Germany: Transfer pricing documentation guidelines, cross-border transactions between related parties

Germany: Transfer pricing documentation guidelines

New administrative guidelines from the Ministry of Finance (BMF) include measures concerning the transfer pricing documentation requirements for cross-border transactions between related parties.


KPMG observation

The BMF guidelines (published 30 December 2020) apply to all open tax assessment periods. As administrative guidance, the guidelines set out the position of the tax authorities and are not binding for taxpayers, but they can have a considerable effect on taxpayers with application of the guidelines in tax audits.

Scope of increased cooperation regarding cross-border transactions

Taxpayers are required to secure the necessary evidence to clarify the circumstances relating to cross-border transactions. The BMF guidance significantly expands the scope of this evidentiary requirement, both with respect to the content of evidence and the conditions under which taxpayers are required to secure such evidence.

For purposes of transfer pricing audits, the German tax authorities may request emails, electronic text messages, and other electronic media in addition to books and records, business papers, professional opinions and statements, and other documents and data regarding international related parties. This represents a significant enhancement.

Data and documents also can be required for use at a later stage during the course of a tax audit in determining and validating the appropriateness of the transfer pricing policy. Although taxpayers are not required to use more than one transfer pricing method, they may nevertheless have to produce evidence during an audit that could be used in considering all possible transfer pricing methods. The BMF guidance notes that taxpayers can continue to enter into contractual agreements prior to a transaction regarding, for example, the selling prices of an affiliated sales company to third parties; the calculations regarding a foreign service company; and proof of contributions made as part of a cost contribution arrangement without examining further whether such arrangements are at arm's length.


The BMF administrative guidelines reflect a significant enhancement regarding the permissible range of estimation by the tax authorities—reflecting an attempt to expand taxpayer cooperation as specifically defined for transfer pricing and ultimately facilitating more extensive income adjustments.

Previously, it was assumed that classifying transfer pricing documentation as “unusable” was essentially the result of a taxpayer failure to submit the documentation. Now, transfer pricing documentation is considered as unusable in the event of differences between the actual facts and the presentation made in the transfer pricing documentation—for example, if a supposedly routine company is presented as a residual-earning entity or if the submitted third-party data does not match the functional and risk profile. There is a concern that the German tax authorities could potentially apply this provision to situations when they have a different interpretation of the functional and risk profile (compared to the taxpayer's position). The guidelines could, therefore, provide the tax authorities with broader scope for using estimates—with adverse consequences for taxpayers, given that this could result in the tax authorities rejecting the transfer pricing documentation, as a whole.

Penalties are now to be assessed for each transaction and for each individual assessment year separately. Consider the example of a late-filing penalty—the maximum amount could thus be increased from €1 million to several times that amount due to the number of transaction groups and tax audit years.

The new BMF guidelines also clarify that the submission of usable transfer pricing documentation does not preclude the tax authorities’ right to use estimates. In this regard, the guidelines contain a range of obligations to provide evidence (e.g., submission of emails) in the context of the scope of increased taxpayer cooperation in cross-border matters.

Content of transfer pricing documentation

Concerning the transfer pricing documentation, the taxpayer must now demonstrate within the framework of an arm’s length analysis why the chosen transfer pricing method is considered the best method. Previously, taxpayers only had to explain why the applied method was considered suitable. Thus, this reflects a certain convergence with the rules of other jurisdictions where the “best method” approach has already been used for some time.

This rather economic approach generally reflects certain elements of the draft ATAD Implementation Act (24 March 2020)—in which the measures on transfer pricing have most recently been abridged. Now, many of the provisions relating to transfer pricing originally provided for in the ATAD Implementation Act are contained in the government’s draft bill for withholding tax relief (20 January 2021). Read TaxNewsFlash

Other changes regarding an arm’s length analysis concern situations when, for instance, companies determine transfer prices based on budget estimates. In such cases, arm’s length data is to be used in the future whenever possible. According to the tax authorities, a “sensitivity analysis” must be conducted for valuations so that it can be determined how the individual valuation parameters may affect the determined value.

Read a February 2021 report [PDF 129 KB] prepared by the KPMG member firm in Germany

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