By Markus Kircher, Partner, Deloitte GmbH, Frankfurt/Germany
The German Finance Ministry’s proposed modifications to the transfer pricing rules would not oblige taxpayers to apply the so-called price-setting approach, the ministry has confirmed.
Wide-ranging German transfer pricing changes, first proposed by the finance ministry in December 2019, were scheduled for discussion and German federal cabinet vote on December 18, 2019; however, that critical step in the legislative process was postponed. Moreover, despite recent rumors to the contrary, the German cabinet’s discussion on the transfer pricing draft has not yet resumed.
Instead, finance ministry officials issued an answer to 18 questions about the proposed transfer pricing modifications posed by members of parliament. The members’ questions appeared to criticize the ministry’s work. The government response was the subject of an April 23 public hearing before the lower house of the German parliament’s finance committee.
The ministry’s response contains only six sentences, four of which focus on procedural aspects and only one that focuses on the content of the German transfer pricing draft.
German price-setting approach
The Ministry of Finance’s answer includes the brief but important clarification that the proposed German transfer pricing amendments are not intended to force taxpayers to apply the so-called price-setting approach.
This is a positive sign for taxpayers since it keeps the door open for solutions to avoid double taxation in transactions with jurisdictions that either oblige taxpayers to use the outcome testing approach or where this is commonly accepted practice.
Nevertheless, the preference of the German tax authorities for the price-setting approach remains, and the contemplated new transfer pricing rules will put even more focus on the setting of transfer prices and the information available at that point in time as opposed to purely testing of the (overall) profitability with hindsight information.
That preference is already reflected in the German transfer pricing documentation rules effective since 2017 and is observed quite often in tax audits. In that respect, the draft lacks guidance on how to deal with the internationally (also at OECD level) unsolved problem of these timing issues in the area of transfer pricing. Hence, to mitigate the increasing inherent risk of double taxation and related international tax disputes, taxpayers should consider close monitoring and steering of their transfer prices to widely close the gap between both approaches.
Financial transactions, DEMPE functions
The parliament questions also addressed justified the concern (although the wording is to some extent misleading) that the contemplated transfer pricing rules for financial transactions would trigger significant double taxation since they partly deviate from the OECD consensus and are defined as a treaty override.
This concern remained unanswered.
Unfortunately, other important concerns vis-à-vis the German transfer pricing draft were not even addressed by the questions.
For example, the draft transfer pricing rules use vague wording to implement into German law OECD concepts regarding the development, enhancement, maintenance, protection, and exploitation (DEMPE) of intangibles. The German transfer pricing draft does not provide legal certainty on how to apply the concept in practice and, probably, would cause double taxation and international tax disputes.
Procedural concerns
Apart from the concerns about the contents of the draft, practitioners heavily criticized the government was because the draft was published only one week before the next step in the legislative process and only scarcely three days were granted for public comment.
This approach differs significantly from formerly typical procedures, where broad and timely inclusion of the public, including business organizations, taxpayers, and advisors, is provided.
Let us hope for more inclusion in the future to ensure a balanced modernization of the German transfer pricing rules.
Overall, I hope for a refinement of the draft rules to provide clear transfer pricing guidance and allow the avoidance of double taxation.
Thanks for this helpful summary of the recent developments. I fully agree with the concerns expressed in the article.
In my opinion two aspects deserve to be highlighted further;
a.) the statement that “the preference of the German tax authorities for the price-setting approach remains…” is certainly accurate. I would venture to suggest that this is “preference” is coupled with an increasingly inexplicable hostility of the German tax authority towards TNMM and benchmarks => the day-to-day problems resulting from this (in my view rather unprincipled) stance clearlyn promise to be excerbated.
b)”amen” to the hope for more inclusion. This hope should also extent to a more comprehensive modernization of the German transfer pricing rules => updating the procedural regulations (dating from 2005) would be welcome – including some more benign provisions for SMEs.