Further changes to Transfer Pricing Documentation in the pipeline

The German Bundestag passes the Fourth German Bureaucracy Reduction Act

On September 26, 2024, the German Bundestag passed the Fourth German Bureaucracy Reduction Act (viertes Bürokratieentlastungsgesetz “BEG IV”). The aim of the BEG IV is to simplify administrative processes, reduce the bureaucratic burden on companies, and advance digital transformation. The German Bundesrat still needs to approve the law, but its implementation is considered very likely.

A central aspect of the BEG IV refers to the documentation of cross border intercompany transactions within a multinational group. The DAC7 Implementation Act, which came into force on January 1, 2023, introduced the obligation to submit the full transfer pricing documentation within 30 days as of the announcement of the general audit order in accordance with section 90 para. 4 of the German Fiscal Code (Abgabenordnung “AO”). The BEG IV appears to mitigate  this rule, which will apply from January 1, 2025.

New structure of transfer pricing documentation – Supposed relief of shortened submission deadlines

In section 90 para. 3 AO-E, the BEG IV provides for a subdivision of the transfer pricing documentation. In this context, the BEG IV aims to divide the country-specific, company-related documentation (i.e. the Local File) into the following parts:

• Overview of business transactions (transaction matrix),
• Presentation of business transactions (factual documentation), and
• Presentation of the economic and legal basis for agreeing arm’s length terms (Documentation of the appropriateness of the transfer pricing method, arm’s length analysis).

Under the assumption that the BEG IV is passed in its current form, the shortened submission deadline of 30 days starting with the general audit order, will (according to section 90 para. 4 AO-E) only apply to:

• The transaction matrix,
• The master file of the multinational group (if applicable), and
• The documentation of extraordinary business transactions.

The specific requirements for the newly introduced and official transaction matrix will be specified in a revised version of the Ordinance on the Documentation of Profit Allocations (Gewinnabgrenzungsaufzeichnungsverordnung “GAufzV”). Based on the German government’s official justification for the BEG IV, it is expected that the transaction matrix will consist of:

• The nature and subject matter of the business transactions (a), 
• The parties involved, specifying service providers and recipients (b), 
• The volume and pricing of transactions (c), 
• The contractual basis (d), 
• The transfer pricing method used (e), 
• The relevant tax jurisdictions (f), and 
• Whether the transactions are subject to standard taxation in the relevant jurisdictions (g).

In this case, it is only upon a separate request within 30 days that the other parts or the full transfer pricing documentation must be provided.

Practical implications and challenges

Although the definition of a “request package” in section 90 para. 4 AO-E with its focus on the transaction matrix within the Local File suggests a simplification of the documentation, the possibility remains that the full transfer pricing documentation can be requested at any time. This request can be made both together with the general audit order or during an ongoing tax audit. It remains to be seen how the tax authorities will implement this provision in practice.

If the full transfer pricing documentation is requested at a later stage, companies may benefit from a time relief. They will be given an “additional” period of 30 days to prepare the factual documentation, the documentation of the arm’s length analysis and the functional and risk analysis.

However, the extended requirements for the transaction matrix, which must be submitted within 30 days as of the announcement of the general audit order according to section 90 para. 4 AO-E should not be underestimated. In particular, the additional information required in points e and g above, could pose significant challenges for companies required to provide documentation.

Actual or only apparent relief ?

The central question is: Does the Fourth German Bureaucracy Reduction Act actually provide relief in the area of transfer pricing documentation?

The concrete effects of the BEG IV will ultimately depend on its implementation by the tax authorities. In our opinion, it is to be expected that the tax authorities will derive questions from the documents submitted on the basis of section 90 para. 4 AO-E, which will have to be answered in the course of the ongoing tax audit – potentially even in parallel with the preparation of the full transfer pricing documentation. Without clear guidelines on the thresholds for “material/significant” transactions based on the transaction matrix to be submitted in advance, no real relief can be expected regarding the scope of transfer pricing documentation. Even with the implementation of the BEG IV, the required scope of transfer pricing documentation remains uncertain – combined with a continued shortened submission deadline.

The relief is therefore rather modest and does not change our clear recommendation to prepare transfer pricing documentation beforehand as "reserve documentation / defence file". These should, as a precaution, be supplemented by the transaction matrix defined in the official justification for the BEG IV.

Update: The German Bundesrat approved the law on 18 October 2024. The law should therefore be promulgated and enter into force shortly.