Transfer prices – cross-border income accrual between associated enterprises
The structuring of transfer prices is probably the most important field of tax structuring and tax policy for internationally active companies. While the final price is usually determined by the market, the profit can in theory be freely determined by the structuring of relations between associated companies.
When examining business and service relationships between internationally associated companies (examination of so-called transfer prices), the bilateral provisions of the DTA and the multilateral provisions of the EU Arbitration Convention are closely linked with the domestic provisions of the AStG, but also of the Corporation Tax and Income Tax Act, because the correction may be made via the rules of the hidden distribution of profits or contribution across the border. When auditing business and service relationships between internationally affiliated companies (transfer prices), all service relationships must be priced in accordance with the arm’s length principle in order to avoid income adjustments, both in accordance with the national income adjustment provisions of the vGA pursuant to Section 8 (3) KStG or Section 1 AStG and the international provisions of the DTA, in particular Section 8 OECD Model DTA and the EU Arbitration Convention.
However, it is not only necessary to examine whether the price corresponds to the material requirements of the „arm’s length principle“, but also whether the formal requirements of the documentation are fulfilled.
Formal transfer pricing issues – the documentation of transfer prices
The generic term of transfer pricing documentation refers to a large number of questions and problems in the formal area of transfer pricing auditing, which deals in particular with the questions of the taxpayers‘ duty to cooperate, the fiscal authorities‘ duty to investigate, the burden of proof (reversal of the burden of proof), etc. The transfer pricing documentation is a form of documentation that is used to describe the transfer pricing of assets.
As a reaction to the ruling of the Federal Court of Finance of 17.10.2001, BStBl II 2004, 171, § 90 Para. 3 AO contains the obligation to keep records of the type and content of business relationships with related parties as defined by § 1 Para. 2 AStG (transactions with an international dimension). In addition, the Profit Recording Ordinance and the Administrative Principles Procedure, BMF dated 12.04.2005, BStBl I 2005, 570 must be observed. The documentation is intended to enable the tax authorities to gain an accurate understanding of significant business transactions, business relationships or transaction types as well as the manner in which transfer pricing is determined. The documentation obligations relate both to the facts (facts documentation) and the appropriateness (appropriateness documentation). In its decision of 10.04.2013, I R 45/11, the Federal Fiscal Court ruled that the German formal transfer pricing bases, the obligation to provide so-called transfer pricing documentation in accordance with § 90 para. 3 AO, are in compliance with Union law. As a result of the BEPS project of the OECD and implemented EU directives, there will be significant changes to the legal regulations from 2017/2018 onwards.
Taxable persons of all legal forms are affected: Norm addressees are basically all unlimited (§§ 1 para. 1 and 3, 1a para. 1 no. 2 EStG or § 1 KStG) or limited (§§ 1 para. 4, 49 EStG or § 2 KStG) or extended limited taxpayers who maintain business relations with an international dimension. Relief is provided for „smaller“ companies. Further details are governed by § 6 GAufzV.
§ 1 GAufzV lays down the principles of recording obligations. Accordingly, the taxpayer must prepare records from which it can be seen which facts were generally realised in business relationships with related parties within the meaning of § 1 AStG and whether or to what extent these business relationships were based on conditions (including the underlying prices) which observe the principle of external conduct.
From the regulatory context of the AStG, § 1 (4) AStG applies, although § 90 (3) AO contains no explicit reference to this. The term taxpayer is to be understood in the sense of § 33 AO and is not limited to taxpayers with profit income (Wassermeyer, Dokumentationspflichten bei internationalen Verrechnungspreisen, DB 2003, 1535). Accordingly, a business relationship is any relationship under the law of obligations on which the income is based which is not a partnership agreement and which is either part of an activity for the taxpayer or the related party to which Sections 13, 15, 18 or 21 EStG apply or would be applicable in the case of a foreign related party if the activity was carried out in Germany. Agreements which establish or change a relationship under company law are excluded from the scope of § 1 AStG. Therefore, the shareholding relationships themselves do not fall under § 1 AStG. With the adoption of the OECD’s AOA concept for the profit sharing between the parent company (company) and its domestic or foreign permanent establishment in § 1 (3) AStG, the scope of application was also extended for the economic relationships („dealings“) between different permanent establishments (§ 1 (4) no. 2 and § 1 (5) AStG 2013).
The tax legislator ultimately wants all transactions to be documented which are of importance for the tax delimitation of income in cross-border situations (Vögele/Vögele, regulations on transfer pricing documentation in StVergAbG, IStR 2003, 466).
The obligation to keep records also applies to business relationships that do not involve the exchange of services, such as agreements on the posting of employees (an employee of a company is posted to a group company for a certain period of time) and pool agreements (e.g. cost apportionment agreements as a rule of a joint development pool).
§ 1 GAufzV requires the taxpayer to keep records of the facts which he has generally carried out transactions with affiliated companies. Details can be found in para. 2 and in particular §§ 2, 4 and 5 GAufzV.
In addition, for the first time, the records must show that the transactions were based on prices and other conditions which indicate that the arm’s length principle was taken into account. The details can be found in § 4 GAufzV.
Burden of proof
The GAufzV does not reverse the burden of proof on the taxpayer. A „serious effort“ on the part of the taxpayer to provide complete and appropriate documentation is sufficient here according to the justification for the regulation. According to § 90 para. 3 sentence 2 AO, the taxpayer must also record the economic and legal basis for an agreement of prices and other terms and conditions of business with related parties that observes the principle of arm’s length settlement. However, the regulation of § 162 para. 3 AO must be observed, according to which the rebuttable presumption of a profit transfer exists if sufficient documentation is not prepared. In this respect, Becker (Neues Gesetz zur Dokumentationspflicht, IWB, Fach 3, Gruppe 1, 1765), who sees an interaction between the scope of the duties to cooperate and the distribution of the burden of proof, must be agreed.
voidance of double taxation – dispute settlement
A reversal of an offsetting correction inevitably leads to double taxation, since a countercorrection does not automatically occur at the level of the foreign affiliated company (Art. 9 para. 2 OECD Model Convention – OECD-MA). For this purpose, there is the instrument of mutual agreement and arbitration proceedings. Mutual agreement procedures are bilateral dispute settlement procedures under the double taxation agreements (Art. 27 OECD-MA). In corporate tax law, these usually concern transfer price corrections through the tax audit of a country when examining the conditions of business relations between affiliated companies. If, for example, the German tax audit takes up an inappropriate pricing on the basis of the statutory arm’s length price, the company has either the option of (unilateral) appeal proceedings in Germany or the initiation of mutual agreement proceedings between Germany and the foreign state concerned. From the point of view of the company concerned, the aim is the corresponding counter adjustment abroad or the reduction of the German seizure. As the facts of the case may have to be determined and assessed for the first time in the other state and significant tax amounts are often involved, these proceedings may take several years (average 3 years). If there is no agreement in the mutual agreement procedure, it is possible in the EU to transfer to an independent arbitration procedure. The current DTAs also provide for arbitration proceedings in relation to important third countries such as Switzerland, the USA and Japan. For details, see the BMF leaflet of 13.7.2006 and the samples provided by the BZSt (minimum information).
Language (§ 2 par. 5 GAufzV)
In practice, it was a problem that taxpayers drafted the documentation in the mother tongue of the top management or in the standard correspondence language of the group (generally English) (Kroppen/Rasch, IWB, Fach 3, Gruppe 1, 1955, 1963). § Section 2 (5) GAufzV now clearly refers to the fact that the official language under Section 87 AO is German. The VGV contains a concrete framework for the granting of exceptions (see para. 3.4.16 VGV): The tax authorities may allow records to be made in another „living“ language upon request. This application can be made before the records are made, but must be made at the latest immediately after the records have been requested by the tax authority. Necessary translations of contracts and similar documents in the sense of §§ 4 and 5 GAufzV belong to the records.