The tax authorities are increasingly shifting their focus to transfer prices within groups of companies in the context of tax audits, including in internationally operating SMEs. Counter the risks of double taxation by actively designing the transfer pricing strategy in your company as well as through structured transfer pricing documentation (master file, local file) that meets requirements. Leverage an individual design of the transfer pricing system in your group of companies and use it as an opportunity and a controlling instrument. Our transfer pricing experts can draw on a wealth of experience. We combine an understanding of business administration with tax know-how and have already successfully supported a large number of projects and tax audits.
Our strength is the development of transfer pricing concepts that are practicable for international SMEs as well as their legally compliant implementation and transfer pricing documentation. We are at home in the SME sector and develop our transfer pricing strategies together with you – at eye level.
We also have an excellent international network. Our colleagues at Nexia offer the highest level of advice around the globe. This enables us to implement your transfer pricing system uniformly and consistently worldwide and to coordinate transfer pricing projects internationally.
Would you like to get together for a personal meeting? We would be glad to arrange an appointment with you – no commitment necessary on your part – so that we can get to know each other. We look forward to your call or e-mail and to meeting you.
The so-called arm's length principle is decisive in determining transfer prices between associated enterprises. When independent enterprises do business with each other, the terms of their commercial and financial relationship (e.g. the price of goods supplied or services rendered) are usually determined by market forces and prevailing clashes of interests. In other words, the terms of a service relationship are negotiated subject to arm's length market conditions. These arm's length conditions do not generally exist between associated enterprises. The Organisation for Economic Co-operation and Development (OECD) has therefore established the arm's length principle, according to which the conditions and relationships agreed between associated enterprises must also stand up to a third party comparison, to serve as an international standard for transfer prices. The OECD member states have agreed that this principle is to be applied for tax purposes by multinational groups of companies and by tax administrations.
The "OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" address the application of the arm's length principle in detail. These guidelines serve as the basis for national regulations in many countries worldwide, including Germany.
Given the crucial role that multinational enterprises play in the global economy and increasingly complex structures, transfer pricing is of paramount importance for both tax administrations and taxpayers. States must ensure that the taxable profits of multinational enterprises are not unnaturally shifted to other tax jurisdictions and that the tax base reported by multinational enterprises in their tax jurisdiction corresponds to the economic activity carried out there. Unlike accounting issues, for example, it is not only a question of a temporal shift of possible taxation, but of the final shift or the final loss of taxable substrate.
Against this backdrop, transfer prices are increasingly becoming the focus in tax audits, including with small and medium-sized enterprises. In addition to the "classics" in the area of transfer pricing, namely the audit of the supply and service relationships within multinational groups of companies both in terms of their reason and amounts, another focus in tax audits due to these developments is also on the allocation and offsetting of intangible assets, such as trademarks, patents, know-how and customer relationships. In this context, the audit and assessment of relocations of functions is also becoming increasingly important. Intra-group financing relationships are also coming under increasing scrutiny.
It is crucial for taxpayers to limit the risks of economic double taxation that may arise from disagreements between two countries regarding the determination of arm's length remuneration for their cross-border transactions. Double taxation in this context means that profits already taxed in one country are taxed again in another country through unilateral adjustments of transfer prices.
The usual obligation to cooperate in the investigation of facts bearing relevance to taxation is significantly stronger in the case of transactions with a foreign connection, since the German tax administration can only conduct its own investigations to a limited extent in the case of cross-border transactions and therefore partially passes on these efforts to clarify matters to domestic taxpayers (§ 90 (2) of the German Fiscal Code - AO). On the other hand, there are special record-keeping obligations regarding the nature and content of business relationships with related foreign parties - transfer pricing documentation (§ 90 (3) of the German Fiscal Code - AO).
In addition to the risk of double taxation, there are also penalties or other sanctions for non-compliance with documentation or reporting obligations. These exist in particular in the form of fines or also authorisation of the tax authorities to determine income by way of estimation. These sanctions can already be applied if the tax authorities do not consider the documentation submitted to be valid.
In addition, taxpayers who are part of a multinational group of companies are confronted with increased tax cooperation and reporting obligations in the case of cross-border tax arrangements (DAC6). The term "tax planning" is interpreted very broadly by the tax authorities.
Under § 90 (3) of the German Fiscal Code (AO), records documenting the nature and content of business relationships with related foreign parties are to be prepared. These records, which are also generally referred to as transfer pricing documentation, serve as proof that the arm's length principle has been taken into account in the business relationships with related foreign parties (in particular affiliated companies) and that the transfer prices applied are appropriate.
The transfer pricing documentation generally comprises the so-called factual documentation, with a presentation of individual business transactions, as well as the legal and economic circumstances surrounding the group of companies and so-called documentation demonstrating the reasonableness of the agreed transfer prices with information, in particular, on the time the transfer prices were determined, the transfer pricing methodology applied and the arm's length data used (local file).
In addition to the statutory provisions, the so-called Profit Accrual Recording Ordinance (GAufzV) specifies cooperation and recording obligations. Under these provisions (§ 6 GAufzV), a full local file must be created for companies with business relationships with related parties if
If such records are to be prepared for a company as part of a multinational group of companies and if its turnover in the previous business year was more than € 100 million, a master file must also be prepared. This essentially contains an overview of the type of worldwide business activity of the group of companies and the system used for transfer pricing.
In addition, according to § 138a of the German Fiscal Code (AO), a domestic group parent company that is obliged to prepare consolidated financial statements in which at least one foreign company is included must generally prepare a so-called country-by-country report and submit it to the Federal Central Tax Office (BZSt). A further requirement is that the consolidated turnover reported in the consolidated financial statement must have amounted to at least € 750 million in the previous financial year.
The arm's length principle established by the OECD as an international standard for transfer pricing is applied in many countries, but is sometimes interpreted differently or implemented to varying degrees.
In concrete terms, this means that both regulations of individual countries and the thresholds for preparing transfer pricing documentation as well as the severity of sanctions in the event of non-compliance with regulations can vary greatly. For this reason, the appropriateness of transfer prices and their documentation must be considered from the perspective of all tax jurisdictions concerned in order to avoid discussions with the respective tax authorities involved.
In addition, a different understanding of terms or contracts in different countries can lead to conflicts in qualification, to the application of withholding taxes and thus ultimately to double taxation. Therefore, it is crucial to design the overall structure of intra-company transfer pricing in an appropriate manner, to lay it down contractually and to monitor it regularly.
The active design of transfer prices or transfer pricing strategies in medium-sized groups of companies as well as structured and customised transfer pricing documentation (master file, local file) offer an opportunity to proactively preclude tax audit risks, especially the risk of double taxation. The individual design of the transfer pricing system is an opportunity, especially in medium-sized companies, to create clear contractual structures as the legal basis for intercompany relations and group-wide guidelines that can be used as a controlling instrument. Thus, they also constitute an important component in a tax compliance management system. Together with those in charge at the company, we establish a transfer pricing concept involving all group companies that is practicable, that can be effectively implemented and which is to the greatest extent possible legally secure. This allows added value to be derived for the entire group.