General transfer pricing climate in Germany
Global measures in response to the OECD's BEPS initiative also have had an impact on the regulatory framework in Germany. The German government supports the BEPS initiative, in particular Action 7 (Prevent the artificial avoidance of PE status), Action 8 (Intangibles) and Action 13 (Transfer pricing documentation and CbC), all of which are expected to have broad influence on the transfer pricing rules in Germany. In this article we would like to highlight the following latest developments:
BEPS Action 13: Implementation into national law planned
The implementation of Action 13 of the BEPS initiative (Guidance on Transfer Pricing documentation and Country-by-Country-Reporting) into national German law takes concrete shape. To implement Action 13 into German tax law, it is planned to restructure and extend the current sec. 90 General Tax Code of Germany (AO) by adding new paragraphs in the near future. Corresponding with the OECD requirements, the new paragraphs of section 90 General Tax Code will contain regulations regarding country-by-country reporting, the master file/ local file concept as well as an ordinance authorizing amendments and/or renewal of the current Decree-Law on the Manner, Content and Extent of Documentation (GAufzV). In addition, it is planned to update the existing Administrative Principles Procedures as of April 12, 2005. The new sec. 90 General Tax Code will be adopted under the Fiscal law 2016 and the regulations will apply for fiscal years commencing in 2016.
Regulation on Attribution of Profits to Permanent Establishments
The upper chamber of Germany's Parliament on October 10, 2014, adopted the final version of the regulation on the application of the arm's length principle to permanent establishments (Betriebsstaettengewinnaufteilungsverordnung, BsGaV). The branch profit attribution regulation includes a range of detailed rules on the application of the Authorized OECD Approach (AOA) in Germany, which was incorporated into German tax law last year. The core idea of the AOA is to treat permanent establishments for tax purposes as if they were (nearly) fully independent and separate legal entities. This implies the consequent application of the arm's length principle to internal dealings between the permanent establishment and its head office, and between permanent establishments of the same company.
The branch profits attribution regulation has the stature of a law, and binds the taxpayer, the tax authorities, and the tax courts. It governs:
- The asset attribution and attribution of chances and risks to permanent establishments;
- The branch capital allocation;
- The recognition of "assumed contractual relationships" (dealings); and
- The application of the AOA to banks, insurance companies, and construction and exploration sites.
Germany generally follows the guidance provided by the OECD in the Report on the Attribution of Profits to Permanent Establishments of July 22, 2010. However, for some fact patterns the German branch profit attribution regulation provides more detailed rules than discussed by the OECD, and reduces the range of alternative approaches available to the taxpayer. This is especially true for branch capital allocations, with regard to some refutable presumptions in the German regulation, which deviate from the OECD consensus, as well as with regard to the special provisions for construction, installation, and exploitation permanent establishments.
In accordance with the OECD PE Report, the attribution of profits to permanent establishments is performed in a two-step approach. In the first step, the people functions performed by the permanent establishment are identified based on the activities of locally employed personnel. Next, the assets used and risks assumed that are associated with those people functions are attributed to the different parts of the enterprise. Finally, the branch capital is attributed to the permanent establishment, taking into account the functions performed and risks assumed by the permanent establishment. On the basis of this attribution, the internal dealings between the head office and its permanent establishment(s) and between permanent establishments of the same entity are identified, and an arm's length remuneration is determined. For this purpose, the provisions of the OECD transfer pricing guidelines apply by analogy.
The detailed rules of the branch profit attribution regulation apply for all fiscal years commencing after December 31, 2014. By contrast, the general principles of the AOA are already applicable for all fiscal years that started after December 31, 2012. "Administration Principles for the Audit of the Profit Attribution to Permanent Establishments" will be published in the near future and will provide further guidance on the application of the AOA in Germany. Taxpayers with permanent establishments in Germany should take action and check whether their international profit attribution is in line with the new detailed German rules.
IDW S5 valuation rules
The IDW (Institute of Public Auditors in Germany, Incorporated Association) S5 rules contain general principles for the valuation of intangible assets and provide guidance regarding specialties in the evaluation of brands and customer-oriented intangible assets. An additional chapter of the IDW S5 rules was issued on April 16, 2015, and includes special issues regarding the valuation of technologies.
German tax authorities are increasingly paying attention to business restructurings and the transfer of functions. This is related to the concept of the hypothetical arm's length test, which was introduced by amendment of the FTA as of January 1, 2008, and the corresponding decree law on the relocation of business functions (FVerlV).
Operationalization of Transfer Pricing Systems
The operationalization of transfer pricing systems to for multinationals is becoming increasingly important. As a result of current transfer pricing developments such as the BEPS initiative, a multinational's transfer pricing will no longer be considered a compliance issue during a tax audit, but rather an administrable and defensible part of the value chain. For example, transfer pricing documentation will be seen not only as a resource for the ex-post defense of a taxpayer's transfer pricing system but rather as an active instrument for the provision of information and results-orientated management of transfer pricing audits.
Transfer pricing documentation should be an additional component of an operationalized transfer pricing system, especially in conjunction with a transfer pricing policy and/or respective underlying intercompany agreements. Therefore, a jointly defined interface between a multinational's ERP system(s) and its transfer pricing system is a useful tool during the planning and allocation phase, as well as for the documentation phase. The relationship between organization, systems, and technology is a decisive factor for the optimization of resources in a multinational corporation. Further prerequisites besides an efficient interface to existing ERP systems are the definition of tasks as well as far-reaching standardization. Thus, multinational corporations should scrutinize and define the future direction of their transfer pricing system, especially with respect to issues related to their operational and organizational structure. Similarly, it can be expected that issues related to the operationalization of transfer pricing systems will be future priorities during tax audits.