Unleashing the Potential of Special Transfer Pricing Rules in Germany

Introduction

Welcome to a deep dive into the fascinating world of transfer pricing regulations in Germany! For multinational corporations and small and medium enterprises (SMEs) operating in this dynamic market, understanding the intricacies of special transfer pricing regimes is key to ensuring compliance and optimizing tax strategies. In this blog post, we will explore the unique rules governing permanent establishments (PEs), SMEs, and the compliance with the EU Code of Conduct. Let's embark on this journey to unravel the complexities and opportunities that lie within Germany's special transfer pricing landscape.

I. Permanent Establishments: Adhering to the Arm's Length Principle

1. The Authorized OECD Approach (AOA)

In January 2015, Germany implemented the Authorized OECD Approach (AOA) for the treatment of PEs. The AOA aligns with Article 7 of the OECD Model Tax Convention and its accompanying commentary. This approach ensures that PEs are treated as separate entities for transfer pricing purposes, reflecting the economic substance of their activities.

2. Profit Attribution to PEs

To provide further clarity on profit attribution to PEs, a draft decree was issued for consultation in August 2013. The decree covers various aspects, including:

- Clarification of situations when dealing between different parts of a legal entity is recognized for tax purposes.

- The allocation of free capital to different parts of the enterprise.

- Attribution of assets and risks to a PE.

3. Ordinance on the Application of the Arm's Length Principle to PEs

In December 2016, the Ministry of Finance published an ordinance on the application of the arm's length principle to PEs. This ordinance is based on section 1(5) of the Foreign Tax Act and provides comprehensive guidance on profit allocation between headquarters and PEs, both in domestic and tax treaty situations. It ensures a consistent application of internationally recognized principles on the taxation of PEs.

II. Small and Medium Enterprises (SMEs): Simplified Requirements

1. Reduced Documentation Requirements for SMEs

Germany acknowledges the unique challenges faced by SMEs and taxpayers generating income other than "profit income" from business relationships. To ease the compliance burden, SMEs are not required to prepare written transfer pricing documentation as required under Sec. 90(3) of the AO and Decree-Law 10/2003. Instead, they must provide any available documentation within 60 days upon request by the tax authority and furnish oral information to determine arm's length conformity.

2. Administrative Principles for SMEs

The Administrative Principles on Procedures and the Administrative Principles on APAs contain specific sections for SMEs. These sections offer reliefs regarding simplified transfer pricing documentation and reduced fees for APA requests. The definition of SMEs in Germany follows the SME definition of the European Union, ensuring consistency across borders.

III. Compliance with EU Code of Conduct

1. The Role of EU Joint Transfer Pricing Forum (EU JTPF)

The EU JTPF plays a significant role in monitoring transfer pricing provisions introduced by EU member states and issuing non-binding guidance on transfer pricing matters. It has issued Codes of Conduct on Transfer Pricing Documentation (EU TPD) and on the effective implementation of the Arbitration Convention.

2. Features of EU TPD

The Code of Conduct on EU TPD introduces several features to facilitate risk assessment and compliance. These include:

- A risk assessment approach to transfer pricing documentation.

- An option for the taxpayer to keep documentation in the prescribed form.

- Less onerous documentation requirements for SMEs.

- Reduction of compliance costs and a lower administrative burden.

- Certainty that if records are kept in the prescribed manner, no penalties will be charged for inadequate documentation.

3. Emphasis on Master File and Country-Specific Documentation

The Code of Conduct recommends an approach involving a master file and country-specific documentation. This enables tax authorities to obtain relevant information for their country, while taxpayers can reduce compliance costs. The documentation must contain sufficient detail for tax authorities to perform a risk assessment and select suitable cases for further investigation.

4. Country-by-Country Reporting

EU Directive 2016/881 requires each EU member state to require the Ultimate Parent Entity of a multinational group that is tax resident in its territory to file a country-by-country report. This report aligns with the OECD's BEPS action 13 and ensures the exchange of information between member states.

Conclusion

Germany's special transfer pricing regimes offer opportunities for multinational corporations and SMEs alike to navigate the complexities of cross-border transactions effectively. By adhering to the arm's length principle, complying with the EU Code of Conduct, and leveraging the benefits of special rules for SMEs, businesses can ensure transparency, compliance, and optimized tax planning.

As the global landscape of transfer pricing continues to evolve, staying updated on Germany's transfer pricing laws and embracing best practices will be critical for achieving sustainable and compliant business operations. By harnessing the potential of special transfer pricing rules, companies can build trust with tax authorities, foster economic growth, and contribute to a thriving business environment in Germany.