Documentation requirements under German transfer-pricing rules.

• Author: Packard, Pamela

German tax legislation, unlike in countries such as the U.S., the U.K. and Canada, does not provide any detailed transfer-pricing rules. The current German transfer-pricing provisions consist of administrative principles adopted almost 20 years ago. To overcome this lack of specific guidance, taxpayers have to follow existing general rules. For substantive rules, German transfer pricing is based on Section 8(3) of the Corporate Income Tax Act, Section 1(1) of the Foreign Tax Act and Article 9(1) of the Organization for Economic Cooperation and Development (OECD) Model Income Tax Treaty. The practical relevance of the Foreign Tax Act's Section 1(1) is rather limited, because it would apply only if Section 8(3) does not apply. The OECD Model Income Tax Treaty's Article 9(1) is not binding on German taxpayers. Consequently, a German taxpayer ends up basing transfer-pricing transactions on the Corporate Income Tax Act's Section 8(3) which, understandably, is sometimes not satisfactory for either the German tax authorities or the taxpayer.

The German legislative situation on procedural rules (especially documentation requirements) is no better. In 2000, the German tax authorities issued draft regulations on documentation requirements and advance pricing agreements (APAs), planning to issue final regulations during 2001. However, before this draft: could be finalized, it was invalidated by May and October 2001 German Federal Tax Court decisions.

Because a German taxpayer can be a German subsidiary of a U.S. parent, a U.S. entity might have to deal with the German transfer-pricing situation if there are transactions between the two companies.

Draft of German Transfer-Pricing Regulations

The draft circular mentioned focused on the procedural aspects of transfer-pricing compliance and audits, covering the following matters:

* Cooperation requirements;

* Contemporaneous documentation requirements; and

* APAs.

Under German law, a German taxpayer would have an extended obligation to cooperate with the tax authorities in an audit if the taxpayer has cross-border transactions with parties in foreign countries (Section 90(2) of the General Tax Act). The draft defined this obligation in-depth, specifying the documents that a taxpayer has to provide when audited and thus effectively spelling out the documents a taxpayer must prepare and retain. Further, the draft gave the German tax authorities authority to enter into APAs.

German Federal Tax Court...