the ‘strategy-driven company’, the ‘routine company’ and the ‘hybrid company’, which represented a combination of the first two types. The OECD Guidelines do not recognise ‘hybrids’, and the BMF circular now follows this simplified definition. It is now only possible to distinguish between ‘strategic entities’ and ‘routine entities’. This raises the question of how to deal with hybrid entities.
Furthermore, the analysis of functions and risks is being expanded. Previously, there was a checklist on which taxpayers would tick the functions they performed. Over the last two or three years, this has come under increasing scrutiny during tax audits. Taxpayers must now demonstrate that there are sufficient staff to carry out these functions – including a specific list of staff members. This has even gone so far as to require proof of training to demonstrate that the individuals in question are actually capable of performing the assigned functions to a professional standard.
Care is key
When it comes to legal disputes, the arguments are never about prices, but always about procedural errors. According to Tobias, figures are never the critical issue; rather, it is things such as choosing the right method, the correct presentation of the value chain – or the appropriate response to the facts of the case. Transfer pricing is not something that should be dealt with as an afterthought. After all, according to Tobias, this is the area that poses the greatest risk in a tax audit. However, if you take transfer pricing seriously, you give greater consideration to documentation and pricing when initiating business transactions.
Next week’s guest is Stefan Groß from the Munich-based law firm Peters, Schönberger & Partner (PSP). The tax adviser is one of Germany’s leading experts on GoBD. The livestream will focus on nothing less than the future of tax consultancy.
German 
English