German transfer pricing documentation obligation conforms in principle to European law

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Dr. Stephan Schnorberger, E-Mail: Stephan.Schnorberger @bakermckenzie.com
T.: +49 211 31116-152
Dr. Juliane Sassmann,
E-Mail: Juliane.Sassmann @bakermckenzie.com
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Maryna Shekhovtsova,
E-Mail: Maryna.Shekhovtsova
@bakermckenzie.com
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German transfer pricing documentation obligation conforms in principle to European law
It has been controversial whether the German transfer pricing documentation obligations conform to European law ever since their introduction in 2003. In a recent decision, the Federal Central Tax Court (BFH) has now ruled that the rules conform at least in principle to the European basic freedoms (decision from April 10, 2013, I R 45/11). There remains hope for the taxpayer in that the BFH left it open as to whether at least parts of the extensive documentation requirements laid down by administrative regulations are excessive and illegal or not.
Taxpayers are obligated to prepare transfer pricing documentation on the legal nature and business content of cross-border related party transactions (factual documentation, or Sachverhaltsdokumentation). In addition, the taxpayer also has to prepare evidence on the arm’s length nature of transfer prices (so-called Angemessenheitsdokumentation or arm’s length documentation). The evidence often takes the form of comparables’ or benchmarking studies. If taxpayers do not meet the documentation requirements, they are potentially exposed to significant penalties and extended rights of the tax authorities to estimate the arm’s length prices or profits.
Since their introduction in 2003, the scope of the documentation requirements has been controversial. In particular, the scope of an arm’s length documentation is disputed. Based on the majority opinion it is sufficient for the taxpayer to document serious efforts to set transfer prices at arm’s length. By contrast, the requirements laid down by the tax authorities in administrative regulations are so harsh that it is ultimately the taxpayer who must prove the arm’s length nature of the transfer prices.
The documentation requirements only burden taxpayers with international transactions. Taxpayers with domestic transactions only are not affected. This discrimination could violate European law. The BFH confirmed in principle the conformity of the documentation obligations with European law. While the rule violates the freedom of services, in the opinion of the BFH this violation is justified by the necessity of establishing the facts of the case.
The BFH points out that the information necessary to test the arm’s length nature of the transfer prices lies with the taxpayer. The taxpayer is deemed to be better able to collect and document the necessary information. In particular, the BFH finds it admissible for the tax authorities to require documentation regarding the market environment and competitive situation, the transactions with related parties as such and their conditions as well as any internal comparable prices available.
Transfer Pricing Documentation Requirements
Tax Law, Germany
Client Alert
1 October 2013
2
Transfer Pricing Documentation Requirementsn
Whether it is in general or only in individual cases permissible to require external comparable data (data on transactions with/between third parties) was not explicitly addressed by the Court and remains an open question.
The Court also did not comment on whether the other extensive requirements as set forth by administrative regulations are covered by the law. Instead, the Court refers taxpayers to judicial remedies against tax assessments or penalties that are based on excessive requirements.
As the BFH has only approved the documentation requirements in principle, we continue to recommend that taxpayers should examine whether to appeal administrative measures and tax assessments that are based on excessive documentation requirements.
This client newsletter is prepared for information purposes only. The information contained therein should not be relied on as legal advice and should, therefore, not be regarded as a substitute for detailed legal advice in the individual case. The advice of a qualified lawyer should always be sought in such cases. In the publishing of this Newsletter, we do not accept any liability in individual cases.
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