Stricter regulations and documentation requirements – the framework for determining transfer prices has become more restrictive. With other issues having dominated 2022, many professionals in tax practice are asking themselves: What is the current state of play regarding transfer pricing at the end of 2022? This is precisely what hsp CEO Paul Liese and Tobias Polka, a chartered accountant at ADKL and an expert in transfer pricing, discussed on „hsp live at 11“.
What’s new? The legislator has updated and added to a number of details. The Function Relocation Ordinance wouldn’t fit on a Scrabble board, but it regulates the relocation of functions abroad and their tax treatment. If a company relocates a function abroad, it deprives the state of a future tax base. That is why the state levies an exit tax. The entire process forms part of transfer pricing taxation. However, in order to handle the transaction correctly from a tax perspective, the company must first recognise the transfer of functions as such.
It is not uncommon for functions to be transferred out of day-to-day operations. For example, it is enough for an employee to be sent abroad to set up a new operation there. If this is only noticed during a tax audit, it is already too late. Many companies rely on drawing up documentation retrospectively if necessary. However, Tobias Polka warns against this and recommends that documentation be prepared immediately or as soon as possible. This is because the more time that passes, the more difficult it becomes to obtain all the necessary information. Sometimes documents are missing; sometimes people are. In such cases, the taxpayer bears the responsibility.
Transfer pricing must become the norm
How often does the transfer pricing documentation When should it be done? The rule of thumb is: at least once a year. Complex transactions should be documented immediately. Tobias emphasises that transfer pricing documentation is just as much a compliance issue as the annual financial statements or procedural documentation. No one can shirk this obligation. What has to be done must be done. In Germany, the regulations on this are becoming increasingly strict; abroad, they are in some cases already considerably stricter. In Turkey, for example, transfer pricing documentation must be attached to the annual tax return.
The differing regulations across various countries illustrate one thing very clearly: groups with international branches should define a standard process that all locations implement. The earlier, more accurate and more consistent the documentation is, the fewer costs and legal complications will arise. However, standardised transfer pricing documentation is also recommended for smaller businesses. After all, nobody knows how the business will develop in the future.
Anyone working internationally needs to be made aware of this
Paul wants to know when Tobias approaches his clients to draw their attention to transfer pricing documentation. Tobias Polka replies that it depends on the size of the company. Ultimately, the aim is to raise awareness of the issue amongst everyone within a company who may be involved in cross-border transactions. This is achieved through training, and a transfer pricing policy is also put in place. Such a policy stipulates, for example, that the relevant departments must be informed before any potential relocation of functions abroad is approved. These departments include Finance, Controlling and Tax Advisory or the Tax Department. According to Tobias, awareness of the issue is key. If all steps are documented both before and during implementation, the effort required to compile the documentation at the end will be minimal.
What about appointing someone based abroad? As always, it depends on a few details. Tobias replies that when setting up a subsidiary abroad, transfer pricing always plays a role. Even in the case of an individual who previously worked in Germany for a company based in Germany and is now moving abroad, the circumstances should be examined and documented. As there are many different approaches and procedures in this area, it is advisable for a company to consult specialists in every case.
Only accuracy ensures safety
In principle, nothing has changed with regard to the transfer pricing documentation has changed, according to Tobias. However, there are always material changes, such as the rising interest rates seen over the past few months. In this regard, corporate groups must check whether the interest rates agreed internally are still arm’s length and in line with the market. In general, Tobias notes that the current environment is extremely volatile. The numerous market upheavals have thrown transfer pricing into disarray. Consequently, the purpose of transfer pricing documentation can only be to demonstrate a genuine intention to present everything accurately and transparently. Paul adds that, particularly in times like these, it could be reckless to put off preparing the documentation.
In various areas of tax audits, there is a clear trend towards a reversal of the burden of proof. Auditors are increasingly demanding that taxpayers prove the accuracy of their transactions and documentation. Tobias Polka emphasises that this trend began much earlier in the world of transfer pricing. Experience also shows that, in the event of faulty documentation, auditors proceed directly to making estimates. It goes without saying that these estimates are significantly higher than the actual figures. It is also to be expected that transfer pricing audits will increasingly affect SMEs as well, and not just large corporations.
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