Draft German tax law adopts low threshold for transfer pricing master file, combats MNE tax avoidance

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by Ninja-Antonia Reggelin

The German Finance Ministry on June 1 released a draft law proposing further measures combating multinational profit shifting, including implementation of transfer pricing documentation and country-by-country reporting and exchange of tax rulings. The proposal is notable because it will likely require the filing of a master file by a majority of German multinationals.

The draft law reflects Germany’s commitment to adhere to the OECD/G20 base erosion profit shifting (BEPS) action plan, adopting BEPS plan recommendations under action 13 regarding country-by-country reporting for multinational enterprises. Although the introduction to the legal text cites an increased need for transparency, it also clarifies that the country-by-country information is to be used by tax authorities for risk analyses for transfer pricing purposes.

It is stated that the draft law’s proposed changes are necessary to avoid double non-taxation. In this context, it should be noted that there is no further comment on making country-by-country information publicly available. The EU’s proposal for public country-by-country reporting remains controversial and undecided among EU Member States as well as within Germany, where it is rumored that the issue has reached the highest political level and will be negotiated in the coming coalition committee.

The German draft law also includes a provision to implement OECD recommendations regarding the master file (new article 90 para 3 fiscal code (AO)). The master file is to be submitted upon request to the tax authorities by multinational groups that, in the previous year, had turnover exceeding €100 million (USD 136 million). A multinational group is defined as two or more connected/related companies in different countries or one company that has at least one permanent establishment in another country.

The very low threshold for filing the master file exposes the lack of agreement among countries regarding OECD action 13. Although the master file includes sensitive information, similar to the country-by-country report —  such as organizational charts, business activities, financing, and general strategies for the use of intangible assets within the value chain —  international tax policy makers failed to define clear global standards in this area.

It appears that while many countries have implemented BEPS action 13 by applying the €750 million (USD 852 million) turnover threshold used for the country-by-country reports to the master and local files, some EU countries have set a much lower threshold. For example, Spain and the Netherlands set turnover thresholds of €45 (USD 51 million) and €50 million turnover(USD 57 million) in their draft laws.

This may be due to the fact that the EU Council passed a resolution in 2006 recommending the voluntary use of a master file for transfer pricing documentation. An obvious threshold for the EU could have been the small and medium size company definition, which requires a staff headcount of less than 250 and turnover of less than or equal to €50 million (USD 57 million) or a balance sheet total of less than or equal to €43 million (USD 49 million).

The proposal’s country-by-country reporting changes also reflect the European Administrative Cooperation Directive regarding a secondary mechanism and the commitment to automatically exchange these reports.

The proposal further commits to automatic exchange of information on tax rulings with other EU States and the European Commission, implementing amendments to the Administrative Cooperation Directive, agreed by the ECOFIN on 8 December 2015.

The following additional measures against profit shifting are highlighted in the Ministry’s statement:

  • Adjustments to the income tax law (Einkommensteuergesetz, EStG) and the foreign transaction tax act (Außensteuergesetz, AStG) to reduce uncertainties of the interpretation and application of double tax treaties. (§ 50d Absatz 9 EStG and § 1 AStG
  • Authorization for the Finance Ministry to issue legal acts allowing a clause in double tax treaties permitting a switch from the exemption method to the tax credit method after notification to the source country, as well allowing a clause (Kassenstaatsklausel) for cases where public duties are performed by privately organized entities
  • Rules regarding the six-year retention period of Article 8 para 9 of the FATCA-USA-Implementation Regulation
  • Extension of the financial accounts information exchange law to treaties of the European Union with other states in the framework of EU Directive 2014/107/EU
  • Closing tax loopholes through the introduction of an article in the trade tax act (article 7a Gewerbesteuergesetz, GewStG) relating to the calculation of trade taxable income in a fiscal unity applied to dividends of the controlled company
  • Changes to articles 7 and 9 of the trade tax act to ensure that additional amounts according to the foreign transaction tax act are also levied with trade tax
  • Changes to the conditions for the application of article 3 No 40 Sent 3 income tax law ((Einkommensteuergesetz, EStG)) and article 8b para 7 of the corporate income tax law (Körperschaftsteuergesetz, KStG) to combat tax avoidance schemes relating to short term stock trading rules for financial institutions

The ministry estimates that the compliance costs for businesses resulting from the proposed changes, mainly for country-by-country reporting, would be €536,000 (USD 608,574) annually. The initial administrative adjustment costs could not be estimated. Costs to the tax administration would amount to €22,000 (USD 24,979) for years 2017-2020.

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Ninja-Antonia Reggelin

Ninja-Antonia Reggelin

Ninja-Antonia Reggelin is based in Berlin, where she is head of tax policy at a business association.

She previously worked at the OECD, contributing to the project that led to the publication of the BEPS Action Plan. Prior to that, she was with PwC Germany, where she focused on international tax structuring.

Ninja holds a Master’s degree (LL.M.) in International Trade Law from Bond University Australia and a Master’s degree (M.A.) in International Relations from the University of Kent Brussels School of International Studies.