Background
Section 1 of the German Foreign Tax Act (Außensteuergesetz, AStG) is the central correction provision in the context of transfer pricing for cross-border service relationships in a multinational group of companies. A large number of administrative directives have been issued on this topic to date. In a letter dated 14 July 2021, the German Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) has now issued a comprehensive statement on the principles of income correction and has summarized or repealed various older letters. In addition, new views are also expressed and a specific reference to the OECD Transfer Pricing Guidelines 2017 is made. Although the "Administrative Principles on Transfer Pricing" are only binding for the tax authorities, they are of enormous practical relevance as a central reference point.
Basic explanations
The BMF is adapting its view on the arm's length principle to international standards. For this purpose, the OECD Transfer Pricing Guidelines 2017 are included in the letter (as an attachment). In addition, the letter responds to a large number of tax court rulings that have been issued in the meantime and to changes in the law. Another focus is on the various tax correction rules and their competitive relationship with each other and with regard to the taxation of taxable profits. Furthermore, the circle of related parties within the meaning of Section 1 (2) AStG is expanded.
Contents of the letter
In terms of content, the letter addresses the following topics, among others:
- Transfer pricing methods and valuation techniques
- Comparability analysis
- Procedure for the avoidance and resolution of transfer pricing conflicts
- Classification of companies only as strategy carrier or routine company (no medium company)
- Dealing with (permanent) losses as well as concretization of the profit situation for routine companies
- Analysis and documentation of transactions involving intangible assets (brands, rights, etc.) and their use within the Group (so-called DEMPE functions: Development, Enhancement, Maintenance, Protection, Exploitation).
- Deliveries of goods
- (Routine) services with low value added with flat-rate value markup of 5 % in principle without in-depth appropriateness analysis
- Corporate and cost allocations
- Employee secondments and relocations of functions
A special focus is also placed on the requirements for financing relationships within the Group and their documentation.
Consequences
In principle, the "Administrative Principles on Transfer Pricing" lead to a certain degree of legal certainty for taxpayers, but in part they already represent transfer pricing practice in practice and in some parts lead to newer views. In any case, the reference to the OECD guidelines and the extensive avoidance of special national approaches are to be welcomed. The BMF letter is to be applied to all open cases, although it also refers to changes in the law, which in turn are not to be applied until 2022 (e.g. ATAD Implementation Act II, Withholding Tax Relief Modernization Act). In order to avoid tax risks, it should be reviewed whether there is a specific need for adjustment with regard to the determination or documentation of transfer prices.