Worldwide transfer pricing reference guide 2014

Germany (continued)
OECD Guidelines treatment
The German tax authority considers its transfer pricing laws and regulations to be consistent with the OECD Guidelines. The OECD
Guidelines provide support for domestic use, but do not constitute binding law in Germany. German transfer pricing regulations and
practices do differ from those of the OECD Guidelines with regard to certain issues (e.g., the application of transactional profit methods,
documentation requirements, and the treatment of transfers of functions).
Priorities/pricing methods
Under the arm’s length principle, it is assumed that the taxpayers have acted in a manner comparable to unrelated parties. This assumes
that all material information about the transaction (complete information about the counterparty) is available and that the parties acted
as prudent and diligent business managers.
Under the tax law effective 1 January 2008, the application of transfer pricing methods is dependent on the availability and quality of
third party comparable data. Three different situations are distinguished: full comparability of the data, limited comparability of the data
and non-availability of third party comparable data.
When full comparability of third party data exists, the law stipulates the priority of the traditional transaction methods: CUP, Resale Price
and cost plus. Any price within the full range of fully comparable third party data meets the arm’s length principle.
If limited comparability exists, all OECD methods are allowed; i.e., the aforementioned traditional methods and the transactional profit
methods (TNMM for routine functions and residual Profit Split as a method of last resort, i.e., if both transaction parties perform
entrepreneurial functions and their individual contributions cannot be differentiated). In case of limited comparability, the range of
available third party comparable data must be limited by applying statistical measures (e.g., the interquartile range).
If no comparable data exists, the law stipulates that taxpayers have to conduct a hypothetical arm’s length analysis to derive arm’s length
transfer prices. Accordingly, in compliance with the so-called prudent and diligent business manager principle, and based on the
functional analysis and internal projections, the taxpayer has to establish a range of “hypothetical” arm’s length prices. The range of
negotiation is defined by the minimum price a hypothetical seller would accept and by the maximum price a hypothetical purchaser would
pay. The taxpayer must use the value within the range of negotiation that has the highest probability of complying with the arm’s length
principle. If the taxpayer provides no reasoning behind choosing that value, the arithmetic mean of the range of values is assumed to be
the arm’s length transfer price for the transaction under review.
Transfer pricing penalties
If a taxpayer does not comply with the transfer pricing documentation requirements to the extent outlined in § 90 (3) of the
German General Tax Code, a rebuttable presumption applies under which the taxpayer’s income had been reduced by the amount of
inappropriate transfer prices, thereby forming the basis of a transfer pricing adjustment.
Taxing authorities may apply § 162 (3) of the German General Tax Code if the taxpayer submits no or insufficient documentation, or if
exceptional transactions have not been recorded contemporaneously. In all three cases, the tax authority is authorized to estimate the
income, provided that the taxpayer does not rebut the presumption. This also holds true when a taxpayer does not disclose relevant
data only available with the foreign related parties. If estimation by the tax authorities is indicated in such cases and it is only possible to
determine the relevant income within a certain range, the range may be fully exploited to the taxpayer’s detriment.
The legislation takes into consideration that a single appropriate transfer price does not exist and that comparable third party prices may
vary within price ranges. Under the tax law effective 1 January 2008, in the event that the taxpayer’s transfer price falls outside the full
range (in case of full comparability of third party data) or the interquartile range (in case of limited comparability of third party data) of
arm’s length prices, the transfer price is adjusted to the median of the range.
Penalties can be assessed based on the taxpayer’s non-compliance with the documentation requirements. An actual income adjustment
is not subject to penalties but interest is assessed on the additional tax payments (6% per annum, which is non-deductible for tax
purposes). Interest starts accruing 15 months after the end of the calendar year in which the tax liability arose.
If the taxpayer fails to submit transfer pricing documentation or if the documentation provided is unusable or insufficient, a penalty of
5%–10% on the income adjustment will be applied, with a minimum penalty of EUR5,000.
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