Germany: Proposed revisions to transfer pricing rules

Germany: Proposed revisions to transfer pricing rules

The German federal government in January 2021 adopted a draft bill including amendments to the provisions on the arm’s length principle under the foreign tax law.

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  • The draft bill includes extensive revisions to the provisions governing transfer pricing. According to the explanatory memorandum, the design of the provisions for a fair division of taxation rights in the case of multinational enterprises is to be updated.
  • The wording of the provisions on the adjustment of income is to be revised extensively, and thereby closer aligned to the Organisation for Economic Cooperation and Development (OECD) transfer pricing guidelines.
  • The “most suitable method” is to be applied instead of the standard methods (e.g., comparable uncontrolled price method, resale method, and cost-plus method).
  • In order to determine the arm’s length price, price-impacting circumstances underlying the transaction to be examined would be determined by a function and risk analysis, with a focus on the principle of substance.  
  • Specific particularities—circumstances that cannot be agreed—of a group are to be taken into account. This does not mean that practices that comply with group standards are at arm’s length; rather, "compliant with group standards" and "at arm’s length" would be kept apart.
  • There would be new separate provisions on transfer pricing in the event of the transfer or licensing of intangible assets.
  • Pre-existing provisions regarding so-called price-adjustment clauses for cases when substantial intangible assets constitute the subject matter of a business relationship would have to be presented separately and extended in a new section of the foreign tax law. The period for potential price adjustments, among others, would be reduced to seven years (from 10 years) following the conclusion of a transaction
  • In the absence of special rules regarding the application timeline, the revised provisions governing the arm’s length principle would be effective on the day following the law’s promulgation.

Read a February 2021 report [PDF 357 KB] prepared by the KPMG member firm in Germany

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