Germany: International transfer pricing

Thomas Ziegler Thomas Ziegler

The transfer pricing issue has been the main topic of multinationals for a long time. In the last few years, the German Tax Office has raised the documentary obligations and problems in the tax controls are developing according to transfer pricing. 

The taxable persons should process the transfer pricing documentation in the cases when a foreign connected person participates in the business transaction. The obligation develops after delivering the goods with a value of more than 5 million EUR, or after acceptance of the services with a value of more than 500000 EUR. That is why small or medium sized companies have to process the transfer pricing documentation.

It is necessary to propose the transfer pricing documentation in the relation to the tax control together with the call of starting the control. Failure to submit the documentation or if the documentation is found to be useless, the Tax Office can provide the tax estimation, which is connected with high fines.

The transfer pricing documentation is divided into the description and comparison parts. In the description part, there should be the description of the type, content and extension of the business relationships with the connected persons as well as the legal and economic conditions. In the relation to the function and risk analysis, the creation of the added value in the concern is represented. Depending on the chances and risks, the company is classified into a routine, hybrid or strategic company. The characteristic of the company is important because of the choice of the transfer pricing method (cup method, resale price method, cost plus method).

In the comparison part, there should be the description of the choice of the method and the reason why the method was chosen. The margin should be tested on the basis of this method. The arm´s length principle has to be kept, which is necessary to document on the basis of comparable external and internal data. Comparing it with independent comparable companies is not relevant in the case of the small and medium sized companies. Especially, the long-term losses have to be justified or the subsequent measures accepted by the leaders of company to prevent the losses have to be cleared.

For the first time, not many small and medium sized companies are dealing with the issue of transfer pricing after the call of the Tax Office to submit the documentation. According to experience, the 60 day deadline is not enough for the processing the documentation for the first time. It is recommended that the small and medium sized companies dealing with this issue should focus on the topic about submitting the transfer pricing documentation on time.

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