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Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
A taxpayer is not obliged to file transfer pricing documentation on a regular basis with the tax authorities, in particular there is no obligation to submit transfer pricing documentation with an annual tax return.
Section 90(3) of the General Fiscal Code stipulates that a taxpayer has a general obligation to prepare documentation on his or her relevant business relationships in terms of the Foreign Tax Act. However, there is no obligation to prepare transfer pricing documentation for all cross-border business transactions on an ongoing basis, this only applies with respect to exceptional business transactions (eg, business restructurings and the transfer of risks and functions). The transfer pricing documentation must be prepared in a timely manner (which is assumed in case of preparation within six months from the end of the fiscal year in which the business transaction took place).
Although there is no obligation to prepare transfer pricing documentation for all cross-border business transactions on an ongoing basis, tax authorities can request in a tax audit transfer pricing documentation which must be prepared in line with Section 90(3) of the General Fiscal Code and the Ordinance on the Kind, Content and Extent of the Documentation within the meaning of Section 90(3) of the General Fiscal Code. Such transfer pricing documentation must be provided within 60 days after the respective request has been received. In case of exceptional business transactions, the transfer pricing documentation must be provided to the tax authorities within a reduced 30-day timeframe after the respective request has been received by the taxpayer. In principle, it is possible to extend the relevant deadlines based on the facts and circumstances of each individual case.
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
Based on the Ordinance on the Kind, Content and Extent of the Documentation within the meaning of Section 90(3) of the General Fiscal Code, the transfer pricing documentation, in principle, must provide the following information (local file), but the kind, content and extent of the transfer pricing documentation to be prepared must be determined on the basis of the circumstances of the individual case taking the applied transfer pricing method into account:
- general information on the corporate shareholder structure, business operations and the operational structure, including a description of:
- the corporate structure between the taxpayer and the related party;
- the organisational and operational group structure; and
- the management structure;
- details of the business transaction between the taxpayer and the related party, including:
- a description of the relevant business transaction; and
- a list of the material intangible assets which are owned by the taxpayer and used in the course of the relevant business transaction;
- a functional and risk analysis, including a description of:
- the performed functions;
- the risks assumed and material assets deployed;
- the material terms and conditions of the contractual relationship;
- the value chain; and
- a transfer price analysis, including:
- a description of the applied transfer pricing method;
- the reasoning for the election of the applied transfer pricing method;
- records regarding the calculation used in connection with the application of the relevant transfer pricing method;
- the date on which transfer prices were established; and
- information relevant to the establishment of relevant transfer prices at that time.
In addition to the local file, companies which are part of a multinational group must prepare a master file if the company turnover in the preceding fiscal year was over €100 million. A ‘multinational group’ is defined as at least two related companies located in two different countries or at least a company with at least one permanent establishment in a different country. The master file must contain an overview of global business activities of the multinational group as well as the applied systematics regarding the determination of transfer prices.
Transfer pricing documentation must be prepared in written or electronic form. Pursuant to Section 2(1)3 of the Ordinance on the Kind, Content and Extent of the Documentation within the meaning of Section 90(3) of the General Fiscal Code, the transfer pricing documentation must document the taxpayer’s serious efforts to arrange his or her business transactions with related parties in compliance with the dealing at arm’s-length principle. Thus, the transfer pricing documentation must enable a qualified third party within a reasonable timeframe to assess if and to what extent the arm’s-length principle has been observed.
Additionally, pursuant to Section 138a of the General Fiscal Code, country-by-country reporting is mandatory for companies resident for tax purposes in Germany, which establish consolidated group accounts or must establish consolidated group accounts other than for tax purposes if and to the extent that a subsidiary resident for tax purposes outside of Germany or a foreign permanent establishment is included in the consolidated group accounts and the total consolidated turnover as shown in the consolidated group accounts in the preceding fiscal year amounts to at least €750 million. The country-by-country reporting must be submitted to the Federal Central Tax Office as set out in Section 138a(2) of the General Fiscal Code and no later than one year after the end of the fiscal year for which the country-by-country report must be prepared. If a company is resident in Germany and is part of a foreign multinational group, it is generally neither obliged to prepare nor file a country-by-country report for the foreign multinational group in Germany. However, this does not apply if the parent company of the foreign multinational group requests the German company to file the country-by-country report for the group with the German Federal Central Tax Office or if specific cooperation obligations apply as the German Federal Central Tax Office has not been provided the foreign group’s country-by-country report.
What are the penalties for non-compliance with documentation and reporting requirements?
Section 162(4) of the General Fiscal Code stipulates that a minimum penalty of €5,000 applies if a taxpayer does not provide transfer pricing documentation as defined under Section 90(3) of the code or if the provided transfer pricing documentation is essentially of no use. The penalty must be at least 5% and at most 10% of the additional income arising from required corrections, including estimates by the tax authorities due to the failure by the taxpayer to comply with his or her cooperation obligations pursuant to Section 90(3) of the General Fiscal Code if this amount exceeds €5,000. Moreover, if sufficient transfer pricing documentation is submitted but it is late, a fine of at least €100 applies for each full day of delay and may amount up to €1 million.
In addition to the penalties set out above, if a taxpayer fails to comply with his or her cooperation obligations pursuant to Section 90(3) of the General Fiscal Code by not submitting the relevant documentation or by submitting documentation which is essentially of no use or where exceptional business transactions have not been documented in a timely manner, unless demonstrated otherwise it will be assumed that the domestic income of the taxpayer to which the respective transfer pricing documentation relates is higher than the income declared. If the tax authorities have to conduct an estimate and the relevant income can only be determined within a certain range (in particular a price range), the authorities may use the upper end of the relevant range to the detriment of the taxpayer.
Finally, taxpayers can be fined between €2,500 to €250,000 if certain documents requested in the course of a tax audit are not provided within a reasonable timeframe.
The failure to submit the country-by-country report may qualify as an administrative offence and can result in fines.
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
It may be advisable to prepare transfer pricing documentation in connection with the notification by the tax authorities of a general tax audit, as the 60-day timeframe may not be sufficient. In any event, it is recommended that the relevant data for a fiscal year forming the basis of the relevant documentation is collected in a timely manner even though the transfer pricing documentation does not have to be prepared on an annual basis, as data collection in connection with a tax audit, which is only carried out several years after the relevant fiscal year ends, is often difficult.
Advance pricing agreements
Availability and eligibility
Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?
Yes, advance pricing agreements (APA) with tax authorities are typically bilateral but can sometimes be multilateral.
Generally speaking, APAs are available to taxpayers protected by a respective double tax treaty and in particular with respect to transfer pricing issues (eg, royalty fees, tolling fees and the remuneration of a commission). The applicant must have a legitimate interest in the APA.
Rules and procedures
What rules and procedures apply to advance pricing agreements?
The requirements and procedure regarding the application for an APA are outlined in detail in an explanatory note published by the Federal Ministry of Finance in 2006. The APA process usually starts with a preliminary meeting (ie, a pre-filing meeting) between the Federal Central Tax Office which is responsible for the negotiations with the other contracting country, the federal and state auditors as well as the taxpayer. In the course of the pre-filing the following aspects are discussed:
- whether the case is suitable for an APA;
- what the scope of the APA might be; and
- what information and documentation must be provided in the course of the application.
The explanatory note contains a detailed list of information and documents to be included in the application. Four copies of the application must be submitted in written form to the Federal Central Tax Office.
An APA with the German tax authorities usually becomes legally effective only if the taxpayer agrees with the APA and waives his or her rights to appeal against tax assessments to the extent that such tax assessments comply with the agreement set out in the APA. After the APA has become effective and on application by the taxpayer, the local tax office must grant a binding ruling reflecting the agreement reached in the APA.
How long does it typically take to conclude an advance pricing agreement?
The timeframe for the conclusion of an APA cannot be predicted and depends on the complexity of the case. It usually takes between two to four years to conclude an APA, in some cases an APA can become effective after the period which was covered by the application.
What is the typical duration of an advance pricing agreement?
The tax authorities suggest a duration of at least three years and maximum of five years. Under certain conditions, a roll-back into preceding fiscal years is possible.
What fees apply to requests for advance pricing agreements?
Generally, the following fees apply:
- €20,000 for an APA application;
- €15,000 for an extension; and
- €10,000 for the amendment of an APA.
Fees are reduced for smaller enterprises to:
- €10,000 for an APA application;
- €7,500 Euro for an extension; and
- €5,000 for the amendment of an APA
and may in exceptional situations be reduced to zero.
Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?
It should be kept in mind that comprehensive information and documentation must be provided in the course of the APA process and that this process takes a significant amount of time and may tie up internal and external resources.
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