There are a number of pitfalls to be aware of when documenting transfer pricing. Christian Schoppe, an experienced digital tax adviser, is an expert in transfer pricing and international tax law. Speaking to Paul Liese, he discusses the key points that beginners in particular should bear in mind when it comes to transfer pricing documentation and transfer pricing. He also clarifies the question of how to prepare documentation based on taxonomy and technical guidance on transfer pricing documentation can help. Experiences from tax audits are also discussed.
Christian is a tax adviser and describes transfer pricing as his hobby. What he finds particularly fascinating is that, in tax law, decisions are usually a matter of right or wrong. With transfer pricing, however, there is a range of possibilities, and the issues are resolved by the burden of proof. „I’d actually be a novelist, but it doesn’t pay enough,“ Christian says with a smile.
The very first question touches on when business owners should draw up their transfer pricing documentation. According to Christian, most of them only do so when a tax audit is just around the corner. „Which isn’t a wise move,“ comments Christian. In the US, companies are required to have transfer pricing documentation in place every year. So if a German company is part of a US group, it cannot avoid this requirement. The average German SME, however, tends to take its time.
Stay on top of things rather than playing catch-up
It is advisable to keep the documentation up to date on an ongoing basis. There are several reasons for this:
- The data is always up to date, which means less stress when you receive your examination notice
- The required data is available
- If documentation is carried out retrospectively, key individuals may no longer be contactable
So one clear piece of advice is: draw up your transfer pricing documentation immediately and keep it up to date.
Next scenario: Someone works in a tax consultancy and is tasked with looking into transfer pricing. What is the best way to prepare for or get to grips with this subject? Christian Schoppe doesn’t think much of learning through reading. He is firmly convinced that, first and foremost, you need to gain experience – specifically through real-world projects. To this end, he recommends taking the plunge. And if you need help, you should go and get it.
If you are going to read any literature on the subject, Christian recommends starting with the legislation and administrative principles, such as Section 1 of the AStG, lecture notes on the fundamentals of transfer pricing, case studies, and so on. However, he also warns that literature which is too detached from practical application tends to be demotivating.
Consultancy services must also play their part
But why has there been such a lull on this issue for so long – and why are new administrative guidelines suddenly being issued in quick succession? For one thing, responsibility within the Federal Ministry of Finance (BMF) has changed, according to Christian. And for another, the world keeps turning. Nevertheless, he also points out that these aren’t entirely new guidelines that have appeared out of the blue. Much of what has now been put down in writing and formalised for the first time has already been practised for years.
So anyone wanting to get started should get hold of the 2020 and 2021 guidelines. Christian therefore recommends Section 1 of the AStG, as it covers important topics in great detail. Furthermore, there’s no harm in taking a look at the OECD guidelines, on which the current administrative principles are based. „Just dive in and find someone who can give you a bit of a hand,“ is how Christian describes the best way to get started. When gathering information, it’s often a matter of keeping track of things and not letting yourself get overwhelmed. You mustn’t lose sight of the key question: Why does the taxpayer believe that the transfer prices are correct?
Here, he suggests starting by listing the transactions and asking how they were priced and why the client believes they are correct. A very simple example: a loan with an interest rate of 2 % – why 2 %? Don’t write too much; instead, cover the topics that are relevant to the audit. That’s why software is particularly useful if it guides the person sitting at the screen through the documentation step by step. That way, nothing can be overlooked.
More isn’t always better
A single sheet of paper can actually say more than 100 pages if it contains the relevant information. How are prices determined? Many businesses could answer that straight away. And it’s easy to work out whether it all makes sense. Beginners often think that comparing prices is a good method.
Example: A medium-sized company with 30 subsidiaries decides to adopt a uniform transfer pricing model, with all subsidiaries paying the same price. Whether it is an external third party or one of its own subsidiaries, everyone pays the same. However, as the company grows, distortions in results begin to emerge. The reason: different transactions are priced the same, and the model quickly becomes unbalanced. Christian’s note: The price comparison method does not work particularly well, especially for the supply of goods. By contrast, it is very well suited to financial transactions.
Exam experiences are helpful
Christian emphasises that exam experience helps when preparing transfer pricing documentation. This is because certain topics recur in the exams, so that over time you come to know which topics are particularly relevant to the exam. A common topic, for example, is the group trademark. A group has registered a trademark in Germany and the examiner states that this must be allocated to the group’s foreign subsidiaries. Or foreign subsidiaries that are particularly profitable.
It becomes particularly dangerous when companies feel too secure because they have already passed audits on several occasions without any problems, despite having only half-hearted documentation. It has often been the case that the long-serving tax inspector retires – and suddenly a highly motivated young successor is standing at the door. He turns everything upside down from the outset. And the company is thrown into turmoil because suddenly adjustments running into tens of millions are on the table.
When in doubt, in favour of the defendant
Another extremely important reason to keep up-to-date transfer pricing documentation on hand is that the documentation reverses the burden of proof. In the absence of usable documentation, the tax inspectorate may make an estimate to the taxpayer’s disadvantage. However, Christian also makes it clear that there is absolutely no sensible reason not to prepare transfer pricing documentation. After all, nobody expects a massive tome; they simply want answers to a few key questions.
From a business perspective, it makes sense to prepare transfer pricing documentation, and not just because of the next tax audit. It also provides the company with a degree of certainty from a tax compliance perspective. At the end of the day, the company only has cause for concern if it does absolutely nothing.
In the next episode of „hsp live at 11“, we welcome Angela Hamatschek, a law firm consultant, to discuss the topic: „When the client isn’t on board: persuade, compel or give up?“ Where does the adviser’s duty end?
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