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Transfer pricing methods

Available methods

Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?

In general, the transfer pricing methods used to establish the arm’s-length price are not restricted, although the tax authorities prefer the transaction-based methods. In addition to the transaction-based methods (ie, comparison method, resale price method and cost-plus method), the transactional net margin method and the profit split method can be used, depending on the circumstances of the case (in particular, if no comparable cases are available). The pros and cons of these transfer pricing methods generally apply without German specifics.

Preferred methods and restrictions

Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?

According to Section 1(3) of the Foreign Tax Act, the price comparison method, the resale price method or the cost-plus method must be preferentially applied if arm’s-length prices can be determined which are – after appropriate adjustments in view of the performed functions, used assets and assumed chances and risks – unrestrictedly comparable for such methods.

If such arm’s-length prices cannot be determined, the application of an appropriate transfer pricing method may be based on arm’s-length prices which are restrictedly comparable and have been adjusted appropriately. If arm’s-length prices which are restrictedly comparable cannot be determined, a hypothetical comparison based on the principles outlined in Section 1(3) of the Foreign Tax Act has to be applied by the taxpayer.

Comparability analysis

What rules, standards and best practices should be considered when undertaking a comparability analysis?

In addition to the rules, standards and best practices generally used to determine transfer prices by using internationally accepted transfer pricing methods, the Ordinance on the Kind, Content and Extent of the Documentation within the meaning of Section 90(3) of the General Fiscal Code stipulates that if a taxpayer uses databases for the determination of transfer prices, the taxpayer must fully disclose:

  • the applied search strategy;
  • the applied search criteria;
  • the search results; and
  • the selection process.

The entire search process must be comprehensible and testable at the time of the tax audit. The configuration of the database, used for the search process, must be fully documented.

Special considerations

Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?

The hierarchy of methods must be respected. Within these limits, a taxpayer may use the method appropriate for the relevant business transaction.

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