Germany: New administrative guidelines for transfer pricing

Germany published new administrative guidelines for transfer pricing.

Germany published new administrative guidelines for transfer pricing.

The German Federal Ministry of Finance (BMF) published (on 14 July 2021) the new administrative guidelines for transfer pricing (Verwaltungsgrundsätze Verrechnungspreise).

  • The administrative guidelines refer to the OECD transfer pricing guidelines, which are now part of the administrative guidelines, and therefore also reflect the German tax authorities' interpretation of German tax law in the area of transfer pricing.
  • The new BMF guidance refers to the publications of the EU Joint Transfer Pricing Forum and to the United Nations Practical Manual on Transfer Pricing for Developing Countries. It is expected that the German tax authorities will continue to align with international transfer pricing standards. The BMF specifies its interpretation of certain aspects of the arm’s length principle by largely following the OECD transfer pricing guidelines in its guidance.
  • The administrative guidelines deal, among other subjects, with principles of income correction, guidelines, and other general principles.
  • The group of related parties has been expanded for income adjustment purposes to include networks and pyramidal organisations whose members are legally independent companies. They are considered to be related parties to the extent they have a presumed common commercial interest.
  • In the opinion of the tax authorities, the arm’s length principle entails not only an arm's length comparison from a quantitative perspective (i.e. the appropriateness of the price), but also whether the other terms and conditions under which the related party transactions are arranged can be considered appropriate. This refers to all related party transactions and applies equally to inbound and outbound cases. It remains to be seen whether this uniform application will in practice also apply to permanent establishments for which the BMF suggests the application of different arm's length standards to same fact patterns in inbound and outbound cases.
  • Based on a functional and risk analysis, transfer prices may be inappropriate according to the BMF, if a routine company does not earn an adequate cumulative profit over a period of five years. Other reasons could be business transactions that have yet to be identified and compensated or the assumption of business expenses in the interest of other group companies. In the opinion of the BMF, the analysis period of five years may vary both upwards and downwards depending on the presence of special circumstances.

The extensive guidance provides for further statements regarding specific subjects, such as intangible assets, services and financial transactions.

The publication of the administrative guidelines repeals several BMF guidance items and further application regulations. The new administrative guidelines apply to all open cases, i.e. also to past tax assessment periods. The BMF is of the opinion that the interpretation of Article 9 (1) of the OECD Model Tax Convention (dynamic vs static) is irrelevant. Instead, the arm’s length principle is to be considered depending on time and context. Amendments to the OECD transfer pricing guidelines need to be taken into consideration without any further legislative measures.

Read an August / September 2021 report [PDF 348 KB] prepared by the KPMG member firm in Germany


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