The Guidelines deal with a number of procedural questions that are important during tax audits rather than in the preparation process of Transfer Pricing documentation or the design of the Transfer Pricing system.
Among those procedural aspects are the following:
- Taxpayers are expected to ensure that they have access to relevant evidence at the time of the audit, e.g. This especially refers to information that is in the hands of related parties not located in Germany, e.g. by introducing respective information clauses in the intra-group agreements. It seems that going forward it will be more difficult than in the past to argue that certain information is not available to the taxpayer in Germany.
- Taxpayers should maintain data and information that allows tax authorities to apply other Transfer Pricing methods than the one actually chosen – it will be interesting to see in practice how this will be handled, as it is not difficult to come up with situations in which this would lead to a massive administrative burden for companies.
- Information such as accounts ready for consolidation can be requested by the tax authorities.
- It is explicitly stated that emails, messages from instant messengers etc. can be requested by the authorities to do a further “reality check” between the information given in the Transfer Pricing documentation and the actual conduct of the parties (e.g. with respect to the decision making process). We have observed this already in practice, and with the explicit stipulation in the guidelines, it can be expected that such requests become more widespread in the future.
The topics relevant for the actual documentation preparation are especially the following:
- The Guidelines now explicitly introduce a “best method rule” – while in the past, taxpayers just had to apply “an adequate method”, one now also needs to justify why other methods have not been applied. For companies that prepare documentation centrally, this is likely not much of a change, as such best method rule existed in other countries already for a while.
- If valuations are done, e.g. in the documentation of transfers of functions, sensitivity analyses for valuation parameters are now regularly requested.
- Further, German language of the Transfer Pricing documentation still seems to be very important for the authorities, although in practice, this is often handled in a more pragmatic way and English language documents are frequently accepted. However, it should be noted that a prior application for foreign language Transfer Pricing documentation reports is required, at the latest at the time when the tax authorities request the handing in of the Transfer Pricing documentation reports.
Finally, it should be noted that the increasing requirements stipulated in the Guideline to provide evidence and support to the “best method” come along with reduced burden to estimate the income of a taxpayer. Therefore, it should be expected that the German tax authorities might try to quicker than in the past go to an income estimation.