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Changes in the area of transfer pricing rules – Part I: An overview of the important points

In conjunction with the draft law for the proposed transposition of the Anti-Tax Avoidance Directive (ATAD), the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) put forward important new rules in the area of transfer pricing. After the revisions, from 24.3.2020, that related solely to the ATAD transposition, the aim is to swiftly implement the draft law in accordance with the resolution passed by the Coalition Committee on 8.4.2020. The new regulations are expected to apply to financial years starting after 31.12.2020. In the following section we give an overview of the planned changes in the area of transfer pricing rules. A detailed presentation of the changes to the approach for precisely defining the arm’s length principle will follow in part two.

Revision to Section 1 of the German Foreign Transactions Tax Act (Außensteuergesetz, AStG)

Section 1 of the Foreign Transactions Tax Act, which includes general guidelines for determining transfer pricing, will be revised and adapted to international standards. In particular, the aim is to implement the outcomes of the OECD BEPS project. In future, only the factual circumstances of a business relationship should be considered; the contractual relationships will, at most, provide a starting point for determining transfer pricing. Moreover, the definition of a “related party”, as the criterion for the connection between taxpayers, will be expanded. Likewise, with a view to preventing tax structuring, cases of multiple voting rights, non-voting shares, pooled voting rights or comparable procedures would be considered to be relevant.

Transfer pricing documentation

Large groups of companies generally have to prepare not only company-related documentation (the so-called Local Files) but also master documentation for the group of companies (the so-called Master File) on the appropriateness of the transfer pricing. This was hitherto applicable to groups of companies who, in the previous year, had generated revenues of at least € 100m. This threshold will be reduced to € 50m.

An obligation to prepare the documentation without delay will be additionally introduced. In future, the master file will have to be submitted electronically directly to the locally competent tax office. The submission will have to take place annually by the end of the respective financial year. When applying these requirements to financial years starting after 31.12.2020, this would mean that, e.g., for the 2021 financial year, the Master File would have to be submitted to the tax office by no later than 31.12.2021. There has thus been a shift away from the previous practice according to which transfer pricing documentation usually only had to be produced if such information was requested in the course of a tax audit.

Please note: As a consequence of the significant reduction in the threshold value (revenues of € 50m in the previous year) you should check to see if, in 2021, a Master File has to be prepared and submitted annually to the tax office.

Advance agreement procedure for transfer pricing

The intention behind a new provision that will be added to the Fiscal Code [Abgabenordnung, AO] (Section 89a AO-E [-draft]) is to create an independent national standard for an advance agreement on the appropriateness of transfer pricing (Advance Pricing Agreement,”APA“) for precisely defined business transactions. Under this provision, multilateral cases will be possible in addition to bilateral ones. Up to now, agreements were made on the basis of the respective double taxation treaties as well as the Federal Ministry of Finance fact sheet from 2006.

Requests for an APA have to be sent to the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt). The prerequisite for a request is that, at the point in time when it is made, the precise situation that has to be decided on is yet to be realised and the risk of double taxation can be avoided. Requests that discernibly relate to tax avoidance strategies would be rejected.

An agreement of understanding would normally not exceed a period of validity of five years and should be linked to the applicant’s waiver of the right to lodge an appeal against the tax assessment insofar as this relates to what has been agreed.

The fee for an advance agreement application will be € 30,000; this amount will be halved in the event of an extension of an application that has already been decided on.

Outlook: In Part II will look into the approach for precisely defining the arm’s length principle. Here, among other things, we will discuss method selection as well as the legal definition of “intangible assets”

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