Transfer pricing review and adjustments in Germany
April, 27th 2018
What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?
Taxpayer compliance with transfer pricing rules are regularly reviewed in the course of general tax audits which usually cover three to four years. Tax audits are conducted by local tax authorities which often have tax inspectors who specialise in transfer pricing. In addition, there are federal auditors who specialise in transfer pricing, some of whom have industry specialisms and may decide to participate in a tax audit. A tax audit involving local and federal tax auditors on transfer pricing can last for many years.
A taxpayer will be notified several weeks in advance of a tax audit. The audit will usually be concluded by a final meeting between the auditors and the taxpayer, in which the results of the audit will be discussed and an agreement sought for any outstanding issues. The results of the audit will be summarised in a written audit report, which can be commented by the taxpayer before it is sent to the tax inspector responsible for the issuance of revised tax assessment notices reflecting the audit’s results.
The burden of proof regarding compliance with the arm’s-length principle lies with the tax authorities, which need to prove the facts and circumstances which lead to a higher tax liability. However, if the taxpayer has not complied with his or her duty of cooperation, the standards for providing proof for an adjustment of the tax liability of the taxpayer are lowered. Further, in cases where the taxpayer does not comply with the relevant documentation requirements, the tax authorities may either estimate the appropriate transfer price or choose the least favourable value within the relevant range.
Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?
There are no specific transfer pricing audits and, therefore, no specific rules in this respect. Transfer pricing aspects are reviewed in the course of general tax audits.
What penalties may be imposed for non-compliance with transfer pricing rules?
There is no specific penalty for non-compliance with the transfer pricing rules other than those which apply for non-compliance with the documentation requirements.
However, the interest rate in Germany for tax liabilities which are later assessed amounts to 6% per annum. Interest starts 15 months after the calendar year in which the relevant tax liability arose. The interest paid to the tax authorities is a non-deductible expense.
What rules and restrictions govern transfer pricing adjustments by the tax authorities?
There are no specific restrictions regarding the adjustments by the tax authorities relating to transfer pricing, but the authorities can only adjust the transfer pricing by a taxpayer within the limits described above.
How can parties challenge adjustment decisions by the tax authorities?
If no agreement can be reached between the taxpayer and the tax authorities, the taxpayer can file an appeal with the tax authorities against the relevant tax assessment notice containing the transfer pricing adjustment. Such an appeal is filed with the same tax office competent for the tax assessment and the entire case is then reviewed by the tax office.
If and to the extent an appeal is unsuccessful, the decision can be contested by filing a lawsuit with the lower fiscal court of the respective federal state. The fiscal court reviews and assesses all aspects of the case. It is not possible to limit the lawsuit to a certain legal question or certain amount and the fiscal court is not obliged to assess the case based only on the arguments and facts presented by the taxpayer and the tax office.
If and to the extent a party is unsuccessful in fiscal court proceedings, he or she can file an appeal against the fiscal court’s decision with the Federal Fiscal Court. However, strict requirements apply for filing a federal appeal and the scope of the review by the Federal Fiscal Court is limited.
Mutual agreement procedures
What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?
Most of the double tax treaties concluded by the Federal Republic of Germany contain provisions regarding mutual agreement procedures (MAPs) and often arbitration provisions. Germany is also a party to the Multilateral Instrument and the double tax treaties nominated by Germany must be amended in line with the provisions regarding MAPs and arbitration in line with the provisions of the Multilateral Instrument.
A taxpayer can apply for the start of an MAP with his or her local tax authorities or the Federal Central Tax Office under the applicable double tax treaty. The double tax treaty may provide for a certain timeframe in which the application for the initiation of a MAP must be submitted. With the application, the taxpayer must provide detailed information about the underlying facts and the respective tax assessments. Details of the scope, content and procedure regarding a MAP or arbitration involving the tax authorities are outlined in explanatory notes published by the Federal Ministry of Finance in 2006.
The agreement reached in a MAP can only be implemented and result in amended tax assessments if the taxpayer has consented in writing and waived his or her right to appeal against tax assessments, which correctly implement the agreement reached in the MAP or the results of the arbitration.
A MAP is free of charge for the taxpayer, except for his or her own costs and expenses.