Germany aligns tax guidelines on cost sharing arrangements with OECD standards

by Ninja-Antonia Reggelin

The German finance ministry on 5 July updated its transfer pricing guidelines on cost contribution arrangements between related companies.

The two-page document titled Principles for Examining Income Allocation Through Cost Contribution Agreements between Internationally Affiliated Companies clarifies that the previous cost contribution guidelines will cease to apply on 31 December 2018.

Cost sharing arrangements in place for business years ending on or before 31 December 2019 will be assessed according to prior guidelines issued 30 December 1999, until the publication of the circular in the Federal Tax Gazette. For financial years beginning after 31 December 2018, the principles of Chapter VIII of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations shall apply.

The ministry moreover clarifies that the contributions are determined according to the arm’s length price and reimbursed by companies on the basis of the expected benefits if several companies of a multinational group work together in the common interest, take risks together, and either jointly develop assets (research cost allocation) or use services (service charge allocation).

The OECD principles differ from the former German rules particularly in respect to research and development contracts. Currently, the costs (without profit surcharge) are regularly distributed to the participants according to their respective expected benefits. In the future, the value of a contribution will always be measured against the market price.

Moreover, unlike the prior guidance, the new letter requires taxpayers to take into account risk control and financial risk-bearing capacity into consideration.

Commentators have noted that the mere reference to the OECD guidelines could increase legal uncertainty in Germany due to the lack of detail and clarification in the previous German guidelines. At the same time, it adds more complexity due to the cross-referencing of the OECD rules, they say.