Focus on Transfer Pricing: Latest Developments and Insights with Tobias Polka (ADKL)

Geopolitical developments are just one of the reasons why the legal requirements for Transfer pricing changing time and again. In an interview with hsp editor-in-chief Paul Liese, Tobias Polka – who, amongst other things, is a transfer pricing expert at ADKL (Düsseldorf) – discusses the latest changes and the reasons behind them.

Over the past 20 years, there has already been increasing competition over tax bases – both globally and within the EU. Prominent examples include companies such as Starbucks and Apple, which have paid their taxes in Ireland, though from the perspective of other countries, these amounts have been too low. Viewed from a global perspective, the whole issue becomes considerably more complex. As early as ten years ago, the BRICS countries joined forces and produced a „United Nations Practical Manual on Transfer pricing for Developing Countries“. The OECD rules, which German legislation follows, run counter to this to some extent. For this reason, concerns about double taxation are growing. This is fuelled by the increasing isolationism of states, the formation of new blocs and the resulting rise in the number of regulations.

Over the past few weeks, Paul has repeatedly heard of companies that have just launched their first Transfer pricing documentation must be drawn up. Paul and Tobias have repeatedly emphasised over recent years that companies should not wait until their next tax audit to draw up this documentation. Anyone interested can find out how to do this and how to keep the documentation up to date in the relevant e-learning course in the hsp.community learn. The course was developed by Tobias Polka and is presented by him. What changes are currently taking place for those companies that are required to provide transfer pricing documentation?

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The requirements for the Transfer pricing documentation rise

A new paragraph 4 has been added to Section 90 of the German Fiscal Code (AO). This states that the tax authorities may request transfer pricing documentation at any time. In practice, this occurs when the tax return is filed, meaning that the documentation is not merely examined during a tax audit. The submission deadline has been halved – from 60 to 30 days. So, should the documentation be sent in along with the tax return? Tobias Polka does not see the role of companies as quite that proactive. It is sufficient to wait for the tax office to make the request. However, the company should have the documentation ready and not wait until it is too late to start preparing it. Should it be requested, it is a standard request for supporting documents, just as with any other documentation.

One change relates to financing transactions, the details of which have now been clarified. Where a loan is granted to a foreign subsidiary, or vice versa, the question arises: in what respects do the loans comply with arm’s length principles, and in what respects do they not? Furthermore, the Transfer of Functions Regulation, which was previously a separate piece of legislation, has been incorporated into the Directive. At the same time, the provisions relating to the secondment of staff and the transfer or duplication of functions have been tightened. The area of documentation is also affected when staff and equipment are brought along as part of an expansion. The requirements in this regard are now also more stringent.

The tax authorities are stepping up their efforts

Transfer pricing documentation has been mandatory since 2003. However, during the first ten years, audits were carried out almost exclusively on large companies. This means that in most tax audits, nobody asked to see the documentation. Since the late 2010s, this situation has changed significantly. The number of audits has risen sharply.

Paul would like to know how the arm’s length principle is applied. In the past, checks were carried out retrospectively to determine whether the interest rates for the years in question were at arm’s length. However, the current recommendation is that transfer pricing documentation should be finalised at the same time as the tax return. How is arm’s length status assessed today? So-called benchmark studies are only suitable for examining highly standardised routine transactions. Instead, the price comparison method is regarded as the method of choice. This involves looking at similar transactions between unrelated third parties on the market and comparing the terms and conditions. From his practical experience, Tobias reports that this method usually works quite reliably. The administrative guidelines state that taxpayers must demonstrate that they have made „sincere efforts“ in this regard.

In the past, when it came to financing, the tax authorities often took the view that unsecured loans always resulted in pricing that was not in line with arm’s length principles. The reasoning was that independent third parties would never grant an unsecured loan. However, the market shows that such loans do indeed exist. It is simply that the security is reflected in the interest rate. Secured loans have a lower interest rate, which affects the price. In this respect, the authorities have adapted to reality.

The next section deals with the relocation of functions. Example: A German company operates two or three subsidiaries in other EU countries. All other countries are supplied with materials by the German sales team. The company now decides to manage sales locally in a further country. In this case, there is already an existing customer base in the country concerned. If a branch is established there, the customer base is transferred from Germany to that country. It is also likely that there will be a transfer of know-how, staff and other resources. Previously, a de minimis threshold applied. If sales operations from Germany were maintained and only slightly reduced, this was regarded as a duplication of functions. This de minimis threshold has now been abolished. If any operations are relocated across the border, this is considered a relocation of functions.

Administrative Principles 23 come into force with immediate effect. This means that the tax authorities will apply the current principles to all outstanding cases. The Opti.Tax Transfer Pricing Documentation module includes all the functions currently required.