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December 16, 2020 German Ministry of Finance issues new Administrative Principles regarding examination of income allocation between internationally associated enterprises Executive summary Germany has had administrative principles in place since 2005 that, among other things, provide guidance regarding the obligations of taxpayers when undergoing a transfer pricing examination (See, Administrative Principles Procedures, BMF letter of 12 April 2005 or AP 2005). On 3 December 2020, the German Ministry of Finance (BMF) updated the AP 2005 by issuing the Administrative Principles 2020 (AP 2020). The revisions focus on two chapters of the AP 2005, those being the: (i) obligations of taxpayers (and their relevant related parties) to cooperate (Sec. 90 Fiscal Code (FC)); and (ii) estimation of tax bases and penalties by German tax authorities (Sec. 162 FC). The parts of the AP 2005 not modified by the AP 2020 remain intact. Germany’s Administrative Principles represent a third element (in addition to the tax law and executive orders) of German tax provisions. Although not binding on taxpayers and courts, the Administrative Principles serve as additional guidance for the interpretation and illustration of the tax law and executive order; accordingly they are important for taxpayers. This Alert summarizes the key aspects of the AP 2020. Detailed discussion It was widely anticipated that under the AP 2020, the German tax authorities would (re)interpret the arm’s-length principle following the revision of the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines in 2017. The AP 2020 contains certain necessary additions due to the changes in German tax law, in particular resulting from the completion of the OECD Base Erosion and Profit Shifting (BEPS) Project. Importantly, the AP 2020 does not mention the OECD’s “DEMPE Concept.”1 On the other hand, the AP 2020 contains comments on the implementation of the master file in Germany with clarifications on the determination of revenue thresholds and on the interpretation of undefined legal terms. The AP 2020 focuses solely on procedural aspects which play an increasingly important role in German tax audits. Many tax auditors have interpreted the provisions addressing taxpayers’ obligations to cooperate and the evidence to be provided on the appropriateness of their transfer prices broadly. Similarly, they have viewed their own discretion to perform estimations in the event of violations of these alleged obligations broadly. The AP 2020 confirms these broad interpretations of the applicable law. Particularly, it is important to consider the following:
Implications The extent of taxpayers’ obligations to cooperate and keep records in the field of transfer pricing has developed into one of the most controversially discussed issues in German international tax law. The AP 2020 strengthens the already broad position of the tax authorities, but as administrative principles, they are not binding for taxpayers and the tax courts. It remains to be seen whether the German tax courts will limit the broad requirements of the tax authorities in the future. Therefore, affected taxpayers should not accept prematurely the often broad requests of tax auditors and should not rule out judicial clarification, especially with regard to procedural aspects. In closing, the BMF’s position appears to be that the German tax authorities need stricter rules, notwithstanding that Germany is the worldwide leader with respect to pending mutual agreement procedures,2 extensive tax audit activities in the area of transfer pricing and continuous global efforts3 to reduce disputes regarding profit distribution in multinational groups. Endnotes 1. Note 6.32 OECD (2017), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017, OECD Publishing, Paris. 2. https://www.oecd.org/tax/dispute/2019-map-statistics-germany.pdf. 3. https://www.oecd.org/tax/forum-on-tax-administration/international-compliance-assurance-programme.htm; Council Directive (EU) 2017/1852 of 10 October 2017 on procedures for the settlement of tax disputes in the European Union. ______________________________________________________________________________________________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Düsseldorf
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Stuttgart
Ernst & Young LLP (United States), EMEIA Transfer Pricing Desk, New York
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