Germany has introduced new regulations on transfer pricing documentation on the basis of the OECD/BEPS rules (local files/master file) which apply to all business years commencing after January 1, 2017. Apart from the general „who has to do what“ there are some special rules worth a closer look.
New German Rules on Transfer Pricing Documentation
Germany introduced new regulations on transfer pricing documentation in July 2017. This so-called Gewinnabgrenzungsaufzeichnungs-Verordnung – GaufzVO, which even causes pronunciation difficulties for Germans, applies to German companies of which the business years commenced on or after January 1, 2017. The new rules are implementing BEPS Action 13 with regards to Master Files and Local Files for German companies or branches that belong to international groups.
Previously, Germany already modified Country-by-country reporting according to BEPS in 2016. As a result, country-by-country reporting is mandatory for groups with annual consolidated sales of at least € 750 million.
Every German company conducting business transactions with foreign related companies, branches or dependent agents is subject to the new regulations.
- First, they are obliged to have sufficient and adequate documentation. The documents should illustrate how the company’s transfer pricing system complies with the applicable rules.
- If these German companies’ or branches’ have sales of goods to their affiliates of more than € 6 million per year, local files should elaborate on these transactions in detail. This also applies where the volume of services is higher than € 600,000 per year. The requirements of the local files are based on the OECD/BEPS standards.
- Master files, on the other hand, are mandatory if companies or branches belong to an international group and the annual sales amount to € 100 million or more. An international group consists of at least two enterprises in two different countries. The master files have to illustrate information on the whole group. Again, the files should meet the OECD/BEPS standards.
Transfer Pricing and Fiscal Consequences
The general rules above are supplemented with an abundance of rules. These determine, inter alia, transfer pricing methods, exceptional business events, and „transfer of functions“. The latter is a – rather fuzzy – German peculiarity, leading to taxes on deemed profits, when at least two economic functions of a German company are transferred to a related foreign enterprise.
In addition, transfer pricing has become a major adventure playground in German tax audits. Therefore, one should take a close look at the details of all regulations. This will reveal much food for thought. Transfer pricing documentation should, for example, include information on the value chain in the group’s business. But which function in which company or branch contributes to the overall business success? The rule is good in theory. In real life, however, it’s very hard to find out what contribution (or misfortune) to the group’s overall success is made by whom. You could ask various departments or companies the percentage of their contribution to the overall profit of the company or the group. But then you’ll probably end up with a total of 437%.
Quite extraordinary for the field of transfer pricing, there is hope. Under the new German rules say a good sound transfer pricing structure may be illustrated by “weighing” the functions of your business. Yet, you have to prove that it’s done correctly. Moreover, weighing of functions can mean many things. In transfer pricing practice it generally means stating percentages of contributions of functions in the value chain. This entails providing data, explanations, and evidence of its execution. Hence, it might become a point of endless discussions – or worse – a point in your next tax audit. Luckily, the rules don’t oblige you to weigh such functions. You may simply describe them in general. In short, the solution is to explain the value chain and avoid percentages (or similar) for its various factors! This is curious, but it isn’t the first time that tax rules took us by surprise.