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Germany’s New Transfer Pricing Rules Emphasize Taxpayer Cooperation with Finance Ministry

Germany’s much-needed new transfer pricing guidance stands to grease the gears between multinational groups and the Ministry of Finance on income-allocation- related inquiries. The changes, which were first introduced in December 2020, advise on the responsibility of the German taxpayer to cooperate with tax authorities and the consequences should the taxpayer fail to do so.

According to the guidance, tax authorities must evaluate transfer pricing cases based on the facts and circumstances. The taxpayer, though, must comply with the investigation—gathering facts and evidence—and have intercompany agreements that allow it to receive information about other entities. For example, if the taxpayer applies the resale price method, the taxpayer should have documentation regarding resale prices applied.

The guidance puts a special focus on transfer pricing methods–the method used in an analysis and also, an evaluation of the methods that were rejected. According to the German tax authority, the purpose of the local file is for risk assessment and the taxpayer must explain why its selected transfer pricing method is the most appropriate. Taxpayers would be wise to make diligent efforts in that explanation, because if tax authorities disagree, they have the right to choose what they deem to be the most appropriate, which of course, could change the outcome of the analysis. Initially, a price-setting approach must be taken to assess arm’s-length pricing, but both the taxpayer and tax authorities can use information that becomes available at a later date.

The good news is that if documentation is insufficient the new guidance gives taxpayers another chance to get it right. If the taxpayer still fails to comply, then the tax authorities have the right to reassess the tax base.

Perhaps the biggest lesson from the Germany’s new guidance is the importance of accurate, robust transfer pricing documentation. It offers protection throughout the process should an audit take place. But at least now, taxpayers have a clear sense of the expectations and therefore, are in a better position to meet them.

The ministry went as far to say it expects any prudent business would have these documents and evidence at their disposal anyway, as a matter of competence, but MNEs can be reassured by new leeway provisions. For instance, if authorities find taxpayers’ data to be insufficient, the ministry is required to notify the taxpayer with an opportunity for them to improve their documentation.

Then comes the whip. If multinationals still fail to provide enough evidence for their methodology, or otherwise are found to be uncooperative with audits, the law allows authorities broad powers to adjust transfer prices by an estimation of the relevant tax base that best reflects the facts and circumstances (again, in the eyes of the Ministry of Finance). The new guidance also states taxpayers bare the risk for any uncertainties resulting from their non-compliance.